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Cavitation Technologies, Inc. - Quarter Report: 2010 December (Form 10-Q)

Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(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, 2010
 
Commission File Number: 0-29901
 
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
 
Nevada
 
20-4907818
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of Principal Executive Offices)
 
(818) 718-0905
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, every Interactive Data File, required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.                                                                                                                
Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer o  
Accelerated Filer o
Non-Accelerated Filer o  (Do not check if a smaller reporting company)
Smaller Reporting Company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
                                                                                                                      Yes o     No x
 
As of February 11, 2011, the issuer had 138,681,636 shares of common stock outstanding.
 

 
TABLE OF CONTENTS
 
       
Page
Part I.
 
FINANCIAL INFORMATION
 
3
         
Item 1.
 
Consolidated Financial Statements
 
3
         
   
Consolidated Balance Sheets at December 31, 2010 (unaudited) and June 30, 2010
 
3
         
   
Consolidated Statements of Operations - Three and Six Months Ended December 31, 2010 (unaudited) and December 31, 2009 (unaudited)
 
4
         
   
Consolidated Statement of Stockholders' Deficit - Six Months Ended December 31, 2010 (unaudited)
 
5
         
   
Consolidated Statements of Cash Flows – Six Months Ended December 31, 2010 (unaudited) and December 31, 2009 (unaudited)
 
7
         
   
Notes to Consolidated Financial Statements (unaudited)
 
8
       
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
17
         
Item 3.  
 
Quantitative and Qualitative Disclosures About Market Risk
 
23
         
Item 4.
 
Controls and Procedures
 
24
         
Part II.
 
OTHER INFORMATION
 
24
         
Item 1.  
 
Legal Proceedings
 
24
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
24
         
Item 3.  
 
Defaults Upon Senior Securities
 
28
         
Item 4.  
 
(Removed and Reserved)
 
28
         
Item 5.  
 
Other Information
 
28
         
Item 6.
 
Exhibits
 
29
         
Signatures
     
30
 
2

 
PART I – FINANCIAL INFORMATION
 
ITEM 1.  Consolidated Financial Statements.
 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
 
   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(Unaudited)
       
ASSETS
 
             
Current assets:
           
Cash and cash equivalents
  $ 185     $ 270  
Prepaid expenses and other current assets
    588       3,158  
Total current assets
    773       3,428  
                 
Property and equipment, net
    60,523       69,605  
Deferred costs
    204,581       71,683  
Patents, net
    90,910       92,284  
Other assets
    9,500       9,500  
Total assets
  $ 366,287     $ 246,500  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
                 
Current liabilities:
               
Bank overdraft
  $ 13,027     $ 2,747  
Accounts payable
    183,334       160,179  
Accrued expenses
    88,014       75,656  
Accrued payroll
    79,416       83,051  
Advances
    67,896       17,262  
Deferred revenue
    16,950       33,499  
Short-term loans
    287,025       109,000  
Bank loan
    498,760       524,750  
Total current liabilities
    1,234,422       1,006,144  
                 
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding as of December 31, 2010 and June 30, 2010
    111       111  
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 138,154,600 (unaudited) and 130,581,562 shares are issued and outstanding as of December 31, and June 30, 2010, respectively
    138,155       130,582  
Additional paid-in capital
    14,524,513       12,656,723  
Deficit accumulated during the development stage
    (15,530,914 )     (13,547,060 )
Total stockholders' deficit
    (868,135 )     (759,644 )
Total liabilities and stockholders' deficit
  $ 366,287     $ 246,500  
 
See accompanying notes, which are an integral part of these financial statements
 
3

 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
 
                           
January 29, 2007,
 
                           
Inception,
 
   
For the Three Months Ended
   
For the Six Months Ended
   
Through
 
   
December 31,
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                               
Revenue
  $ 248,600     $ -     $ 248,600     $ -     $ 248,600  
Cost of sales
    36,700       -       36,700       -       36,700  
Gross profit
    211,900       -       211,900       -       211,900  
General and administrative expenses
    915,316       1,249,554       1,824,447       4,327,428       10,086,817  
Research and development expenses
    104,817       91,968       346,070       154,933       4,969,470  
Total operating expenses
    1,020,133       1,341,522       2,170,517       4,482,361       15,056,287  
Loss from operations
    (808,233 )     (1,341,522 )     (1,958,617 )     (4,482,361 )     (14,844,387 )
Interest expense
    (9,544 )     (10,167 )     (22,237 )     (93,749 )     (510,702 )
Loss before income taxes
    (817,777 )     (1,351,689 )     (1,980,854 )     (4,576,110 )     (15,355,089 )
Income tax expense
    -       -       -       -       -  
Net loss
  $ (817,777 )   $ (1,351,689 )   $ (1,980,854 )   $ (4,576,110 )   $ (15,355,089 )
Deemed dividends to preferred stockholders
    (1,500 )     (1,500 )     (3,000 )     (3,000 )     (175,825 )
Net loss available to common stockholders
  $ (819,277 )   $ (1,353,189 )   $ (1,983,854 )   $ (4,579,110 )   $ (15,530,914 )
                                         
Net loss available to common shareholders per share:
                                       
Basic and Diluted
  $ (0.01 )   $ (0.01 )     (0.01 )   $ (0.04 )        
                                         
Weighted average shares outstanding:
                                       
Basic and Diluted
    136,734,911       111,567,617       134,613,680       107,253,064          

See accompanying notes, which are an integral part of these financial statements
 
4


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

 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
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 )
                                                         
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 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  
Warrants issued as payment for services on November 22, 2010
                                    46,735               46,735  
Amortization of restricted stock issued for services
                                    786,275               786,275  
Dividends on preferred stock
                                            (3,000 )     (3,000 )
Net loss
                                            (1,980,854 )     (1,980,854 )
                                                         
Balance at December 31, 2010 (unaudited)
    111,111     $ 111       138,154,600     $ 138,155     $ 14,524,513     $ (15,530,914 )   $ (868,135 )

See accompanying notes, which are an integral part of these financial statements
 
6

 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows (Unaudited) 
 
               
January 29, 2007,
 
               
Inception,
 
   
For the Six Months Ended
   
Through
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Operating activities:
                 
Net loss
  $ (1,980,854 )   $ (4,576,110 )   $ (15,355,089 )
Adjustments to reconcile net loss to net cash
                       
used in operating activities:
                       
Depreciation and amortization
    10,456       7,940       40,043  
Warrants issued in connection with convertible notes payable
    -       -       49,245  
Beneficial conversion feature on convertible notes payable
    -       63,601       286,738  
Common stock issued for services
    1,503,987       3,763,232       10,464,131  
Stock option compensation
    -       -       307,512  
Warrants issued for services
    46,735       5,173       337,359  
Effect of changes in:
                       
Prepaid expenses and other current assets
    2,570       1,989       (588 )
Deposits
    -       -       (9,500 )
Bank overdraft
    10,280       -       13,027  
Accounts payable and accrued expenses
    32,513       131,914       272,807  
Accrued payroll
    (3,635 )     -       358,338  
Advances
    67,896       -       67,896  
Deferred revenue
    (33,811 )     7,480       16,950  
Net cash used in operating activities
    (343,863 )     (594,781 )     (3,151,131 )
                         
Investing activities:
                       
Purchase of property and equipment
    -       (21,020 )     (99,192 )
Payments for systems
    (132,898 )     -       (204,581 )
Payments for patents
    -       -       (92,284 )
Net cash used in investing activities
    (132,898 )     (21,020 )     (396,057 )
                         
Financing activities:
                       
Proceeds from (payments on) bank loan borrowings
    (25,990 )     (86,771 )     498,760  
Proceeds from sales of preferred stock
    -       -       725,000  
Proceeds from convertible notes payable
    -       -       235,000  
Payments on convertible notes payable
    -       (20,000 )     (55,000 )
Proceeds from sale of common stock
    324,641       709,510       1,856,588  
Proceeds from short-term loans
    187,025       18,500       296,025  
Payments of short-term loans
    (9,000 )     -       (9,000 )
Net cash provided by financing activities
    476,676       621,239       3,547,373  
Net increase in cash
    (85 )     5,438       185  
Cash, beginning of period
    270       5,038       -  
Cash, end of period
  $ 185     $ 10,476     $ 185  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid for interest
  $ 22,237     $ 30,368     $ 173,219  
Cash paid for income taxes
  $ 1,600     $ -     $ 6,728  
Supplemental disclosure of non-cash investing and financing activities:
                       
Warrants issued in connection with preferred stock
  $ -     $ -     $ 155,714  
Beneficial conversion feature on preferred stock
  $ -     $ -     $ 11,111  
Conversion of preferred to common shares in reverse merger
  $ -     $ -     $ 625,000  
Proceeds from sales of preferred shares used to purchase shares of Bio
  $ -     $ -     $ 400,000  
Conversion of note payable to common stock
  $ -     $ -     $ 278,922  
Accrued dividends issued to preferred stockholders
  $ 3,000     $ -     $ 9,000  
Conversion of convertible notes payable and accrued interest to common stock
  $ -     $ 190,803     $ 190,803  

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)
December 31, 2010
 
Note 1 - Nature of Operations
 
Cavitation Technologies, Inc. (the “Company”) is a Nevada Corporation originally incorporated under the name Bio Energy, Inc. The Company designs and engineers environmentally friendly NANO technology based systems that have potential commercial applications in industries such as vegetable oil refining, renewable fuels, water-oil emulsions, alcoholic beverage enhancement, algae oil extraction, and crude oil yield enhancement.

We are  focused on merchandising our NANO Neutralization System – a vegetable oil refining system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors.  The principal global market for our systems includes major refiners who process vegetable oils including soybean, canola and rapeseed.  The finished product is used for human consumption as well as animal feed.  During the three months ended December 31, 2010, we recorded revenue of $248,600. Our cumulative loss since inception on January 29, 2007 is $15,355,089, including $10,464,131 in common stock issued for services.  Cumulative net cash used in operating activities of $3,151,131 was funded largely with $2,816,588, in equity issuances, including proceeds of $725,000 from the sale of preferred stock and $235,000 from convertible debt, and $498,760 in a bank loan. Our investment in research and development since inception on January 29, 2007 through December 31, 2010 is $4,969,470, consisting of $2,737,662 paid in cash and $2,231,808 paid in restricted stock primarily to service providers.  We have four full-time employees and no part-time employees.

Note 2 – Basis of Presentation and Going Concern

Management’s Plan Regarding Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  The Company has no significant operating history and, from January 29, 2007, (inception), through December 31, 2010, generated a net loss of $15,355,089.  The Company also has negative cash flow from operations and negative net equity.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

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

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

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

 
Note 3 – Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. All significant inter-company transactions and balances have been eliminated in consolidation.
 
Fair Value Measurement
 
FASB Accounting Standards Codification (“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 2010, the carrying value of certain accounts such as deferred costs, accounts payable, accrued expenses, accrued payroll and short-term loans approximates fair value due to the short-term nature of such instruments.    
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our common stock issued for services, among other items. Actual results could differ from these estimates.
 
Revenue Recognition
 
The Company recognizes revenue when an arrangement exists, delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured.

Deferred Revenue

The Company received total deposits of $16,950 as of December 31, 2010 relating to fabrication of the Company’s NANO Neutralization Systems.  Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidated balance sheet as of December 31, 2010.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.
 
Property and Equipment
 
Property and equipment is presented at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company's accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations.

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

Leasehold improvements
 
Shorter of life of asset or lease
Furniture
 
5-7 Years
Office equipment
 
5-7 Years
Equipment
 
5-7 Years
 
9

 
Stock-Based Compensation
 
The Company accounts for its share-based compensation in accordance ASC 718-20, Share-Based Payment.  Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite vesting period.  There were no stock options granted during the six months ended December 31, 2010 or 2009.  Warrants granted during the six months ended December 31, 2010 and 2009 were valued using the following assumptions.
 
   
Six
 
Six
   
Months Ended
 
Months Ended
   
December 31,
 
December 31,
   
2010
 
2009
         
Expected life in years
 
3.0
 
3.0
Stock price volatility
 
132.1%
 
64.0%
Risk free interest rate
 
0.72%
 
1.60%
Expected dividends
 
None
 
None
Forfeiture rate
 
0%
 
0%
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes.  The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
 
 
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.
 
The Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
 
Advertising and Promotion Costs
 
Advertising costs (including marketing expenses) incurred in the normal course of operations are expensed as incurred.  Advertising expenses amounted to $12,281, $11,291 and $151,584 for the six months ended December 31, 2010 and 2009, and the period from January 29, 2007 (date of inception) through December 31, 2010, respectively.  Advertising expenses amounted to $8,178 and $8,556 for the three months ended December 31, 2010 and 2009, respectively.
 
10

 
Research and Development Costs

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

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications.  The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill.  As of December 31, 2010, the Company had incurred $92,284 in gross patent costs which are capitalized in the accompanying consolidated balance sheet.  The Company had one patent issued during the six months ended December 31, 2010 which is being amortized over an estimated useful life of 4 years.  The patent has a duration through February 27, 2029.  For the three and six months ended December 31, 2010, amortization amounted to $806 and $1,375, respectively.  The Company is awaiting final approval and issuance of additional pending patents.  Once the patents are issued, the Company will begin amortizing the capitalized patent costs over their estimated useful lives.

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

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

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

On December 31, 2010, the Company had 1,810,957 stock options and 13,145,618 warrants outstanding to purchase common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive.  In addition, the Company had 111,111 shares of Series A Preferred Stock outstanding which are convertible into approximately 333,333 shares of common stock.  These items were also not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.
 
11


Note 5 - Property and Equipment

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

   
December 31,
   
June 30,
 
   
2010
   
2010
 
   
(Unaudited)
       
             
Leasehold  improvement
  $ 2,475     $ 2,475  
Furniture
    26,837       26,837  
Office equipment
    1,500       1,500  
Equipment
    68,380       68,380  
                 
      99,192       99,192  
                 
Less: accumulated depreciation and amortization
    (38,669 )     (29,587 )
                 
    $ 60,523     $ 69,605  
 
Depreciation expense amounted to $9,082, $7,940 and $38,669 for the six months ended December 31, 2010 and 2009, and the period from January 29, 2007 (date of inception) through December 31, 2010, respectively.  Depreciation expense amounted to $4,541 and $4,401 for the three months ended December 31, 2010 and 2009, respectively.

Note 6 -Bank Loan
 
On August 1, 2010 the Company renewed its loan with National Bank of California until November 1, 2010.  The amount outstanding at the time of renewal was $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%.  On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payment of $6,000 and a final payment of $474,171  The interest rate floor was increased from 7.0% to 7.5%. As of December 31, 2010, the outstanding balance on the loan was $498,760.

Note 7 – Short-Term Loans

In January 2010, the Company borrowed $9,000 from a shareholder as a short-term loan.  The borrowing bears no interest and is due on demand.  As of June 30, 2010, the total outstanding amount related to this short-term loan amounted to $9,000.  On July 6, 2010, the outstanding short-term loan amount of $9,000 was repaid.

On October 26, 2010, the Company entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000.  The loan bears no interest and is repayable at $25,000 per month beginning January 25, 2011.

As of December 31, 2010, the Company had short-term loans from shareholders in the amount of $212,025.  The borrowings bear no interest and are due on demand.  Management expects the shareholders to convert these short-term loans into common stock or another financial instrument during the year ending June 30, 2011.

The total outstanding balances of the above loans amounted to $287,025 as of December 31, 2010, and are recorded as short-term loans on the accompanying consolidated balance sheet.
 
Note 8 – Stockholders’ Deficit
 
Common Stock
 
On July 8, 2010, the Company issued an aggregate total of 349,571 shares of restricted common stock with an aggregate fair value of $52,436 for the payment of services rendered.
 
12


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

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

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

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

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

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

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

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

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

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

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

Preferred Stock
 
The Company has 5,000,000 shares of Series A Preferred Stock authorized and 111,111 shares outstanding.  Series A Preferred Stock is convertible into common stock at a rate of 3 shares of common stock per share of each Series A Preferred Stock held at any time at the option of the preferred shareholders.  In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred will have liquidation preferences prior to distributions made to any other class of stockholder.  The Series A Preferred Stock is not redeemable.  On the third anniversary date of the issuance of the preferred shares, any Series A Preferred shares outstanding are automatically converted into common stock, at a conversion rate of 3 shares for common to 1 share of Series A Preferred Stock.
 
The holders of the Series A Preferred Stock are entitled to receive out of any funds legally available dividends at the rate of 6% per annum payable on September 30 and March 30. Dividends shall accrue and be cumulative whether or not they have been declared. Dividends may be paid in cash or through the issuance of additional shares of Series A Preferred Stock at the Company’s option.  As of December 31, 2010, cumulative dividends amounted to $9,000.  As of December 31, 2010, none of the cumulative dividends were paid and are recorded in accrued expenses on the accompanying consolidated balance sheet.
 
The Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock.  The Board of Directors can establish the rights, preferences and privileges of the Series B Preferred Stock.  There are no shares of Series B Preferred Stock outstanding.
 
13


Stock Options
A summary of the stock option activity for the six months ended December 31, 2010 is presented below.

               
Weighted-
 
               
Average
 
         
Weighted-
   
Remaining
 
         
Average
   
Contractual
 
         
Exercise
   
Life
 
   
Options
   
Price
   
(Years)
 
                   
Outstanding at June 30, 2010
    1,987,612     $ 0.56       6.16  
Granted
    -       -          
Forfeited
    (176,655 )     0.67          
Outstanding at December 31, 2010 (unaudited)
    1,810,957       0.55       6.23  
                         
Vested and expected to vest
                       
at December 31, 2010 (unaudited)
    1,810,957       0.55       6.23  
                         
Exercisable at December 31, 2010 (unaudited)
    1,810,957       0.55       6.23  
 
The following table summarizes information about outstanding stock options as of December 31, 2010.

       
Options Outstanding
   
Options Exercisable
 
             
Weighted
   
Weighted
         
Weighted
 
             
Average
   
Average
         
Average
 
 
Exercise
   
Number
   
Remaining
   
Exercise
   
Number
   
Exercise
 
 
Price
   
of Shares
   
Life (Years)
   
Price
   
of Shares
   
Price
 
                                   
  $ 0.33       637,297       6.06     $ 0.33       637,297     $ 0.33  
    0.67       1,173,660       6.71       0.67       1,173,660       0.67  
            1,810,957                       1,810,957          
 
14

 
Warrants

A summary of the warrant activity for the six months ended December 31, 2010 is presented below.

               
Weighted-
 
               
Average
 
         
Weighted-
   
Remaining
 
         
Average
   
Contractual
 
         
Exercise
   
Life
 
   
Warrants
   
Price
   
(Years)
 
                   
Outstanding at June 30, 2010
    12,545,618     $ 0.42       2.66  
Granted
    600,000       0.25          
Exercised
    -       -          
Outstanding at December 31, 2010 (unaudited)
    13,145,618       0.42       2.19  
                         
Vested and expected to vest
                       
at December 31, 2010 (unaudited)
    13,145,618       0.42       2.19  
                         
Exercisable at December 31, 2010 (unaudited)
    13,145,618       0.42       2.19  

The following table summarizes information about outstanding warrants as of December 31, 2010.

       
Warrants Outstanding
   
Warrants Exercisable
 
             
Weighted
   
Weighted
         
Weighted
 
             
Average
   
Average
         
Average
 
 
Exercise
   
Number
   
Remaining
   
Exercise
   
Number
   
Exercise
 
 
Price
   
of Shares
   
Life (Years)
   
Price
   
of Shares
   
Price
 
                                   
  $
0.20 - 0.37
      2,939,374       2.27     $ 0.29       2,939,374     $ 0.29  
   
0.42 - 0.58
      10,206,244       2.16       0.45       10,206,244       0.45  
            13,145,618                       13,145,618          
 
Note 9 - Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 270, Interim Financial Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections. The Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the Company will generate net operating losses in the year ending June 30, 2011, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax or tax liability has been recorded as of and for the period ended December 31, 2010.

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


Note 10 - Commitments and Contingencies

Lease Agreements

On December 30, 2009, the Company extended its existing lease agreement for approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave for a period of two years effective February 1, 2010.  Monthly rent under the extended lease agreement is $4,250 per month.  The Company has a security deposit of $9,500 associated with this lease. 

Total rent expense was $25,500, $30,235, and $226,183 for the six months ended December 31, 2010 and 2009, and for the period from January 29, 2007 (date of inception) through December 31, 2010, respectively.  Total rent expense was $12,750 and $15,118 for the three months ended December 31, 2010 and 2009, respectively.

Future minimum lease payments under non-cancelable operating leases are as follows.
 
Year Ended
     
 June 30,
     
       
2011 (remainder of)
    25,500  
2012
    29,750  
Total
  $ 55,250  
 
Royalty Agreements


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

During the three months ended December 31, 2010, we incurred royalty expenses relating to these agreements.  As of December 31, 2010, we had not paid any amounts related to these royalties, and the amounts are reflected in accrued expenses on the accompanying balance sheet.

Licensing Agreement

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

As of December 31, 2010, the Company received advances of $67,896 from Desmet to assist with funding the production of specific CTI Systems.  The Company has agreed to pay these amounts back at the time the systems are sold or licensed.  These amounts are reflected as Advances on the accompanying consolidated balance sheets as of December 31, 2010 and June 30, 2010.
 
16


Note 11 – Subsequent Events

On January 10, 2011, we issued 110,000 restricted shares of common stock to Anita McCormick for a total purchase price of $12,100.

On January 10, 2010, we issued 31,836 shares of common stock to Michael Psomas for accounting services.

On January 10, 2010, we issued 76,080 shares of common stock to Tomer Tal for legal services.

On January 10, 2011, we issued 9,000 shares of common stock to Shannon Stokes for administrative services.

On February 1, 2011, we issued convertible promissory notes in an amount equal to $61,212 to the Tripod Group, LLC.  The notes bear interest rate of 6% per annum and have a maturity of one year or less.  The holder of the notes may elect to convert the outstanding principal and accrued interest into shares of our common stock at a conversion price equal to 65% of the lowest closing bid price of any of the four trading days prior to the conversion.

On Feb 8, 2011 the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. under which Asher Enterprises, Inc. purchased a convertible promissory note in the amount of $42,500. The convertible promissory note bears interest at a rate of 8% p.a. and matures on Nov 10, 2011. The holder of the note may elect to convert principal and accrued interest into shares of common stock at a conversion price equal to 58% of the average lowest closing bid prices of the Company’s common stock for 3 of any 10 trading days prior to conversion.

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
 
Overview
 
We design and engineer NANO technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, alcoholic beverage enhancement, algae oil extraction, water-oil emulsions and crude oil yield enhancement.  During the three months ended December 31, 2010, we recorded revenue of $248,600.  Our cumulative loss since inception on January 29, 2007 is $15,355,089, including $10,464,131 in common stock issued for services.  Cumulative net cash used in operating activities of $3,151,131 was funded largely with $2,816,588 in proceeds from equity sales, including proceeds of $725,000 from the sale of preferred stock and $235,000 from convertible debt, and $498,760 in a bank loan. Our investment in research and development since inception on January 29, 2007 through December 31, 2010 is $4,969,470, consisting of $2,737,662 paid in cash and $2,231,808 paid in restricted stock primarily to service providers.  We have four full-time employees and no part-time employees.

The company is focused on merchandising our NANO Neutralization System – a vegetable oil refining  system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors. The principal market for our systems includes global refiners who process vegetable oils including soybean, canola and rapeseed.  The finished product is used for human consumption as well as animal feed. To date, we have licensed one system and recorded nominal revenue.
 
17


Management’s Plan

We are a development stage entity engaged in merchandising our NANO Neutralization System which is designed to help refine vegetable oils such as soybean, canola, and rapeseed.  Our near term goal is to successfully merchandise our systems. We have no significant operating history and, from January 29, 2007, (inception), through December 31, 2010, generated a net loss of $15,355,089.  We also have negative cash flow from operations and negative net equity. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.
 
Management’s plan is to generate income from operations by successfully finalizing arrangements with prospective clients. We will also attempt to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

Critical Accounting Policies

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

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

Deferred Revenue

The Company received total deposits of $16,950 as of December 31, 2010 relating to fabrication of the Company’s NANO Neutralization Systems.  Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidated balance sheet as of December 31, 2010.

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications.  The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill.  As of December 31, 2010, the Company had incurred $92,284 in gross patent costs which are capitalized in the accompanying consolidated balance sheet.  The Company had one patent issued during the six months ended December 31, 2010 which is being amortized over an estimated useful life of 4 years.  The patent has a duration through February 27, 2029. For the three and six months ended December 31, 2010, amortization amounted to $806 and $1,375, respectively. In addition to one approved patent, we have 10 pending United States patents and 10 pending international patent applications filed under the Patent Corporation Treaty.  The Company is awaiting final approval and issuance of these additional pending patents.  Once the patents are issued, the Company will begin amortizing the capitalized patent costs over their estimated useful lives. CTi also received the “CE Marking” certification which allows us to market our systems in the European Union. We plan to continue to file for new and improved patents on a regular basis.

Intangible and Long-Lived Assets
 
In accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
 
18

 
Stock-Based Compensation

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

Income Taxes
 
We account for income taxes in accordance with ASC 740-10. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates on the date of enactment.
 
 
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid. We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
 
Deferred costs

Deferred costs represent costs associated with units of our NANO Neutralization System that we plan to  lease or rent.  The direct costs incurred by the Company associated with manufacturing the products have been capitalized and reflected as deferred costs on the balance sheet.  When sales or licensing of the specific products are made, the amounts recorded as deferred costs will be expensed as cost of sales.
 
Results of Operations for the Three Months Ended December 31, 2010 Compared to the Three Months Ended December 31, 2009
 
The following is a comparison of our results of operations for the three months ended December 31, 2010 and 2009.
 
   
For the Three Months Ended
             
   
December 31,
             
   
2010
   
2009
   
$ Change
   
% Change
 
   
(Unaudited)
   
(Unaudited)
             
                         
Revenue
  $ 248,600     $ -     $ 248,600       100.0 %
Cost of sales
    36,700       -       36,700       100.0 %
Gross profit
    211,900       -       211,900       100.0 %
General and administrative expenses
    915,316       1,249,554       (334,238 )     -26.7 %
Research and development expenses
    104,817       91,968       12,849       14.0 %
Total operating expenses
    1,020,133       1,341,522       (321,389 )     -24.0 %
Loss from operations
    (808,233 )     (1,341,522 )     533,289       -39.8 %
Interest expense
    (9,544 )     (10,167 )     623       -6.1 %
Loss before income taxes
    (817,777 )     (1,351,689 )     533,912       -39.5 %
Income tax expense
    -       -       -       0.0 %
Net loss
  $ (817,777 )   $ (1,351,689 )     533,912       -39.5 %
 
19


Revenue

During the three months ended December 31, 2010, our revenue consisted primarily of a sale that we completed in December 2010 with a customer located in North Carolina for a 10 gallons/minute NANO Neutralization System for $187,600.

In addition, we also recognized revenue of $35,000 associated with the rental of a NANO Neutralization System. From May through November 2010, we received monthly rental payments of $5,000 from a commercial vegetable oil refining plant located in South Carolina.  These payments were received as compensation for use of our NANO Neutralization System.  This facility was sold in mid December 2010 and will be used for purposes other than soybean oil refining.  As a result, we will receive no further monthly rental payments from this facility.  The equipment has been returned to us and we expect to use it in another facility.

We also recognized $26,000 in revenue associated with the sale of a Bioforce 9000 Reactor Skid System.

We had no revenue during the three months ended December 31, 2009.

Cost of Sales

During the three months ended December 31, 2010, our cost of sales amounted to $36,700 which was the result of the revenue transactions described above.  We had no cost of sales during the three months ended December 31, 2009, as we had no sales during that period.  One of the units sold in 2010 was a prototype, and as a result much of the associated cost was expensed in a prior year.  As a result, we  do not expect our gross profit percentage to be as high on future sales.

Operating Expenses
 
Our operating expenses for the three months ended December 31, 2010 amounted to $1,020,133 compared with $1,341,522 in 2009, a decrease of $321,389, or 24.0%.  The decrease consisted of a decrease in general and administrative expenses in 2010 of $334,238, or 26.7%, offset by an increase in research and development expenses of $12,849, or 14.0%.  These components of our operating expenses increased primarily due to the following.

Our general and administrative expenses decreased by $334,238 for the three months ended December 31, 2010 as compared to 2009.  This decrease is primarily due to a decrease in our expenses related to the issuance of share-based compensation as payment for services.  During the three months ended December 31, 2009, we issued 1,985,670 shares of common stock valued at $562,667 to consultants, service providers and other key personnel who contributed to the success of the Company.  During the three months ended December 31, 2010, we issued 2,053,055 shares of common stock valued at $266,187, including $185,837 in general and administrative expenses and $80,350 in research and development expenses.  We also issued 600,000 warrants as payment for services during the three months ended December 31, 2010 resulting in $46,734 in general and administrative expenses.  As a result, our total general and administrative expenses relating to share-based compensation decreased by $330,096.  The primary reason for this decrease is due to the decrease in the value of our common stock in 2010 as compared to 2009.  During the three months ended December 31, 2010, our common stock had an average value per share of approximately $0.13 per share, as compared with an average value per share of approximately $0.29 during the three months ended December 31, 2009.  The remaining expenses for the three months ending December 31, 2010 and 2009 consisted mostly of compensation expense and professional fees for legal, audit, and accounting services which remained fairly consistent between the periods.

Our research and development expenses increased by $12,849 for the three months ended December 31, 2010 as compared to 2009. This increase is primarily due to the issuance of common stock valued at $80,350 and issued to consultants that were added in 2010 involved in research and development.  There was no such expense in 2009.  The increase was offset by a general decrease in research and development spending in 2010 due to cash flow constraints.

Interest Expense
 
Our interest expense decreased by $623, or 6.1%, for the three months ended December 31, 2010 as compared to 2009.  This decrease was primarily due to a decrease in the outstanding balance of the loan in 2010.
 
20


Results of Operations for the Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009

The following is a comparison of our results of operations for the six months ended December 31, 2010 and 2009.

   
For the Six Months Ended
             
   
December 31,
             
   
2010
   
2009
   
$ Change
   
% Change
 
   
(Unaudited)
   
(Unaudited)
             
                         
Revenue
  $ 248,600     $ -     $ 248,600       100.0 %
Cost of sales
    36,700       -       36,700       100.0 %
Gross profit
    211,900       -       211,900       100.0 %
General and administrative expenses
    1,824,447       4,327,428       (2,502,981 )     -57.8 %
Research and development expenses
    346,070       154,933       191,137       123.4 %
Total operating expenses
    2,170,517       4,482,361       (2,311,844 )     -51.6 %
Loss from operations
    (1,958,617 )     (4,482,361 )     2,523,744       -56.3 %
Interest expense
    (22,237 )     (93,749 )     71,512       -76.3 %
Loss before income taxes
    (1,980,854 )     (4,576,110 )     2,595,256       -56.7 %
Income tax expense
    -       -       -       0.0 %
Net loss
  $ (1,980,854 )   $ (4,576,110 )     2,595,256       -56.7 %

Revenue

During the six months ended December 31, 2010, our revenue consisted primarily of a sale that we completed in December 2010 with a customer located in North Carolina for a 10 gallons/minute NANO Neutralization System for $187,600.  In addition, we recognized revenue amounting to $35,000 associated with the rental of a NANO Neutralization System, as well as $26,000 associated with the sale of a Bioforce 9000 Reactor Skid System.  We had no revenue during the six months ended December 31, 2009.

Cost of Sales

During the six months ended December 31, 2010, our cost of sales amounted to $36,700 which was the result of the revenue transactions described above.  We had no cost of sales during the six months ended December 31, 2009, as we had no sales during that period. One of the units sold in 2010 was a prototype, and as a result much of the associated cost was expensed in a prior year.  As a result, we go not expect our gross profit percentage to be as high on future sales.

Operating Expenses
 
Our operating expenses for the six months ended December 31, 2010 amounted to $2,170,517 compared with $4,482,361 in 2009, a decrease of $2,311,844 or 51.6%.  The decrease consisted of a decrease in general and administrative expenses in 2010 of $2,502,981, or 57.8%, offset by an increase in research and development expenses of $191,137, or 123.4%.  These components of our operating expenses increased primarily due to the following.

Our general and administrative expenses decreased by $2,502,981 for the six months ended December 31, 2010 as compared to 2009.  This decrease is primarily due to a decrease in share-based compensation during the six months ended December 31, 2010.  During the six months ended December 31, 2009, our total share-based compensation recorded as general and administrative expenses amounted to $3,768,405 which consisted of $3,763,232 relating to the issuance of 19,698,681 shares of common stock to consultants, service providers and other key personnel who contributed to the success of the Company, as well as $5,173 relating to the issuance of warrants as payment for services.  The increased number of shares issued for services was due primarily to bonuses in July 2009 to kep employees and consultants.  During the six months ended December 31, 2010, we issued 4,568,827 shares of common stock as payment for services valued at $717,712, including $433,112 in general and administrative expenses and $284,600 in research and development.  During the six months ended December 31, 2010, we also recognized amortization of $786,275 in restricted stock issued for services during the year ended June 30, 2010, as well as $46,734 in expenses relating to warrants issued as payment for services.  As a result, total share-based general and administrative expenses for the six months ended December 31, 2010 amounted to $1,266,121.  Share based compensation, therefore declined by $2,502,284 during the six months ended December 31, 2010.  The remaining expenses for the six months ending December 31, 2010 and 2009 consisted largely of salaries, professional fees for legal, audit, and accounting services, and remained fairly consistent between the periods.
 
21


Our research and development expenses increased by $191,137 for the six months ended December 31, 2010 as compared to 2009. This increase is primarily due to the issuance of common stock valued at $284,600 and issued to consultants that were added in 2010 involved in research and development.  There was no such expense in 2009.  The increase was offset by a general decrease in research and development spending in 2010 due to cash flow constraints.

Interest Expense
 
Our interest expense decreased by $71,512, or 76.3%, for the six months ended December 31, 2010 as compared to 2009.  This decrease was primarily due to $63,601 attributable to the beneficial conversion feature on convertible debt during 2009. This amount arose as we converted debt into restricted common shares at a 25% discount to the market price. There was no such charge in 2010.  The remaining decrease was due primarily to a decrease in the outstanding loan balance in 2010.

Liquidity and Capital Resources

Bank Loan

On August 1, 2010 we renewed our loan from the National Bank of California through November 1, 2010 for $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%.  On August 1, 2010, we renewed the loan until November 1, 2010.  The amount outstanding at the time of renewal was $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%. On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payments of $6,000 and a final payment of $474,171.  The interest rate floor was increased from 7.0% to 7.5%. As of December 31, 2010, the outstanding balance on the loan was $498,760.

Short-Term Loans

As of December 31, 2010, we had outstanding short-term loans from shareholders in the amount of $212,025.  The borrowings bear no interest and are due on demand.  We expect the shareholders to convert these short-term loans into common stock or another financial instrument during the year ending June 30, 2011.

On October 26, 2010, we entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000.  The loan bears no interest and is repayable at $25,000 per month beginning January 25, 2011.  This agreement was restructured on January 21, 2011 extending the due date on the initial payment to March 31, 2011.

Common Stock

During the six months ended December 31, 2010, we issued 3,004,211 shares of common stock for $324,641 in cash.

Share-based Compensation

During the six months ended December 31, 2010, we issued 4,568,827 shares of common stock valued at $717,712 as payments to service providers.  In addition, we incurred $786,275 of expenses relating to the amortization of restricted stock issued during the year ended June 30, 2010.  We also issued warrants as payment for services during the six months ending December 31, 2010, resulting in $46,735 in expenses.
 
22

 
Cash Flow

Net cash used in operating activities during the six months ended December 31, 2010 amounted to $343,863 compared to $594,781 for the same period in 2009.  During the six months ended December 31, 2010, our net loss amounted to $1,980,854, including non-cash operating expenses of $1,561,178 arising primarily from common stock issued for services provided.  The remaining net cash of $419,676 was used largely to pay salary and related expenses, research and development, interest expense and professional fees such as attorneys and accountants.  During the six months ended December 31, 2009, our net loss amounted to $4,576,110, including non-cash operating expenses of $3,839,946 arising primarily from common stock issued for services provided.  The remaining net cash of $736,164 was used largely to pay similar salary and professional expenses as in 2010.

Net cash used in investing activities during the six months ended December 31, 2010 amounted to $132,898 which was the result of payment for customization of systems.  During the six months ended December 31, 2009, our net cash used in investing activities amounted to $21,020 which resulted from amounts spent for the purchase of property and equipment.

Net cash provided by financing activities during the six months ended December 31, 2010 amounted to $476,676, which resulted from proceeds from the sale of common stock amounting to $324,641 and proceeds from short-term loans of $187,025, offset by the payment of short-term loans of $9,000 and payments for the bank loan of $25,990.  During the six months ended December 31, 2009, our net cash provided from financing activities amounted to $621,239 which resulted from proceeds from the sale of common stock of $709,510 offset by payments for convertible notes payable of $20,000 and payments for the bank loan of $86,771.

Commitments

Lease Agreements

On December 30, 2009, we extended our existing lease agreement for approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave for a period of two years effective February 1, 2010.  Monthly rent under the extended lease agreement is $4,250 per month.

Future minimum lease payments under non-cancelable operating leases are as follows.
 
Year Ended
     
 June 30,
     
       
2011 (remainder of)
    25,500  
2012
    29,750  
Total
  $ 55,250  
 
Royalty Agreements

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

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk.
 
Not applicable for smaller reporting companies.
 
23

 
ITEM 4.  Controls and Disclosures

Evaluation of  Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

In accordance with the requirements of Rule 13a-15(d) of the Securities Exchange Act of 1934, there were no changes in internal  control over financial reporting during the second quarter of fiscal 2011 that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.

PART II – OTHER INFORMATION
 
Item 1  Legal Proceedings

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

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
 
Since our previous disclosure in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, the following is a listing of unregistered security activity during the quarter ended December 31, 2010.
 
Sales of Restricted Common Stock

On October 1, 2010, we issued 100,000 shares of common stock to Charles Collier for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 42,000 shares of common stock to Richard Burns for a total purchase price of $5,040.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 84,000 shares of common stock to Nathanial D. Conrad for a total purchase price of $10,080.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 84,000 shares of common stock to Constance Troncale for a total purchase price of $10,080.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
 
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On October 1, 2010, we issued 16,000 shares of common stock to Nick Pomeranz for a total purchase price of $1,920. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 126,000 shares of common stock to Gerald Healy for a total purchase price of $15,120. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 125,000 shares of common stock to David P. Conrad for a total purchase price of $15,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 84,000 shares of common stock to Philip L. Terry for a total purchase price of $10,080. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Kathleen Elliott for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Patricia Morales for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 1,000,000 shares of common stock to West Pointe Partners, LTD for a total purchase price of $100,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Anna Mosk for a total purchase price of $10,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 100,000 shares of common stock to Suzahnna Tepper for  a total purchase price of $10,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
 
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On November 22, 2010, we issued 100,000 shares of common stock to Janice Tamoto for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 22, 2010, we issued 150,000 shares of common stock to Rose De Santos for a total purchase price of $18,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

Issuance of Restricted Common Stock for Services

On October 1, 2010, we issued 101,370 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 78,147 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 250,000 shares of common stock to RL Hartshorn for CFO services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 9,000 shares of common stock to Shannon Stokes for office services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On October 1, 2010, we issued 35,000 shares of common stock to Varvara Grichko for research and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 88,800 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 116,954 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
 
26


On November 1, 2010, we issued 47,728 shares of common stock to Kelly Lowry & Kelley, LLP for legal  services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 150,000 shares of common stock to James Hurley for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 500,000 to AM-PM Appliance Service for research and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 30,000 shares of common stock to Irakli Gagua for IT services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 37,500 shares of common stock to James Fuller for board of director services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 1, 2010, we issued 50,000 shares of common stock to Kirk Wiggins for marketing and sales services.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 22, 2010, we issued 75,000 shares of common stock to Viktor Grichko for research and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On November 22, 2010, we issued 25,000 shares of common stock to Strategic IR, LTD for investor relation services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On December 7, 2010, we issued 55,062 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
 
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On December 7, 2010, we issued 170,107 shares of common stock to Tomer Tal for legal  services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On December 7, 2010, we issued 10,000 shares of common stock to Varvara Grichko for research and development services.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On December 7, 2010, we issued 226,887 shares of common stock to Snapshot, LTD for investor relation services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

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

Issuance of Warrants

On November 22, 2010, we issued Pinnacle Financial Group warrants to purchase 600,000 shares of common stock at an exercise price of $0.25 for investor relation services.  The warrants are fully vested as of the issuance date and can be exercised at any time through November 22, 2013.

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

Item 3 – Defaults Upon Senior Securities

None

Item 4 – (Reserved and Removed)
 
Item 5 – Other Information

None
 
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Item 6 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report or incorporated by reference.

       
Incorporated by Reference
   
   
Filed
       
Exhibit
Exhibit Description
Herewith
Form
Pd. Ending
Exhibit
Filing Date
             
3(i)(a)
Articles of Incorporation - original name of Bioenergy, Inc.
 
SB-2
N/A
3.1
Oct. 19, 2006
3(i)(b)
Articles of Incorporation - Amended and Restated
 
10-Q
Dec. 31, 2008
3-1
February 17, 2009
3(i)( c )
Articles of Incorporation - Amended and Restated
 
10-Q
June 30 2009
3-1
May 14, 2009
3(i)(d)
Articles of Incorporation - Amended; increase in authorized shares
 
8K
N/A
N/A
October 29, 2009
3(i)(e)
Articles of Incorporation - Certificate of Amendment; forward split
 
10Q
30-Sep-09
3-1
November 16, 2009
             
3(ii)(a)
By-laws - originally Bioenergy, Inc.
 
SB-2
N/A
3.2
Oct. 19, 2006
             
10.1
Licensing  agreement
X
       
10.2
CFO agreement
X
       
10.3
Employment Agreement
X
       
10.4
Employment Agreement
X
       
10.5
Assignment of Patent Assignment Agreement
 
8K
N/A
10.3
May 18, 2010
10.6
Assignment of Patent Assignment Agreement
 
8K
N/A
10.4
May 18, 2010
10.7
Patent Assignment Agreement
 
8K
N/A
10.1
May 18, 2010
10.8
Patent Assignment Agreement
 
8K
N/A
10.2
May 18, 2010
             
31.1
Certificat of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
X
       
31.2
Certificat of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
X
       
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted
X
       
 
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
         
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
X
       
 
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
         
 
29

 
SIGNATURES

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

SIGNATURE
 
TITLE
 
DATE
         
/s/ Roman Gordon
 
Chief Executive Officer and Director
 
February 11, 2011
Roman Gordon
 
(Principal Executive Officer)
Chairman of the Board
   
         
/s/  Igor Gorodnitsky
 
President
 
February 11, 2011
Igor Gorodnitsky
       
         
/s/  R.L. Hartshorn
 
Chief Financial Officer
 
February 11, 2011
R.L. Hartshorn
 
(Principal Financial Officer and Accounting Officer)
   
 
30