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EX-31.1 - CERTIFICATE - Cavitation Technologies, Inc.exh31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549




FORM 10-Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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 Number)

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 reports), and (2) has been subject to such filing requirements for the past 90 days.
YES    x        NO    ¨

      Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  x     NO  ¨

      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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ¨

Accelerated filer    ¨

Non-accelerated filer    ¨
(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 Exchange Act).
YES    ¨        NO    x

      As of May 11, 2012, the issuer had 163,701,906 shares of common stock outstanding.



TABLE OF CONTENTS

 

 

Page

Part I.

FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

Consolidated Balance Sheets at March 31, 2012 (unaudited) and June 30, 2011

 

 

 

 

Consolidated Statements of Operations - Three and Nine Months Ended March 31, 2012 (unaudited) and March 31, 2011 (unaudited), and the period from January 29, 2007 (Inception) through March 31, 2012

 

 

 

 

Consolidated Statement of Stockholders' Deficit - January 29, 2007 (Inception) through March 31, 2012

 

 

 

 

Consolidated Statements of Cash Flows - Nine Months Ended March 31, 2012 (unaudited) and March 31, 2011 (unaudited), and the period from January 29, 2007 (Inception) through March 31, 2012

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

21

 

 

 

Item 4.

Controls and Procedures

21

 

 

 

Part II.

OTHER INFORMATION

21

 

 

 

Item 1.  

Legal Proceedings

21

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

 

 

 

Item 3.  

Defaults Upon Senior Securities

25

 

 

 

Item 4.  

Mine Safety Disclosures

26

 

 

 

Item 5.  

Other Information

26

 

 

 

Item 6.

Exhibits

26

 

 

 

Signatures

 

27

1


PART I - FINANCIAL INFORMATION

ITEM 1 - Consolidated Financial Statements

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS

      March 31,     June 30,
      2012     2011
      (Unaudited)      
ASSETS
             
Current assets:            
     Cash and cash equivalents   $ 5,072    $ 14,779 
     Other receivables     8,853     
     Inventory     125,457      92,475 
     Prepaid expenses and other current assets         3,337 
     Related party advances     21,120     
          Total current assets     160,502      110,591 
             
Property and equipment, net      142,352      159,344 
Patents, net     117,126      118,153 
Other assets     9,500      9,500 
          Total assets   $ 429,480    $ 397,588 
             
LIABILITIES AND STOCKHOLDERS' DEFICIT            
             
Current liabilities:            
     Accounts payable    $ 198,780    $ 143,949 
     Accrued expenses     109,670      54,745 
     Accrued payroll     633,517      149,316 
     Advances from customers     136,533      36,533 
     Deferred revenue     147,444      16,951 
     Convertible notes payable, net of discounts     69,791      52,852 
     Derivative liability     23,034      121,679 
     Related party payable     24,388      15,750 
     Short-term loan     55,000      60,000 
     Bank loan     370,271      486,110 
     Short-term loans, related parties     157,000     
          Total current liabilities     1,925,428      1,137,885 
             
Commitments and contingencies, Note 11            
             
Stockholders' deficit:            
     Preferred stock, $0.001 par value, 10,000,000 shares authorized,
          0 and 111,111 shares issued and outstanding as of March 31,
          2012 and June 30, 2011, respectively.
        111 
     Common stock, $0.001 par value, 1,000,000,000 shares
          authorized, 163,701,906 shares and 153,799,715 shares are issued
          and outstanding as of March 31, 2012 and June 30, 2011, respectively
    163,704      153,800 
     Additional paid-in capital     16,548,389      15,954,280 
     Deficit accumulated during the development stage     (18,208,041)     (16,848,488)
          Total stockholders' deficit     (1,495,948)     (740,297)
          Total liabilities and stockholders' deficit   $ 429,480    $ 397,588 

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,
        2012     2011     2012     2011     2012
        (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)
                                 
Revenue     $ 51,818    $ 341,326    $ 165,972    $ 589,926    $ 755,898 
Cost of revenue       12,260      54,444      35,274      91,144      126,418 
     Gross profit       39,558      286,882      130,698      498,782      629,480 
General and administrative expenses       502,820      898,946      1,203,887      2,723,393      12,496,167 
Research and development expenses       64,735      282,134      126,940      628,204      5,415,334 
Total operating expenses       567,555      1,181,080      1,330,827      3,351,597      17,911,501 
     Loss from operations       (527,997)     (894,198)     (1,200,129)     (2,852,815)     (17,282,021)
Interest expense and other       (25,337)     (30,645)     (155,138)     (52,882)     (742,907)
Loss before income taxes       (553,334)     (924,843)     (1,355,267)     (2,905,697)     (18,024,928)
Income taxes       -                   -  
     Net loss     $ (553,334)   $ (924,843)   $ (1,355,267)   $ (2,905,697)   $ (18,024,928)
Deemed dividends to preferred stockholders        (1,286)     (1,500)     (4,286)     (4,500)     (183,113)
     Net loss available to common stockholders     $ (554,620)   $ (926,343)   $ (1,359,553)   $ (2,910,197)   $ (18,208,041)
                                 
Net loss available to common shareholders per share:                                
Basic and diluted     $ (0.00)   $ (0.01)   $ (0.01)   $ (0.02)      
                                 
Weighted average shares outstanding:                                
Basic and diluted       160,767,919      140,793,632      158,090,480      136,643,591       

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

3


CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)

                                  Deficit      
                                  Accumulated      
                                  During the      
    Series A Preferred     Common Stock     Additional Paid-in     Development      
    Shares     Amount     Shares     Amount     Capital     Stage     Total
                                         
Balance at inception, January 29, 2007    -     -       -     -     -     -     -  
                                         
Common stock issued as payment 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)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) (Continued)

                                  Deficit      
                                  Accumulated      
                                  During the      
    Series A Preferred     Common Stock     Additional 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)

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

5


CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) (Continued)

                                  Deficit      
                                  Accumulated      
                                  During the      
    Series A Preferred     Common Stock     Additional Paid-in     Development      
    Shares     Amount     Shares     Amount     Capital     Stage     Total
                                         
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 issued as payment for services on April 1, 2011                816,145      816      80,799            81,615 
Common stock issued as payment for services on May 17, 2011                276,203      276      27,343            27,619 
Common stock issued as payment for services on June 13, 2011                333,924      334      33,058            33,392 
Common stock issued as payment for services on June 14, 2011                8,096,990      8,097      689,603            697,700 
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      51      2,949            3,000 
Common stock issued for conversion of note payable on March 30, 2011                59,829      60      3,440            3,500 
Common stock issued for conversion of note payable on April 4, 2011                59,829      60      3,440            3,500 
Common stock issued for conversion of note payable on April 5, 2011                24,376      24      1,402            1,426 
Amortization of restricted stock issued for services                            786,275            786,275 
Dividends on preferred stock                                  (6,000)     (6,000)
Net loss                                  (3,295,428)     (3,295,428)
                                         
Balance at June 30, 2011    111,111    111      153,799,715    153,800    15,954,280    (16,848,488)   (740,297)
                                         
Common stock issued as payment for services on July 13, 2011                379,449      380      25,968            26,348 
Common stock issued as payment for services on August 19, 2011                198,879      199      10,541            10,740 
Common stock issued as payment for services on August 22, 2011                230,000      230      12,191            12,421 
Common stock issued as payment for services on September 29, 2011                366,924      367      13,787            14,154 
Common stock issued for conversion of note payable on August 16, 2011                287,356      287      20,786            21,073 
Common stock issued for conversion of note payable on August 17, 2011                391,850      392      25,949            26,341 
Common stock issued for conversion of note payable on August 19, 2011                391,850      392      25,949            26,341 
Common stock issued for conversion of note payable on August 22, 2011                288,401      288      17,216            17,504 
Common stock issued for conversion of note payable on September 13, 2011                30,769      31      1,508            1,539 
Common stock issued for conversion of note payable on September 15, 2011                46,154      46      2,262            2,308 
Common stock issued for conversion of note payable on September 16 2011                76,923      77      4,538            4,615 
Common stock sold for cash on August 22, 2011                600,000      600      34,400            35,000 
Common stock issued for conversion of note payable on October 4, 2011                130,474      130      4,818            4,948 
Common stock issued for conversion of note payable on October 5, 2011                178,891      179      6,943            7,122 
Common stock issued for conversion of note payable on October 6, 2011                429,338      429      16,663            17,092 
Common stock issued for conversion of note payable on October 10, 2011                35,778      36      1,388            1,424 
Common stock issued for conversion of note payable on October 11, 2011                194,231      194      6,929            7,123 
Common stock issued as payment for services on October 25, 2011                44,000      44      1,653            1,697 
Common stock issued as payment for services on November 1, 2011                353,959     354      13,300            13,654 
Common stock issued as payment for services on November 22, 2011                87,500     88      2,612            2,700 
To record prepayment of convertible promissory note December 6, 2011                            24,591           24,591
Common stock issued for conversion of note payable on January 25, 2012                230,769     231     6,692           6,923
Common stock issued for conversion of note payable on January 26, 2012                179,487     179     5,205           5,384
Common stock issued for conversion of note payable on January 27, 2012                102,564     103     4,000           4,103
Common stock issued for conversion of note payable on January 30, 2012                76,923     77     3,000           3,077
Common stock issued for conversion of note payable on January 31, 2012                338,462     338     13,200           13,538
Common stock issued for conversion of note payable on February 1, 2012                153,846     154     6,000           6,154
Common stock issued for conversion of note payable on February 17, 2012                50,441     50     2,063           2,113
Common stock issued for conversion of note payable on February 21, 2012                249,750     250     9,740           9,990
Common stock issued for conversion of note payable on March 5, 2012                82,124     82     2,382           2,464
Common stock issued for conversion of note payable on March 9, 2012                122,587     123     3,555           3,678
Common stock issued for conversion of note payable on March 12, 2012                183,880     184     5,333           5,517
Common stock issued for conversion of note payable on March 13, 2012                91,940     92     2,666           2,758
Common stock issued for conversion of note payable on March 16, 2012                61,538     62     1,785           1,847
Common stock issued for conversion of note payable on March 26, 2012                200,669     201     5,819           6,020
Common stock issued for conversion of note payable on March 27, 2012                66,890     67     1,940           2,007
Common stock issued for conversion of note payable on March 29, 2012                100,334     100     2,910           3,010
Common stock issued for conversion of note payable on March 30, 2012                196,399     196     5,696           5,892
Issuance of stock options as payment for services on February 16, 2012                            168,928           168,928
Common stock issued as payment for services on January 5, 2012                140,792     141     5,290           5,431
Common stock issued as payment for services on February 7, 2012                87,500     88     1,937           2,025
Common stock issued as payment for services on February 16, 2012                2,000,000     2,000     44,290           46,290
Conversion of Convertible Preferred Shares to Common Shares on March 18, 2012    (111,111)     (111)     442,570     443     17,687           18,019
Dividends on preferred stock                                 (4,286)     (4,286)
Net Loss                                  (1,355,267)     (1,355,267)
                                         
Balance at March 31, 2012    -     -       163,701,906    163,704    16,548,389    (18,208,041)   (1,495,948)

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

6


CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

                January 29, 2007,
                Inception,
    For the nine Months Ended     Through
    March 31,     March 31,
    2012     2011     2012
                 
Operating activities:                
Net loss (1,355,267)   (2,905,697)   (18,024,928)
Adjustments to reconcile net loss to net cash                 
     used in operating activities:                
     Depreciation and amortization   37,730      15,786      88,440 
     Warrants issued in connection with convertible notes payable   -           49,245 
     Amortization of convertible loan discount   95,345      19,207      416,807 
     Common stock issued for services   135,459      1,730,131      11,666,060 
     Stock option compensation   168,928          476,440 
     Warrants issued for services   -       46,735      337,359 
     Change in value of derivatives   (18,489)     13,588      708 
     Equipment write-down   -           5,399 
     Patent write-down   21,758          35,258 
Effect of changes in:                
     Accounts receivable   -       (309,964)     -  
     Inventory   (32,982)     -       (86,038)
     Prepaid expenses and other current assets   (5,516)     (166)     (8,853)
     Advances to related parties   (21,120)         (21,120)
     Deposits/Ars   -           (9,500)
     Bank overdraft, net   -       (2,109)     -  
     Accounts payable and accrued expenses   126,423      474,328      323,817 
     Accrued payroll   484,201      86,015      912,438 
     Advances   -       19,271      36,533 
     Deferred revenue   130,493      (16,549)     147,444 
     Related party payables   24,388      254,595      24,386 
          Net cash used in operating activities   (208,649)     (574,829)     (3,630,105)
                 
Investing activities:                
     Purchase of property and equipment   (17,719)     -       (116,911)
     Payments for systems   -       (133,528)     (152,721)
     Payments for patents   (23,750)         (158,362)
          Net cash used in investing activities   (41,469)     (133,528)     (427,994)
                 
Financing activities:                
     Proceeds from (payments on) bank loan borrowings   (115,839)     (34,271)     370,271 
     Proceeds from sales of preferred stock   -       -       725,000 
     Proceeds from convertible notes payable   132,500      103,712      518,712 
     Payments on convertible notes payable   (47,500)     -       (102,500)
     Proceeds from sales of common stock   35,000      572,741      2,139,688 
     Payments on related party short-term loans   (15,750)     -       (15,750)
     Proceeds from short-term loans, related parties   157,000      -       172,750 
     Proceeds from short-term loans   -       75,000      184,000 
     Advances from customers   100,000      -       100,000 
     Payments on short term loans   (5,000)     (9,000)     (29,000)
          Net cash provided by financing activities   240,411      708,182      4,063,171 
Net increase (decrease) in cash   (9,707)     (175)     5,072 
Cash, beginning of period   14,779      270     
Cash, end of period $ 5,072    $ 95    $ 5,072 
                 
Supplemental disclosures of cash flow information:                
     Cash paid for interest $ 23,494    $ 32,588    $ 217,086 
     Cash paid for income taxes $ 1,600    $ 1,600    $ 8,328 
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    $ 100,000 
     Accrued dividends issued to preferred stockholders $ 4,286    $ 4,500    $ 18,019 
     Conversion of convertible notes payable and accrued interest to common stock $ 120,593    $ 25,916    $ 342,239 

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

7


CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012

Note 1 - Nature of Operations

Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly owned subsidiary of Cavitation Technologies, Inc., a Nevada corporation originally incorporated under the name Bio Energy, Inc. Cavitation Technologies, Inc. is a process and product development firm that has developed, patented, and commercialized proprietary technology for processing oils and fats through the Nano Reactor® Device and Nano Reactor® System. The reactor is the critical component of system which is designed to reduce operating costs and increase yields in the refining of vegetable oils. 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.

Basis for 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. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the nine months ended March 31, 2012 are not indicative of the results that may be expected for the fiscal year ending June 30, 2012. You should read these unaudited consolidated financial statements in conjunction with the audited financial statements and the notes included in the Company's annual report on Form 10-K for the year ended June 30, 2011.

Note 2 - 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, 2012 recorded cumulative revenue of $755,898 and a cumulative net loss of $18,208,041. To date, cumulative negative cash flow from operations of $3,630,105 was funded largely with $3.3 million in equity. Total Stockholder's Deficit at March 31, 2012 was $1,495,948. These factors, among others, raise doubt about the Company's ability to continue as a going concern.

Management's plan is to generate income from operations by licensing our technology globally through our strategic partner, the Desmet Ballestra Group. 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 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.

As a result of the aforementioned factors, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2011, expressed substantial doubt about our ability to continue as a going concern.

8


Note 3 - Summary of Significant Accounting Policies

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with Accounting Standards Codification ("ASC") 350-30, General Intangibles Other Than Goodwill. As of March 31, 2012, the Company recorded $117,126 in net patents comprised of $122,062 in capitalized patents and $4,935 in cumulative amortization. This compares with a net of $118,153 at June 30, 2011 comprised of $121,112 in capitalized patents and accumulated amortization of $2,963. On October 25, 2011, the Company had a patent issued for its Multi-Stage Cavitation Device the cost for which will be amortized over an estimated useful life of 4 years. The Company has been issued two patents and has eight US and nine PCT/international applications pending.

At March 31, 2012, future amortization of patent costs is estimated as follows:

Year Ended      
June 30,     Amount
2012   $ 7,594 
2013     14,251 
2014     20,611 
2015     21,545 
2016     15,883 
Thereafter     37,242 
Total   $ 117,126 

Related Party Advances

The Company advanced Igor Gorodnitsky, President, and Roman Gordon, Chief Technology Officer, $15,000 each for operating expenditures that will be incurred on behalf of the Company during fiscal 2012. This amount was reduced to $21,120 on March 31, 2012.

Deferred Revenue

The Company received payment of $100,000 from the Desmet Ballestra Group ("Desmet") during the nine months ended March 31, 2012 related to CTi Nano Reactors. The payment will be recognized as revenue when the system has been accepted by the end-user which is expected to occur in calendar 2012. In addition, the Company received $47,444 associated with the down-payment on a system sold to a client in Argentina.

Fair Value Measurement

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, 2012, the carrying value of certain accounts such as accounts receivable, inventory, accounts payable, accrued expenses, and accrued payroll which approximate fair value due to the short-term nature of such instruments and loans payable which appproximate fair value based on prevailing interest rates.

9


The following table presents information about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of March 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

      Fair Value     Fair Value Measurements at March 31, 2012
      as of     Using Fair Value Heirarchy
Financial Instruments     March 31, 2012     Level 1     Level 2     Level 3
                         
Liabilities:                        
     Derivative liability   $ 23,034    $ -     $ -     $ 23,034 
Total   $ 23,034    $ -     $ -     $ 23,034 

The following tables provide a reconciliation of the beginning and ending balances of our financial liabilities classified as Level 3:

Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
    Derivative Liability
     
Balance at June 30, 2011 $ 121,679 
Total (gains) losses included in interest expense and other   (18,489)
Creation - convertible note issuances   45,696 
Settlements - note conversions   (125,852)
Balance at March 31, 2012 $ 23,034 

Advertising and Promotion Costs

Advertising costs (including marketing expenses) incurred in the normal course of operations are expensed as incurred. Expenses amounted to $33,339, $94,117, and $255,663, for the nine months ended March 31, 2012 and 2011, and the period from January 29, 2007 (date of inception) through March 31, 2012, respectively. Advertising expenses amounted to $6,375 and $81,836 for the three months ended March 31, 2012 and 2011, respectively.

10


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 normally 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, 2012, the Company had 13,560,957 stock options and 11,812,285 warrants to purchase common stock outstanding that were not included in the diluted net loss per common share because their effect would be anti-dilutive. The company had no Series A Preferred Stock outstanding as 111,111 preferred shares plus $18,019 in accrued dividends previously outstanding were converted to 442,570 common shares in March 2012. The Company also had $87,900 of outstanding convertible notes payable, before discounts, which were convertible into 4,640,381 shares of common stock as of March 31, 2012. 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 on March 31, 2012 (unaudited) and June 30, 2011.

    March 31,   June 30,
    2012   2011
         
Leasehold improvement $ 2,475    2,475 
Furniture     26,837    26,837 
Office equipment   1,499    1,500 
Equipment   68,380    68,380 
Systems   130,193    112,474 
         
    229,384    211,666 
         
Less: accumulated depreciation and amortization   (87,032)   (52,322)
         
  $ 142,352    159,344 

Depreciation expense amounted to $34,710, $13,623, and $82,461 for the nine months ended March 31, 2012 and 2011 and the period from January 29, 2007 (date of inception) through March 31, 2012, respectively.

Note 6 - Bank Loan

On November 1, 2010, we renewed our loan with National Bank of California until November 1, 2011 with 11 monthly payments of $6,000 and a final payment of $474,171. The interest rate floor was increased from 7.0% to 7.5%. On November 1, 2011, the maturity of the variable rate loan was extended to February 1, 2013. Monthly payments include 14 principal payments of $6,000 plus interest. In addition, CTi is to make a quarterly principal payment of $50,000. The remaining principal and accrued interest of approximately $110,000 is due February 1, 2013. As of March 31, 2012, the outstanding balance on the loan was $370,271.

Note 7 - 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. This agreement was restructured on January 21, 2011 extending the due date on the initial payment to March 31, 2011. The due date on the loan was subsequently extended with no definitive maturity date. The loan bears no interest but accrued interest on late payments amounted to $4,125 at March 31, 2012. Principal payments are being made to Desmet when possible. The outstanding balance on March 31, 2012 was $55,000.

11


On December 28, 2011, the CEO, Todd Zelek, extended to the company a $100,000 short-term loan due on demand at an annual interest rate of 12%. Accrued interest amounted to $3,000 at March 31, 2012.

In addition, throughout the third quarter of fiscal 2012, we received $57,000 from our Director of Operations which is included in short-term loans, related parties which are funds that are earmarked for eventual conversion into a convertible promissory note, should the Company be able to raise $400,000.

Note 8 - 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. From February through October 2011, Tripod converted the entire $61,212 into 1,635,897 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. During the quarter ended September 30, 2011, the entire $42,500 was converted into 1,359,457 shares of common stock at a value of $91,258, and the $47,059 beneficial conversion feature was allocated to additional paid in capital.

On June 6, 2011, the Company issued a convertible promissory note payable to Asher Enterprises, Inc., (the "Second Asher Note") in the amount of $47,500. During the second quarter of fiscal 2012, the $47,500 outstanding balance was pre-paid incurring a pre-payment penalty (interest expense) of $23,750. The company pre-paid the convertible promissory note as part of our overall strategy to minimize the issuance of shares.

On June 24, 2011, we issued a convertible promissory note payable to GEL Properties, LLC, (the "GEL Note") in the amount of $52,500. The Note is due June 24, 2012 and bears interest at a rate of 6% p.a. The Note is convertible into shares of our common stock at a conversion price equal to 65% of the average day's lowest closing bid out of the 5 trading days prior to conversion. The transaction was funded July 12, 2011. The issuance of the GEL Note amounted in a beneficial conversion feature of $28,269 on the issue date which has been recorded as a discount to the carrying value of the note. As of March 31, 2012, the remaining discount balance amounted to $6,565. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet. As of March 31, 2012, $44,600 had been converted to common stock and $7,900 remained the outstanding balance.

On December 6, 2011 we issued a convertible promissory note payable to the Prolific Group, LLC, (the "Prolific Note") in the amount of $25,000. The Note is due December 6, 2012 and bears interest at 6% p.a. The Note is convertible into shares of our common stock at a conversion price equal to 65% of the average day's lowest closing bid out of the 5 trading days prior to conversion. The issuance of the Prolific Note amounted in a beneficial conversion feature of $4,673 on the issue date which has been recorded as a discount to the carrying value of the note. As of March 31, 2012, the remaining discount balance amounted to $3,192. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet. As of March 31, 2012, the outstanding balance was $25,000.

On December 6, 2011 we issued a convertible promissory note payable to the Tripod Group, LLC, (the "Tripod Note") in the amount of $30,000. The Note is due December 6, 2012 and bears interest at 6% p.a. The Note is convertible into shares of our common stock at a conversion price equal to 65% of the average day's lowest closing bid out of the 5 trading days prior to conversion. The issuance of the Tripod Note amounted in a beneficial conversion feature of $5,608 on the issue date which has been recorded as a discount to the carrying value of the note. As of March 31, 2012, the remaining discount balance amounted to $3,830. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet. As of March 31, 2012, the outstanding balance was $30,000.

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On December 21, 2011 we issued a convertible promissory note payable to Asher Enterprises, Inc., (the "Asher Note") in the amount of $25,000. The Note is due September 21, 2012 and bears interest at 8% p.a. The Note is convertible into shares of our common stock at a conversion price equal to 60% of the average day's lowest trading price during the 10 trading days prior to conversion. The issuance of the Asher Note amounted in a beneficial conversion feature of $7,146 on the issue date which was recorded as a discount to the carrying value of the note. As of March 31, 2012, the remaining discount balance amounted to $4,522. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet. As of March 31, 2012, the outstanding balance was $25,000.

On March 31, 2012, the outstanding balance of Convertible Notes Payable (net of discounts) as recorded on the balance sheet amounted to $69,791 consisting of outstanding principal of $87,900 less discount of $18,109. By virtue of the variable conversion ratios of these transactions, 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, 2012, the aggregate value of the conversion features associated with the above notes amounted to $23,034.

Note 9 - Stockholders' Equity

Preferred Stock

The Company has 5,000,000 shares of Series A Preferred Stock authorized with no shares outstanding. The company converted 111,111 Series A Preferred Shares plus $18,019 in accrued dividends into 442,570 shares of common stock in March 2012.

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, 2012 is presented below.

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Options     Price   (Years)
Outstanding at June 30, 2011   1,810,957    $ 0.55    5.23 
     Granted   11,750,000      0.03    9.88 
     Forfeited   -            
     Exercised   -            
     Expired   -            
Outstanding at March 31, 2012   13,560,957    $ 0.07    9.23 
Exercisable at March 31, 2012   8,060,957    $ 0.15    8.84 

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The following table summarizes information about outstanding stock options as of March 31, 2012.

      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
$ 0.03   11,750,000    9.88    $ 0.03    6,250,000    $ 0.03 
  0.33   637,297    4.62      0.33    637,297      0.33 
  0.67   1,173,660    5.21      0.67    1,173,660      0.67 
      13,560,957              8,060,957       

Options are valued using the Black-Scholes option valuation model using the following inputs:

Expected life in years    0 to 10
Stock price volatility    147%
Risk free interest rate    0.86%
Expected dividends   0
Forfeiture rate   0%

Warrants

A summary of the warrant activity for the nine months ended March 31, 2012 is presented below.

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Warrants     Price   (Years)
Outstanding at June 30, 2011   13,145,618    $ 0.41    1.69 
Granted   -       -      
Exercised   -       -      
Unexercised   1,333,333      0.42     
Outstanding at March 31, 2012   11,812,285    $ 0.42    1.06 
               
Vested and expected to vest              
     at March 31, 2012   11,812,285    $ 0.42    1.06 
               
Exercisable at March 31, 2012   11,812,285    $ 0.42    1.06 

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The following table summarizes information about outstanding warrants as of March 31, 2012.

      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   1,939,374    1.62    $ 0.29    1,939,374    $ 0.29 
  0.42 - 0.58   9,872,911    1.30      0.45    9,872,911      0.45 
      11,812,285              11,812,285       

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, 2012, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision f