Cavitation Technologies, Inc. - Quarter Report: 2009 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2009

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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class:		Name of Each Exchange on Which Registered:
None		Over the Counter (Bulletin Board)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.101 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 Smaller Reporting Company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

State the aggregate market value of the voting and non -voting common equity held by non-affiliates of the registrant by reference to the price at which the common equity was last sold, or of the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completely second fiscal quarter: $26,216,684 as of December 31, 2009 based on the closing price of $0.23 per share and 113,985,584 shares outstanding.

The registrant had 114,165,048 shares of Common Stock, par value $0.001 per share, outstanding at January 22, 2009.

FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED DECEMBER 31, 2009

TABLE OF CONTENTS

			Page
PART I - FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS	4

	ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22

	ITEM 4.	CONTROLS AND PROCEDURES	22

PART II – OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS	23

	ITEM 1A	RISK FACTORS	23

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	23

	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	23

	ITEM 5.	OTHER INFORMATION	23

	ITEM 6.	EXHIBITS	23

Note Regarding Forward Looking Statements

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain statements relating to future results of Cavitation Technologies, Inc. (including certain projections and business trends) that are “forward-looking statements”. Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward-looking statements contained in this quarterly report by the foregoing cautionary statements.

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CAVITATION TECHNOLOGIES, INC.

Balance Sheets

	(Unaudited)
	December 31,			June 30,
	2009			2009

ASSETS

Current assets:
Cash and cash equivalents	$	10,476		$	5,038
Prepaid expenses and other current assets		352			2,341
Total current assets		10,828			7,379

Property and equipment, net		75,833			62,753
Other assets		9,500			9,500
Total assets	$	96,161		$	79,632

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable and accrued expenses	$	506,976		$	382,615
Deferred revenue		33,480			26,000
Convertible notes payable, net of discounts		-			200,000
Common stock subscription deposit		9,870			-
Short term loan		18,500			-
Line of credit		550,146			636,917
Total current liabilities		1,118,972			1,245,532

Commitments and contingencies

Stockholders' deficit:
Preferred stock $0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding at December 31, 2009 and June 30, 2009.		111			111
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 113,985,584 and 88,984,593 shares issued and outstanding at December 31, 2009 and June 30, 2009, respectively.		41,955			29,661
Additional paid-in capital		8,855,831			4,148,926
Deficit accumulated during the development stage		(9,920,708	)		(5,344,598	)
Total stockholders' deficit		(1,022,811	)		(1,165,900	)
Total liabilities and stockholders' deficit	$	96,161		$	79,632

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

CAVITATION TECHNOLOGIES, INC.

Statements of Operations (Unaudited)

													January 29, 2007,
													Inception,
	Three Months Ended						Six Months Ended						Through
	December 31,						December 31,						December 31,
	2009			2008			2009			2008			2009

General and administrative expenses	$	1,249,554		$	660,586		$	4,327,428		$	1,009,532		$	6,914,171
Research and development expenses		91,968			48,671			154,933			178,546			2,593,431
Total operating expenses		1,341,522			709,257			4,482,361			1,188,078			9,507,602
Loss from operations		(1,341,522	)		(709,257	)		(4,482,361	)		(1,188,078	)		(9,507,602	)
Interest expense		(10,167	)		(11,681	)		(93,749	)		(21,318	)		(246,281	)
Loss before income taxes		(1,351,689	)		(720,938	)		(4,576,110	)		(1,209,396	)		(9,753,883	)
Income tax expense		-			-			-			-			-
Net loss	$	(1,351,689	)	$	(720,938	)	$	(4,576,110	)	$	(1,209,396	)	$	(9,753,883	)
Preferred stock dividend		(1,500	)		(50,756	)		(3,000	)		(50,756	)
Net loss available to common stockholders	$	(1,353,189	)	$	(771,694	)	$	(4,579,110	)	$	(1,260,152	)

Net loss available to common stockholders per share:
Basic and Diluted	$	(0.01	)	$	(0.01	)	$	(0.04	)	$	(0.02	)

Weighted average shares outstanding:
Basic and Diluted		111,567,617			77,416,140			107,253,064			67,068,510

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

Cavitation Technologies, Inc.

Statement of Changes In Stockholders' Deficit (Unaudited)

	Preferred Stock				Common Stock				Additional			Accumulated
	Shares		Amount		Shares		Amount		Paid-In Capital			Deficit			Total

Issuance of common stock for services on
January 29, 2007, inception						42,993,630	$	14,331	$	6,669		$			$	21,000
Net loss													(533,185	)		(533,185	)

Balance at December 31, 2007		-	$	-		42,993,630	$	14,331	$	6,669		$	(533,185	)	$	(512,185	)

Common stock sold for cash						2,047,314		682		499,318						500,000
Common stock issued as payment for services						10,369,650		3,457		1,819,943						1,823,400
Amortization of discount on convertible preferred stock										47,879			(47,879	)		-
Net loss													(2,148,597	)		(2,148,597	)

Balance at June 30, 2008		-	$	-		55,410,594	$	18,470	$	2,373,809		$	(2,729,661	)	$	(337,382	)

Preferred stock sold in connection with reverse merger						2,149,560		717		124,283						125,000
Preferred stock sold for cash		111,111		111						99,889						100,000
Preferred stock - Beneficial Conversion Feature										11,111			(11,111	)
Bio shares outstanding before reverse merger						27,840,534		9,280		(9,280	)					-
Common stock issued as payment for services						1,983,909		661		639,012						639,673
Common stock sold for cash						1,599,996		533		299,467						300,000
Warrants issued in connection with issuance of convertible debt										49,245						49,245
Amortization of discount on conversion of preferred stock										107,835			(107,835	)		-
Warrants issued as payment for services										146,043						146,043
Share-based compensation										307,512						307,512
Net loss													(2,495,991	)		(2,495,991	)

Balance at June 30, 2009		111,111	$	111		88,984,593	$	29,661	$	4,148,926		$	(5,344,598	)	$	(1,165,900	)

Common stock issued as payment for services						17,938,011		5,979		2,799,303						2,805,282
Common stock issued for debt and accrued interest conversion						1,122,375		374		190,429						190,803
Conversion feature on notes payable										63,601						63,601
Warrants issued as payment for services										5,173						5,173
Net loss													(3,224,421	)		(3,224,421	)

Balance at September 30, 2009		111,111	$	111		108,044,979	$	36,014	$	7,207,432		$	(8,569,019	)	$	(1,325,462	)

Common stock sold for cash						4,179,935		4,180		695,460						699,640
Common stock issued as payment for services						1,760,670		1,761		560,904						562,665
Amortization of restricted stock										395,285						395,285
Dividends on preferred stock										(3,250	)					(3,250	)
Net loss													(1,351,689	)		(1,351,689	)

Balance at December 31, 2009		111,111	$	111		113,985,584	$	41,955	$	8,855,831		$	(9,920,708	)	$	(1,022,811	)

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

CAVITATION TECHNOLOGIES, INC.

Statements of Cash Flows (Unaudited)

							January 29, 2007,
							Inception,
							Through
	Six Months Ended December 31,						March 31,
	2009			2008			2009

Operating activities:
Net loss	$	(4,576,110	)	$	(1,209,396	)	$	(9,753,883	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		7,940			2,262			20,558
Warrants issued in connection with convertible notes payable		-			1,255			49,245
Common stock issued for services		3,763,232			454,600			6,247,649
Stock option compensation		-			198,620			307,512
Warrants issued for services		5,173			-			151,216
Amortization of loan discount		63,601			-			63,601

Effect of changes in:

Prepaid expenses and other current assets		1,989			(898	)		(353	)
Deposits		-			-			(9,500	)
Accounts payable and accrued expenses		131,914			35,195			514,187
Deferred revenue		7,480			26,000			33,480
Net cash used in operating activities	$	(594,781	)	$	(492,362	)	$	(2,376,288	)

Investing activities:
Purchase of Property and Equipment		(21,020	)		-			(96,392	)
Net cash used in investing activities	$	(21,020	)	$	-		$	(96,392	)

Financing activities:
Proceeds from line of credit borrowings		-			9,061			636,917
Payments on line of credit		(86,771	)		-			(86,771	)
Proceeds from sales of preferred stock		-			125,000			725,000
Payments on convertible notes payable		(20,000	)		-			(55,000	)
Proceeds from convertible notes payable		-			125,900			235,000
Proceeds from sale of commom stock and subscription deposit		709,510			-			1,009,510
Proceeds from short term loan		18,500			-			18,500
Net cash provided by financing activities	$	621,239		$	259,961		$	2,483,156

Net increase (decrease) in cash		5,438			(232,401	)		10,476
Cash, beginning of period		5,038			310,929			-
Cash, end of period	$	10,476		$	78,528		$	10,476

Supplemental disclosures of cash flow information:
Cash paid for interest	$	30,368		$	17,868		$	133,655
Cash paid for income taxes		-			-			3,469

Supplemental disclosure of non-cash investing and financing activities:
Warrants issued in connection with preferred stock		-			-			155,714
Beneficial conversion feature of preferred stock		-			-			11,111
Conversion of preferred to common shares in reverse merger		-			625,000			625,000
Proceeds from sales of preferred stock used to purchase shares of Bio		-			-			400,000
Conversion of notes payable to common stock		190,803			-			190,803

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

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

Note 1 - Nature of Operations

Cavitation Technologies, Inc. is a Nevada Corporation (the “Company”) ,which operates through its wholly owned subsidiary Hydrodynamic Technology, Inc., a California corporation. The Company designs and engineers environmentally friendly NANO technology based systems that use our patents pending, multi-stage, continuous flow-through, hydrodynamic NANO Series of cavitation reactors. These systems have commercial applications in industries such as vegetable oil refining, renewable fuels, water recycling, water-oil emulsions, alcoholic beverage enhancement, extraction of algae, and crude oil yield enhancement.

Products include the "Green D+ Plus De-gumming System", a vegetable oil refining system, the "HydorFuel System" for producing diesel-water fuel emulsions, and the "Bioforce 9000 NANO Reactor Skid System" which performs the transesterification process during the production of biodiesel.

Our success will depend in part on our ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others both in the United States and other countries. We have eight patent applications pending in the US and have applied for three international patents. We intend to apply for new patents on a regular basis. Our patents pending apply to potential commercial applications in markets such as vegetable oil refining, renewable fuels production, waste water treatment, water-oil emulsions, crude oil yield enhancement,

and alcoholic beverage enhancement. There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company.

We are are traded on both the Over the Counter Bulletin Board where our ticker symbol is CVAT as well as the Berlin and Stuttgart Stock Exchanges where our symbol is WTC. Our single location is our headquarters in Chatsworth, CA. We have four full-time employees and have engaged approximately forty consultants and independent contractors over the past two years.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Going Concern

The Company is a development stage entity as of December 31, 2009 as defined by the Financial Accounting Standard Board Accounting Standard Codification (ASC) 915. Successful completion of the Company’s development programs and ultimately the attainment of profitable operations are dependent on future events including, among other things, our ability to access potential markets; secure financing; develop a customer base; attract, retain, and motivate qualified personnel; and develop strategic alliances. The Company has no significant operating history and, from January 29, 2007 (inception), through December 31, 2009 generated a net loss of $9,753,883. The Company also has negative cash flow from operations and negative net equity. To date the Company has been funded by private equity and debt. Although management believes that the company will be able to successfully fund its operations, there can be no assurance that the Company will be able to do so or that the company will ever operate profitably.

Management’s plan is 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. 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.

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three and six months ended December 31, 2009 and for the three and six months ended December 31, 2008 are not necessarily indicative of results to be expected for fiscal year ending June 30, 2010. For further information, please refer to Notes to Consolidated Financial Statements - “Significant Accounting Policies” of the Company’s Form 10-K for the year ended June 30, 2009 as filed with the Securities and Exchange Commission (SEC) on September 28, 2009 for a description of the Company’s Basis of Presentation.

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 through consolidation.

Fair Value Measurement

Effective January 1, 2008, the Company adopted the provisions of ASC 820, “Fair Value Measurements”. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The implementation of this standard did not have any impact on the Company’s consolidated financial positions, results of operations, or cash flows. The carrying amounts of cash and cash equivalents, accounts payable and other accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of outstanding debt issued pursuant to credit agreements approximate fair value because interest rates over the term of these instruments approximate current market interest rates.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted 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 stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.

Revenue Recognition

Revenue is recognized 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 collectibility is reasonably assured. The Company recognizes revenues in accordance with ASC 605 Revenue Recognition. During the first quarter of fiscal 2010, the Company received a deposit of $7,480 from a customer relating to an order for our Bioforce 9000 NANO Reactor Skid System. Because this transaction has not yet been fully completed, this amount is included in deferred revenue on the accompanying balance sheet as of December 31, 2009. There were no deposits during the second quarter of fiscal 2010.

Cash

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.

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

Property and Equipment

Property and equipment 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

Share-Based Compensation

Compensation costs related to stock options are determined in accordance with ASC 718, “Share-Based Payments”. Under this method, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.

Income Taxes

The Company accounts for income taxes under the liability method which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred income tax assets and liabilities.

Advertising costs

Advertising costs incurred in the normal course of operations are expensed as incurred.

Research and Development Costs

R&D expenses relate primarily to the development, design, and testing of preproduction prototypes and models and are expensed as incurred.

Note 3 -Net Loss Per Share – Basic and Diluted

The Company computes 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. Diluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute the potential dilution that would occur if stock-based awards and other commitments to issue common stock were exercised.

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

On December 31, 2009, the Company had 2,251,938 stock options and 8,802,638 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 375,000 shares of common stock. These items were not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.

Note 4 - Property and Equipment

Property and equipment consisted of the following as of December 31, 2009 (unaudited) and June 30, 2009.

	December 31,			June 30,
	2009			2009

Leasehold improvements	$	2,475		$	2,475
Furniture and fixtures		26,837			26,837
Office equipment		1,400			1,400
Equipment		65,680			44,660
Property and Equipment (gross)		96,392			75,372
Less: accumulated depreciation		(20,559	)		(12,619	)
Property and Equipment (net)	$	75,833		$	62,753

Depreciation expense for the three and six months ended December 31, 2009 amounted to $4,401 and $7,940, respectively. Depreciation expense for the three and six months ended December 31, 2008 amounted to $1,131 and $2,363, respectively.

Note 5 -Bank Loan

On February 7, 2007, the Company contracted a $700,000 revolving line of credit from National Bank of California. On August 1, 2009, the revolving line of credit was replaced by a one-year variable rate loan which matures August 1, 2010. This loan bears interest at Prime + 2.75% and will be repaid with equal monthly installments of $7,396 beginning September 1, 2009. A final payment of $599,322 is due August 1, 2010. This loan is secured by personal guarantees of the Company’s principals and assets. The balance outstanding under the loan was $550,146 on December 31, 2009 and under the line of credit was $636,917 on June 30, 2009.

Note 6 - Convertible Notes Payable

Convertible Notes Payable

On August 17, 2009, $180,000 in convertible notes payable plus accrued interest were converted into 1,122,375 shares of restricted common stock. Immediately prior to the conversion, the Company changed the conversion rate to be equal to 75% of the average closing price of the Company’s stock for the 10 days immediately preceding the conversion request.

Note 7 – Common and Preferred Stock, Options and Warrants

Common

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

On September 24, 2009, the Company’s Board of Directors authorized an increase in authorized common shares from 100,000,000 to 1,000,000,000 as well as a 3 for 1 forward split of the Company’s common shares. The stock split requires retroactive restatement of all historical shares outstanding. The accompanying Statement of Changes to Stockholder’s Deficit was restated to give retroactive recognition of the forward stock split. All references to the number of shares in the Consolidated Financial Statements are presented on a post-split basis. On October 7, 2009, the Company filed an amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to authorize and increase the number of authorized shares of common stock to 1,000,000,000 (par value $0.001) and to effect a 3 for 1 forward split of all outstanding shares. The effective date for the forward split was October 12, 2009.

On December 31, 2009, the Company received $9,870 in deposits from an individual for the purpose of investing in common stock. The amount of $9,870 is reflected in Common Stock Subscription Deposit on the accompanying balance sheet as of December 31, 2009. In January 2010, the $9,870 deposit was converted into 58,056 of common stock.

Preferred

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 accrue and are 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. At December 31, 2009, the Company has accrued $4,750 in dividends.

Stock Options

There were 2,251,938 stock options outstanding June 30, 2009. There were no options issued during the six months ended December 31, 2009. For details on Stock Options, please refer to our 10-K submitted September 28, 2009.

Warrants

The following tables summarize the Company’s warrant activity and related information for six months ended December 31, 2009 and the year ended June 30, 2009 after consideration of the 3 for 1 forward stock split which occurred on October 12, 2009.

	Warrants				Weighted Average Exercise Price
	December 31,				December 31,
	2009		June 30, 2009		2009		June 30, 2009
Outstanding — Beginning		4,532,703		409,440	$	0.44	$	0.37
Granted		4,269,935		4,123,263	$	0.42		0.45
Exercised		—		—		—		—
Forfeited		—		—		—		—
Expired		—		—		—		—
Outstanding — ending		8,802,638		4,532,703	$	0.43		0.44
Exercisable		8,802,638		4,532,703	$	0.43	$	0.44

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

Warrants Outstanding
	Range of Exercise	Number of		Weighted Average Remaining
	Prices	Warrants		Contractual Life (Years)
$	0.20 – 0.42		6,632,642		3.05
$	0.50 – 0.58		2,169,996		3.75
			8,802,638

The fair value of the warrants granted for services during the first quarter of fiscal 2010 is estimated at $5,173. There were no warrants issued for services during the second quarter of fiscal 2010. The fair value of these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:

Expected Life	3.0 years
Stock Price Volatility		64	%
Risk Free Interest Rate		1.6	%
Expected Dividends	None

Note 8 - 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, 2010, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax has been recorded as of and for the period ended December 31, 2009.

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.

The Company files income tax returns with state and federal jurisdictions. The Company’s state and federal income tax returns for the tax years ended December 31, 2009, 2008 and 2007 are subject to examination by the taxing authorities as of December 31, 2009. The Company has sustained significant net operating losses since inception and has generated corresponding net operating loss carryforwards. We are in the process of evaluating those losses. At December 31, 2009 and 2008, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, we determined that it was not more likely than not that our deferred income tax assets would not be realized. Consequently we have recorded a 100% valuation allowance which is presented as a reduction of our deferred income tax asset which principally arose from our net operating loss carryforwards.

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

Note 9 - Lease Agreements

On January 9, 2007, the Company entered into a 3-year lease agreement for approximately 6,000 square feet of office space located at 10019 Canoga Ave., Chatsworth, CA 91311. The lease provides for monthly rental payments including parking and utilities of $4,750 for the first 12 months, and cost of living adjustments according to the Consumer Price Index for All Urban Customers at a rate not less than 3% per annum, and not greater than 6% per annum. The lease expires February 15, 2010. As of December 31, 2009, the Company has a security deposit of $9,500 associated with this lease.

On December 30, 2009, the Company extended its lease agreement for office space for a period of two years effective February 1, 2010. Monthly rent under the extended lease agreement is $4,250 per month.

Note 10 – Recent Accounting Standards

Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) change periodically. Changes in such standards may have an impact on the Company’s future financial position. The following are a summary of recent accounting developments.

In February 2007, the FASB issued ASC 825, (formerly SFAS No. 159), The Fair Value Option of Financial Assets and Financial Liabilities. ASC 825 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. ASC 825 is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007. The adoption of ASC 825 did not have a significant impact on the Company’s financial statements.

In December 2007, the FASB issued ASC 810 (SFAS No. 160), Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. ASC 810 establishes accounting and reporting standards for the non—controlling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests of which the Company currently has none. All other requirements of ASC 810 shall be applied prospectively. ASC 810 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 810 did not have a significant impact on the Company’s financial statements.

In December 2007 the FASB issued ASC 805 (formerly SFAS No. 141 revised 2007), Business Combinations, which revises current purchase accounting guidance in ASC 805, Business Combinations. ASC 805 requires most assets acquired and liabilities assumed in a business combination to be measured at their fair values as of the date of acquisition. ASC 805 also modifies the initial measurement and subsequent re-measurement of contingent consideration and acquired contingencies, and requires that acquisition related costs be recognized as expense as incurred rather than capitalized as part of the cost of the acquisition. ASC 805 is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to business combinations occurring after adoption. The impact of ASC 805 on the Company’s financial statements will depend on the nature and extent of the Company’s future acquisition activities.

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

In March 2008, the FASB issued ASC 815-10-50 (formerly SFAS No. 161 and an amendment of FASB Statement No. 133), Disclosures about Derivative Instruments and Hedging Activities. ASC 815 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. ASC 815 is effective for fiscal years beginning on or after November 15, 2008 with earlier adoption allowed. The adoption of ASC 815 on the Company’s financial statements will depend on the nature and extent of the Company’s future use of hedging and derivatives.

In April 2008 the Financial Accounting Standards Board issued ASC 350-30 (formerly FASB Staff Position No. FAS 142-3) “Determination of the Useful Life of Intangible Assets.” This ASC discusses the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this ASC is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under ASC 805, “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). This ASC is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted this FSP beginning July 1, 2009 and it did not have a significant impact on the Company’s financial position, results of operations, or cash flow.

In May 2008 the FASB issued ASC 470-20 (formerly FSP No. APB 14-1), “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement).” ASC 470-20 addresses instruments commonly referred to as Instrument C which requires the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer's option. ASC 470-20 requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity, and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective application to all periods presented. The adoption of this accounting pronouncement did not have a material effect on our financial statements.

In May 2009 FASB issued ASC 855 (formerly SFAS 165), Subsequent Events effective for interim and annual financial periods ending after June 15, 2009. The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. It also includes the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. It addresses the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This pronouncement had no material impact on the Company’s financial statements.

In June 2009 FASB issued ASC 810 (formerly SFAS 167 which is an amendment to FASB Interpretation No. 46), Consolidation of Variable Interest Entities, to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This Statement requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This Statement eliminates the quantitative-based risks and rewards calculation previously required for determining the primary beneficiary of a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. This pronouncement had no material impact on the Company’s financial statements.

On April 9, 2009 the FASB Issued ASC 825 (formerly Staff Position FAS 107-1 and APB 28-1), Interim Disclosures about Fair Value of Financial Instruments. This requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This ASC also requires those disclosures in summarized financial information at interim reporting periods. This ASC shall be effective for interim reporting periods ending after June 15, 2009. This pronouncement had no material impact on the Company’s financial statements.

CAVITATION TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2009

In June 2009 FASB issued ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This ASC identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. ASC 105 arranges these sources of GAAP in a hierarchy for users to apply accordingly. The GAAP hierarchy will include only two levels of GAAP: authoritative and non-authoritative. This Codification supersedes all existing non-SEC accounting and reporting standards. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the Board’s view, the adoption of this ASC will not change GAAP, and as a result, will not have a material impact on the company’s financial statements.

Note 11 – Subsequent Events

In accordance with ASC 855, “Subsequent Events”, the Company has performed a review of events subsequent to the balance sheet date through February 2, 2010, the date that the consolidated financial statements were issued. On January 15, 2010 the Company signed a worldwide license and distribution Agreement with the Desmet Ballestra Group for the marketing of the Company’s “Green D Plus Nano Cavitation Reactor Systems”.

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

Hydrodynamic Technology, Inc. dba Cavitation Technologies, Inc (Company) was incorporated January 29, 2007, in California. We are a development stage enterprise that designs and engineers NANO technology based systems that use our patents pending, multi-stage, continuous flow-through, hydrodynamic cavitation reactors. We are a “GreenTech” company whose goal is to monetize our patent pending technologies that we feel have unique, useful, and environmentally friendly commercial applications in markets such as vegetable oil refining, renewable fuels, water recycling and desalination, alcoholic beverage enhancement, water-oil emulsions, and crude oil yield enhancement. Research and development has led to products which include the Green D De-gumming System, a vegetable oil refining system, and the Bioforce 9000 NANO Reactor Skid System which performs the transesterification process during the production of biodiesel. We believe the application of our technology can dramatically reduce operating costs and improve yields in comparison to competitive solutions. Our headquarters and only office is in Chatsworth, California.

We have no significant operating history and from January 29, 2007 (date of inception) through December 31, 2009, we generated net losses aggregating $9,753,883. Management’s plan is 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.

Our success depends in part on our ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others both in the United States and other countries. We have seven patent applications pending in the US along with three PCT applications. We intend to apply for new patents on a regular basis. Our patents pending apply to potential commercial applications in markets such as vegetable oil processing, renewable fuels production, water recycling and desalination, water–oil emulsions, crude oil yield enhancement, water-oil emulsions, blending systems, alcoholic beverage enhancement, and algae processing. There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company.

We are a public company with stock traded on the Over the Counter Bulletin Board with ticker symbol CVAT. Our stock is also traded on the Stuttgart Stock Exchange with symbol WTC. Our only location is our headquarters in Chatsworth, California. We have four employees and have engaged approximately 40 consultants and independent contractors over the past two years.

Results of Operations

The following is a comparison of the results of operations for the Company for the three and six months ended December 31, 2009 and 2008.

	Three Months Ended
	December 31,
	2009			2008			$ Change			% Change

General and administrative
expenses	$	1,249,554		$	660,586		$	588,968			89	%
Research and development
expenses		91,968			48,671			43,297			89	%
Total operating expenses		1,341,522			709,257			632,265			89	%
Loss from operations		(1,341,522	)		(709,257	)		(632,265	)		89	%
Interest expense		(10,167	)		(11,681	)		1,514			-13	%
Loss before income taxes		(1,351,689	)		(720,938	)		(630,751	)		87	%
Income tax expense		-			-			-			-
Net loss	$	(1,351,689	)	$	(720,938	)	$	(630,751	)		87	%

	Six Months Ended
	December 31,
	2009			2008			$ Change			% Change

General and administrative
expenses	$	4,327,428		$	1,009,532		$	3,317,896			329	%
Research and development
expenses		154,933			178,546			(23,613	)		-13	%
Total operating expenses		4,482,361			1,188,078			3,294,283			277	%
Loss from operations		(4,482,361	)		(1,188,078	)		(3,294,283	)		277	%
Interest expense		(93,749	)		(21,318	)		(72,431	)		340	%
Loss before income taxes		(4,576,110	)		(1,209,396	)		(3,366,714	)		278	%
Income tax expense		-			-			-			0	%
Net loss	$	(4,576,110	)	$	(1,209,396	)	$	(3,366,714	)		278	%

Revenues

We had no revenue for the three and six months ended December 31, 2009 and 2008. For the three month period ended September 30, 2009, we recorded Deferred Income of $7,480 as a deposit for a potential future sale/lease/license. This amount is included in deferred revenue on the accompanying balance sheet as of December 31, 2009. We expect to be able to achieve revenue during the fiscal year ending June 30, 2010.

General and Administrative Expenses

Our general and administrative expenses increased $588,968 and $3,317,896 for the three and six months ended December 31, 2009, respectively. This is primarily attributed to the issuance of 1,660,182 common shares valued at $923,870, and 19,598,181 common shares valued at $3,729,152, as compensation for services rendered by consultants and key personnel during the three and six months ended December 31, 2009, respectively. We issued 1,050,000 common shares valued at $454,600, and 15,000 stock option s valued at $4,590, during the three months ended December 31, 2008 as compensation for services rendered by consultants and key personnel. We issued 1,050,000 common shares valued at $454,600, and 675,000 stock options valued at $198,620 as compensation for services rendered by consultants and key personnel during the six months ended December 31, 2008. Other expenses contributing to the increase in general and administrative expenses for the three months ended December 31, 2009 include legal fees and salaries in the amount of $90,011 and $112,765, respectively. Legal fees and salaries for the three months ended December 31, 2008 totaled $28,554 and $60,681, respectively. Other expenses contributing to the increase in general and administrative expenses for the six months ended December 31, 2009 include consulting and legal fees, and salaries in the amounts of $267,972, $162,273 and $225,324, respectively. For the six months ended December 31, 2008, legal fees and salaries totaled $38,330 and $122,858, respectively. There were no consulting fees (other than share-based incentives mentioned above) during the six months ended December 31, 2008.

Research and Development

Research and development expenses increased by $43,297 for the three months ended December 31, 2009 when compared to the three months ended December 31, 2008. This increase is primarily attributed to issuance of 100,500 common shares as compensation for services rendered by consultants valued at $34,080. Research and development expenses decreased by $23,613 for the six months ended December 31, 2009 when compared to the six months ended December 31, 2008. Research and development expenses decreased because we focused more resources on advertising and marketing of our existing products and we focused fewer resources on the development potential of commercial products. Nevertheless, we did continue to conduct research and development on our NANO Technology for potential commercial applications in markets such as vegetable oil refining, water recycling and desalination, alcoholic beverage enhancement, crude oil yield enhancement, and water-diesel emulsion.

Interest Expense

Interest expense decreased by $1,514 for the three months ended December 31, 2009 when compared to the three months ended December 31, 2008. Interest expense increased by $72,431 for the six months ended December 31, 2009 when compared to the six months ended December 31, 2008. The decrease in interest expense for the three months ended December 31, 2009 is attributed to lower bank loan levels. The increase in interest expense for the six months ended December 31, 2009 is attributed to interest and amortization of discount on convertible notes payable that were issued on December 30, 2008 at a rate of 12% that were converted to common stock on August 17, 2009 offset by lower bank loans levels.

Liquidity and Capital Resources

At December 31, 2009 and June 30, 2009, we had cash of $10,476 and $5,038, respectively. Our net cash used by operating activities increased by $102,419 from $492,362 to $594,781 during the six months ended December 31, 2008 and 2009, respectively. Our net cash used by investing activities increased by $21,020 from $0 to $21,020 during the six months ended December 31, 2008 and 2009, respectively. Our net cash provided by financing activities increased by $361,278 from $259,961 to $621,239 during the six months ended December 31, 2008 and 2009, respectively.

At December 31, 2009 and June 30, 2009 we had a negative working capital, excluding the aforementioned bank loan, of $557,998 and $601,236, respectively. Our working capital improved primarily because of the conversion of the convertible notes payable to common shares offset by an increase in accounts payable and accrued expenses.

It is our intent to raise additional debt and/or equity financing to fund operations. In addition, we expect to fund our operations from revenue generated in fiscal 2010. 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 we 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.

Share-Based Compensation

Income Taxes

Recently Issued Accounting Standards

In June 2009 FASB issued ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This ASC identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. ASC 105 arranges these sources of GAAP in a hierarchy for users to apply accordingly. The GAAP hierarchy will include only two levels of GAAP: authoritative and non-authoritative. This Codification supersedes all existing non-SEC accounting and reporting standards. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the Board’s view, the adoption of this ASC has not changed GAAP, and as a result, it did not have a material impact on the company’s financial statements.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. Controls and Disclosures

Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were effective.

The term “disclosure controls and procedures,” as defined under the Exchange Act, means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our 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

We sold 4,179,935 common shares for $699,640 during the three months ended December 31, 2009. There were no sales of common stock during the three months ended September 30, 2009.

We issued 19,698,681 common shares as compensation for services rendered during the six months ended December 31, 2009.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Submission of Matters to a vote of Securities Holders.

On September 24, 2009, the Board of Directors authorized an increase in outstanding common shares from 100,000,000 to 1,000,000,000 (par value $0.001as well as authorizing a 3 for 1 forward split of our common shares. A majority of the shareholders voted in favor of the forward split. The articles of incorporation were amended and submitted to the Secretary of State of the State of Nevada on October 7, 2009. The forward split became effective October 12, 2009 in the State of Nevada and was declared effective by FINRA on October 28, 2009. We have incorporated the impact of the forward split into these financial statements.

Item 5 – Other Information

None

Item 6 – Exhibits

Part I Exhibits

31.1 Principal Executive Officer Certification

31.2 Principal Financial Officer Certification

32.1 Section 1350 Certification

10.1 Material agreement

Part II Exhibits

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SIGNATURE	TITLE	DATE

/s/ Roman Gordon	Chief Executive Officer and Director	February 2, 2010
Roman Gordon	(Principal Executive Officer) Chairman of the Board

/s/ Igor Gorodnitsky	President	February 2, 2010
Igor Gorodnitsky

/s/ R.L. Hartshorn	Chief Financial Officer	February 2, 2010
R.L. Hartshorn	(Principal Financial Officer and Accounting Officer)