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

Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
   
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the quarterly period ended March 31, 2010
 
OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
   
For the transition period from            to          
 
Commission File Number: 0-29901
 
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
 
Nevada
 
20-4907818
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of Principal Executive Offices)
 
(818) 718-0905
(Registrant’s telephone number, including area code)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of Each Class:
 
Name of Each Exchange on Which Registered:
None
 
Over the Counter (Bulletin Board)

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

Common Stock, $0.001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o      No x

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o     No x

State the aggregate market value of the voting and non -voting common equity held by non-affiliates of the registrant by reference to the price at which the common equity was last sold, or of the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completely second fiscal quarter: $11,229,822 as of March 31, 2010 based on the closing price of $0.16 per share and 70,186,388 shares outstanding.  

The registrant had 122,855,952 shares of Common Stock, par value $0.001 per share, outstanding at May 5, 2010.
 


FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED DECEMBER 31, 2009
 
TABLE OF CONTENTS
 
     
Page
PART I - FINANCIAL INFORMATION
 
   
 
ITEM 1.
FINANCIAL STATEMENTS
3
       
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
14
       
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
18
       
 
ITEM 4.
CONTROLS AND PROCEDURES
18
       
PART II – OTHER INFORMATION
 
   
 
ITEM 1.
LEGAL PROCEEDINGS
19
       
 
ITEM 1A
 RISK FACTORS
 
       
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
19
       
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
19
       
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
19
       
 
ITEM 5.
OTHER INFORMATION
19
       
 
ITEM 6.
EXHIBITS
19

1


Note Regarding Forward Looking Statements

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain statements relating to future results of Cavitation Technologies, Inc. (including certain projections and business trends) that are “forward-looking statements”. Our actual results may differ  materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward-looking statements contained in this quarterly report by the foregoing cautionary statements.
 
2


PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Balance Sheets
 
   
(Unaudited)
       
   
March 31,
   
June 30,
 
   
2010
   
2009
 
             
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 599     $ 5,038  
Prepaid expenses and other current assets
    3,303       2,341  
Deferred cost
    7,378       -  
      Total current assets
    11,280       7,379  
                 
Property and equipment, net
    71,531       62,753  
Other assets
    9,500       9,500  
      Total assets
  $ 92,311     $ 79,632  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
Current liabilities:
               
    Bank overdraft
  $ 9,555     $ -  
   Accounts payable and accrued expenses
    153,948       158,073  
   Accrued officer salary
    354,591       224,542  
   Deferred revenue
    50,741       26,000  
   Convertible notes payable, net of discounts
    -       200,000  
   Short term loan
    9,000       -  
   Line of credit
    537,505       636,917  
      Total current liabilities
    1,115,340       1,245,532  
                 
                 
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Preferred stock $0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding at March 31, 2010 and June 30, 2009.
    111       111  
Common stock, $0.001 par value,  1,000,000,000 shares authorized, 122,503,550 and 88,984,593 shares issued and outstanding at March 31, 2010 and June 30, 2009, respectively.
    50,473       29,661  
Additional paid-in capital
    11,020,860       4,148,926  
Deficit accumulated during the development stage
    (12,094,473 )     (5,344,598 )
      Total stockholders' deficit
    (1,023,030 )     (1,165,900 )
      Total liabilities and stockholders' deficit
  $ 92,311     $ 79,632  
                 
 
 
See accompanying notes, which are an integral part of these financial statements.
 
3

 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Operations (Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
January 29, 2007,
Inception,
Through
   
March 31,
   
March 31,
 
March 31,
   
2010
   
2009
   
2010
   
2009
 
2010
                           
General and administrative expenses
 
$
        2,116,779
   
$
      460,170
   
$
          6,444,167
   
$
       1,469,702
 
$
9,030,950
Research and development expenses
   
             47,373
     
        79,079
     
             202,306
     
          257,625
   
2,640,804
Total operating expenses
   
        2,164,151
     
      539,249
     
          6,646,473
     
       1,727,327
   
11,671,753
Loss from operations
   
       (2,164,151)
     
     (539,249)
     
         (6,646,473)
     
     (1,727,327)
   
          (11,671,753)
Interest expense
   
              (9,614)
     
       (48,593)
     
            (103,362)
     
          (69,912)
   
               (255,895)
Loss before income taxes
   
       (2,173,765)
     
     (587,842)
     
         (6,749,835)
     
     (1,797,239)
   
          (11,927,648)
Income tax expense
   
 -
     
 -
     
 -
     
 -
   
-
Net loss
 
$
       (2,173,765)
   
$
     (587,842)
   
$
         (6,749,835)
   
$
     (1,797,239)
 
$
          (11,927,648)
Preferred stock dividend
   
              (1,500)
     
                -
     
                (4,500)
     
          (50,756)
     
Net loss available to common stockholders
 
$
       (2,175,265)
   
$
     (587,842)
   
$
         (6,754,335)
   
$
     (1,847,995)
     
                                     
Net loss available to common stockholders per share:
                                   
 Basic and Diluted
 
 $
                (0.02)
   
 $
           (0.01)
   
 $
                  (0.06)
   
 $
              (0.03)
     
                                     
Weighted average shares outstanding:
                                   
Basic and Diluted
   
    118,653,402
     
 85,367,766
     
      111,013,943
     
     73,079,217
     
                                     
 
See accompanying notes, which are an integral part of these financial statements.
 
4

 
Cavitation Technologies, Inc
 (A Development Stage Company)
 Consolidated Statements of Changes In Stockholders' Deficit
 
    Preferred Stock     
Common Stock
   
Additional Paid-in
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
                                           
 Issuance of common stock for services on January 29, 2007, inception
                42,993,630       14,331       6,669             21,000  
 Net loss
                                        (533,185 )     (533,185 )
 Balance at December 31, 2007
    -       -       42,993,630       14,331       6,669       (533,185 )     (512,185 )
                                                         
                                                         
 Common stock sold for cash
                    2,047,200       682       499,318               500,000  
 Common stock issued as payment for services on March 31, 2008
                    6,428,904       2,143       1,128,257               1,130,400  
 Common stock issued as payment for services on April 16, 2008
                    51,180       17       8,983               9,000  
 Common stock issued as payment for services on April 22, 2008
                    102,360       34       17,966               18,000  
 Common stock issued as payment for services on June 18, 2008
                    3,787,320       1,262       664,738               666,000  
 Amortization of discount on convertible preferred stock
                                    47,879       (47,879 )     -  
 Net loss
                                            (2,148,597 )     (2,148,597 )
 Balance at June 30, 2008
    -       -       55,410,594       18,470       2,373,809       (2,729,661 )     (337,382 )
                                                         
                                                         
 Preferred stock sold in connection with reverse merger for cash on October 3, 2008
                    2,149,560       717       124,283               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       167       99,833               100,000  
 Common stock sold for cash on June 4, 2009
                    499,998       167       99,833               100,000  
 Common stock sold for cash on June 22, 2009
                    300,000       100       49,900               50,000  
 Common stock sold for cash on June 30, 2009
                    300,000       100       49,900               50,000  
 Bio shares outstanding before reverse merger
                    27,840,534       9,280       (9,280 )             -  
 Common stock issued as payment for services on September 22, 2008
                    150,000       50       17,950               18,000  
 Common stock issued as payment for services on December 3, 2008
                    450,000       150       187,450               187,600  
 Common stock issued as payment for services on December 17, 2008
                    300,000       100       132,000               132,100  
 Common stock issued as payment for services on February 27, 2009
                    590,565       197       157,287               157,484  
 Common stock issued as payment for services on March 11, 2009
                    86,550       29       26,910               26,939  
 Common stock issued as payment for services on March 22, 2009
                    150,000       50       50,450               50,500  
 Common stock issued as payment for services on April 23, 2009
                    29,415       10       9,305               9,315  
 Common stock issued as payment for services on May 28, 2009
                    152,379       51       39,060               39,111  
 Common stock issued as payment for services on June 4, 2009
                    37,500       13       9,863               9,875  
 Common stock issued as payment for services on June 30, 2009
                    37,500       13       8,738               8,750  
Warrants issued in connection with issuance of convertible debt in December 2008 and January 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       29,661       4,148,926       (5,344,598 )     (1,165,900 )
                                                         
                                                         
 Warrants issued as payment for services on July 15, 2009
                                    5,173               5,173  
 Common stock issued as payment for services on July 27, 2009
                    17,170,500       5,674       2,662,110               2,667,783  
 Common stock issued as payment for services on July 30, 2009
                    37,500       13       9,988               10,000  
 Common stock issued as payment for services on August 5, 2009
                    165,000       55       45,045               45,100  
 Common stock issued as payment for services on August 17, 2009
                    150,000       50       39,950               40,000  
 Common stock issued for debt and accrued interest conversion on August 18, 2009
                    1,091,325       364       185,161               185,525  
 Common stock issued for debt and accrued interest conversion on September 11, 2009
                    31,050       10       5,268               5,279  
 Common stock issued as payment for services on September 30, 2009
                    190,011       63       42,336               42,399  
 Conversion feature on notes payable
                                    63,601               63,601  
 Net Loss
                                            (3,224,421 )     (3,224,421 )
 Balance at September 30, 2009
    111,111       111       107,819,979       35,890       7,207,557       (8,569,019 )     (1,325,461 )
                                                         
 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 issued as payment for services on October 7, 2009
                    130,500       131       42,500               42,630  
 Common stock issued as payment for services on October 12, 2009
                                                       
 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               13,500  
 Common stock issued as payment for services on November 3, 2009
                    37,500       38       13,463               13,500  
 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       1,405       406,044               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  
 Amortization of restricted stock
                                    395,285               395,285  
 Dividends on preferred stock
                                    (3,250 )             (3,250 )
 Net loss
                                            (1,351,689 )     (1,351,689 )
 Balance at December 31, 2009
    111,111       111       113,985,584       41,955       8,855,831       (9,920,708 )     (1,022,811 )
                                                         
                                                         
 Sale of common stock on January 6, 2010
                    58,058       58       9,812               9,870  
 Common stock issued in lieu of cash compensation on January 11, 2010
                    121,286       121       30,200               30,321  
 Common stock issued in lieu of cash compensation on February 1, 2010
                    5,125,102       5,125       1,071,146               1,076,271  
 Common stock issued in lieu of cash compensation on February 11, 21010
                    500,000       500       109,500               110,000  
 Sale of common stock on February 14, 2010
                    888,235       888       150,112               151,000  
 Common stock issued in lieu of cash compensation on February 15, 2010
                    127,500       128       26,648               26,776  
 Common stock issued in lieu of cash compensation on February 23, 2010
                    135,000       135       26,865               27,000  
 Sale of common stock on March 2, 2010
                    743,746       744       125,693               126,437  
 Common stock issued in lieu of cash compensation on March 5, 2010
                    121,098       121       83,122               83,243  
 Common stock issued in lieu of cash compensation on March 12, 2010
                    295,000       295       13,230               13,525  
 Common stock issued in lieu of cash compensation on March 22, 2010
                    50,000       50       8,450               8,500  
 Sale of common stock on March 22, 2010
                    352,941       353       59,647               60,000  
 Amortization of restricted stock
                                    395,285               395,285  
 Dividends on prefered stock
                                    (1,500 )             (1,500 )
 Warrants issued as compensation for services
                                    56,818               56,818  
 Net loss
                                            (2,173,765 )     (2,173,765 )
 Balance at March 31, 2010
    111,111       111       122,503,550       50,473       11,020,859       (12,094,473 )     (1,023,030 )
 
5

 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)

               
January 29, 2007,
 
               
Inception,
 
               
Through
 
   
Nine Months Ended March 31,
   
March 31,
 
   
2010
   
2009
   
2010
 
                   
Operating activities:
                 
Net loss
    (6,749,835 )     (1,797,239 )     (11,927,608 )
Adjustments to reconcile net loss to net cash
                       
   used in operating activities:
                       
   Depreciation and amortization
    12,343       5,641       24,961  
   Warrants issued in connection with convertible notes payable
    -       40,147       49,245  
   Common and preferred stock issued for services
    5,534,155       638,000       8,018,572  
   Stock option compensation
    -       198,620       307,512  
   Increase in deferred revenue
    24,741       26,000       50,741  
   Warrants issued for services
    61,991       -       208,034  
   Amortization of loan discount
    63,601       -       63,601  
                         
Effect of changes in:
                       
                         
   Prepaid expenses and other current assets
    (8,340 )     (312 )     (10,682 )
   Deposits
    -       -       (9,500 )
   Accounts payable and accrued expenses
    131,937       111,237       514,210  
   Bank overdraft
    9,555               9,555  
      Net cash used in operating activities
    (919,853 )     (777,906 )     (2,701,359 )
Investing activities:
                       
                         
  Purchase of Property and Equipment
    (21,121 )     -       (96,493 )
    Net investing activities
    (21,121 )     -       (96,493 )
                         
Financing activities:
                       
   Proceeds from line of credit borrowings
    -       9,061       636,917  
   Payments on line of credit
    (99,412 )     -       (99,412 )
   Proceeds from sales of preferred stock
    -       225,000       725,000  
   Proceeds from convertible notes payable
    -       235,000       235,000  
   Payments on convertible notes payable
    (20,000 )             (55,000 )
   Proceeds from sale of commom stock
    1,033,447       -       1,333,447  
   Payments on short term notes payable
    (5,000 )             (5,000 )
   Proceeds from short term notes payable
    27,500               27,500  
      Net cash provided by financing activities
    936,535       469,061       2,798,452  
                         
Net increase (decrease) in cash
    (4,439 )     (308,845 )     599  
Cash, beginning of period
    5,038       310,929       -  
Cash, end of period
    599       2,084       599  
                         
Supplemental disclosures of cash flow information:
                 
   Cash paid for interest
    39,761       32,905       143,048  
   Cash paid for income taxes
    -       -       3,469  
                         
Supplemental disclosure of non-cash investing and financing activities:
         
   Warrants issued in connection with preferred stock
    -       -       155,714  
   Beneficial conversion feature of preferred stock
    -       -       11,111  
   Conversion of preferred to common shares in reverse merger
    -       625,000       625,000  
   Dividend issued to preferred stockholders, as converted
    50,756       -       50,756  
   Proceeds from sales of preferred stock used to purchase shares of Bio
    -       -       400,000  
   Conversion of notes payable to common stock
    204,303       -       204,303  
                         
 
See accompanying notes, which are an integral part of these financial statements
 
6

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010
 
Note 1 - Nature of Operations
 
Cavitation Technologies, Inc. is a Nevada Corporation (the “Company”) ,which  operates through its wholly owned subsidiary Hydrodynamic Technology, Inc., a California corporation.  The Company designs and engineers environmentally friendly NANO technology based systems that use our patents pending, multi-stage, continuous flow-through, hydrodynamic NANO Series of cavitation reactors.  These systems have potential commercial applications in industries such as vegetable oil refining, renewable fuels, water recycling, water-oil emulsions, alcoholic beverage enhancement, extraction of algae, and crude oil yield enhancement.

The Company’s  products include the "Green D+ NANO De-gumming System", an edible oil refining system, the "HydorFuel System" for producing diesel-water fuel emulsions, and the "Bioforce 9000 NANO Reactor Skid System" which performs the transesterification process during the production of biodiesel.  Each reactor skid system contains one of more multi-stage continuous flow through hydrodynamic NANO reactors.  To date, we have sold no products and have received no significant revenue.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Going Concern

The Company is a development stage entity as of March 31, 2010 as defined by the Financial Accounting Standard Board Accounting Standard Codification (ASC) 915. Successful completion of the Company’s development programs and ultimately the attainment of profitable operations are dependent on future events including, among other things, our ability to access potential markets; secure financing; develop a customer base; attract, retain, and motivate qualified personnel; and develop strategic alliances. The Company has no significant operating history and, from January 29, 2007 (inception), through March 31, 2010 generated a net loss of $11,927,648. The Company also has negative cash flow from operations and negative net equity. To date the Company has been funded by private equity and debt. Although management believes that the company will be able to successfully fund its operations, there can be no assurance that the Company will be able to do so or that the company will ever operate profitably.

Management’s plan is to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.
 
Unaudited Interim Financial Information

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended March 31, 2010 and for the three and nine months ended March 31, 2009 are not necessarily indicative of results to be expected for fiscal year ending June 30, 2010. For further information, please refer to Notes to Consolidated Financial Statements - “Significant Accounting Policies” of the Company’s Form 10-K for the year ended June 30, 2009 as filed with the Securities and Exchange Commission (SEC) on September 28, 2009 for a description of the Company’s Basis of Presentation.
 
7

 CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. All significant inter-company transactions and balances have been eliminated through consolidation.
  
Fair Value Measurement
 
Effective January 1, 2008, the Company adopted the provisions of ASC 820, “Fair Value Measurements”. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The implementation of this standard did not have any impact on the Company’s consolidated financial positions, results of operations, or cash flows. The carrying amounts of cash and cash equivalents, accounts payable and other accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of outstanding debt issued pursuant to credit agreements approximate fair value because interest rates over the term of these instruments approximate current market interest rates.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
 
Revenue Recognition
 
Revenue is recognized when: an arrangement exists; delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectibility is reasonably assured. The Company recognizes revenues in accordance with ASC 605 Revenue Recognition.  During the first 9 months of fiscal 2010, the Company received a deposit of $24,741  from  customers  relating to an order for our Bioforce 9000 NANO Reactor Skid System. Because this transaction has not yet been fully completed, this amount is included in deferred revenue on the accompanying balance sheet as of March 31, 2010.   There were no deposits during the second quarter of fiscal 2010.
 
Cash
 
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.
 
Property and Equipment
 
Property and equipment presented at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company's accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations

8

 CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010
 
Share-Based Compensation
 
Compensation costs related to stock options are determined in accordance with ASC 718, “Share-Based Payments”. Under this method, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.
 
Income Taxes
 
The Company accounts for income taxes under the liability method which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred income tax assets and liabilities.
 
Advertising costs
 
Advertising costs incurred in the normal course of operations are expensed as incurred.

Research and Development Costs

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

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning January 1, 2011. The Company’s adoption of this updated guidance was not significant to our consolidated financial statements.

In February 2010, the FASB issued updated guidance related to subsequent events.  As a result of this updated guidance, public filers must still evaluate subsequent events through the issuance date of their financial statements; however, they are not required to disclose the date in which subsequent events were evaluated in their financial statements disclosures.  This amended guidance became effective upon its issuance on February 24, 2010 at which time the Company adopted this updated guidance.  

9

 CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010
 
Note 3 -Net Loss Per Share – Basic and Diluted
 
The Company computes loss per common share using ASC 260, Earnings Per Share. The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period.  The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued. Diluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute the potential dilution that would occur if stock-based awards and other commitments to issue common stock were exercised.
 
On March 31, 2010, the Company had 2,251,938 stock options and 11,845,618 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 375,000 shares of common stock. These items were not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.

Note 4 - Property and Equipment

Property and equipment consisted of the following as of March 31, 2010 (unaudited) and June 30, 2009.

   
March 31,
   
June 30,
 
   
2010
   
2009
 
             
Leasehold improvements
  $ 2,475     $ 2,475  
Furniture and fixtures
    26,837       26,837  
Office equipment
    1,499       1,400  
Equipment
    65,680       44,660  
                 
Property and Equipment (gross)
    96,491       75,372  
Less: accumulated depreciation
    (24,961 )     (12,619 )
Property and Equipment (net)
  $ 71,530     $ 62,753  
 
Depreciation expense for the three and nine months ended March 31, 2010 amounted to $4,403 and $12,343, respectively.  Depreciation expense for the three and nine months ended March 31, 2009 amounted to $3,379 and $5,641, respectively.  

Note 5 -Bank Loan
 
On February 7, 2007, the Company contracted a $700,000 revolving line of credit from National Bank of California. On August 1, 2009, the revolving line of credit was replaced by a one-year variable rate loan which matures August 1, 2010.  This loan bears interest at Prime + 2.75% and will be repaid with equal monthly installments of $7,396 beginning September 1, 2009. The loan is due on August 1, 2010. This loan is secured by personal guarantees of the Company’s principals and assets. The balance outstanding under the loan was $537,505 on March 31, 2010 and under the line of credit was $636,917 on June 30, 2009.
 
10

 CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010

Note 6 - Convertible Notes Payable
 
On August 17, 2009, $180,000 in convertible notes payable plus accrued interest were converted into 1,122,375 shares of restricted common stock. Immediately prior to the conversion, the Company changed the conversion rate to be equal to 75% of the average closing price of the Company’s stock for the 10 days immediately preceding the conversion request.

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

Preferred
 
The holders of the Series A Preferred Stock are entitled to receive out of any funds legally available, dividends at the rate of 6% per annum, payable on September 30 and March 30. Dividends accrue and are cumulative whether or not they have been declared. Dividends may be paid in cash or through the issuance of additional shares of Series A Preferred Stock at the Company’s option. At March 31, 2010, the Company has accrued $6,250 in dividends.

Stock Options

There were 2,251,938 stock options outstanding June 30, 2009.  There were no options issued during the nine months ended March 31, 2010.  For details on Stock Options, please refer to our 10-K submitted September 28, 2009.

Warrants

The following tables summarize the Company’s warrant activity and related information for the nine months ended March 31, 2010 and the year ended June 30, 2009 after consideration of the 3 for 1 forward stock split which occurred on October 12, 2009.
 
11

 CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2010
 
   
Warrants
   
Weighted Average Exercise Price
 
   
March 31,
2010
   
June 30,
2009
   
March 31,
 2010
   
June 30,
 2009
 
Outstanding — Beginning
    4,532,703       409,440     $ 0.44     $ 0.37  
Granted
    7,312,915       4,123,263     $ 0.42       0.45  
Exercised
                       
Forfeited
                       
Expired
                       
Outstanding — ending
    11,845,618       4,532,703     $ 0.43       0.44  
Exercisable
    11,845,618       4,532,703     $ 0.43     $ 0.44  
 
Warrants Outstanding
 
Range of Exercise
Prices
   
Number of
Warrants
   
Weighted Average Remaining
Contractual Life (Years)
 
$0.20–0.42
      9,675,622       2.73  
$0.50–0.58
      2,169,996       3.50  
          11,845,618          
 
The fair value of the warrants granted for services the three and nine months ended March 31, 2010 is estimated at $56,818 and $61,991, respectively. The fair value of these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following range of assumptions:

Expected Life
 
3.0 years
 
Stock Price Volatility
   
64%
 
Risk Free Interest Rate
   
 1.6%
 
Expected Dividends
 
None
 
 
Note 8 - Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 270, Interim Financial Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections. The Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the Company will generate net operating losses in the year ending June 30, 2010, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax has been recorded as of and for the period ended March 31, 2010.
 
12

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

The Company files income tax returns with state and federal jurisdictions. The Company’s state and federal income tax returns for the tax years ended December 31, 2009, 2008 and 2007 are subject to examination by the taxing authorities as of March 31, 2010 as well as all years in which we geenerated a loss that we claim in future years. The Company has sustained significant net operating losses since inception and has generated corresponding net operating loss carryforwards. We are in the process of evaluating those losses. At March 31, 2010 and 2009, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, we determined that it was more not likely that our deferred income tax assets would not be realized. Consequently we have recorded a 100% valuation allowance which is presented as a reduction of our deferred income tax asset which principally arose from our net operating loss carryforwards.

Note 9 - Lease Agreements

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

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

Note 10 – Subsequent Events

In accordance with ASC 855, “Subsequent Events”, the Company has performed a review of events subsequent to the balance sheet date through the filing date of this Form 10-Q of May 15, 2010, the date that the consolidated financial statements were issued.  There were no significant or material transactions that occurred  subsequent to March 31, 2010.

13


ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
 
Overview
 
Hydrodynamic Technology, Inc. dba Cavitation Technologies, Inc (Company) was incorporated January 29, 2007, in California. The Company is a development stage enterprise that designs and engineers environmentally friendly NANO technology based systems that employ our patents pending, multi-stage, continuous flow-through, hydrodynamic NANO Series of cavitation reactors.  These systems have potential commercial applications in markets such as vegetable oil refining, renewable fuels, water purification, water-oil emulsions, alcoholic beverage enhancement, and algae oil extraction.

Products include the "Green D+ NANO De-gumming System" - an edible oil refining system, and the “Bioforce
9000 NANO Skid System” which performs the transesterification process during the production of biodiesel.  Each reactor skid system contains one or more multi-stage, continuous flow-through, hydrodynamic NANO reactors which are manufactured by Canyon Engineering Products.  To date the Company has sold no products and has received no revenue.

Our Green D+ De-gumming System uses a patent pending NANO Cavitation Process which removes the impurities from non-degummed vegetable oils, which assists in the refining process to achieve high quality refined oils.  Lab tests indicate that our technology is able to produce a higher yield than competitive technologies due to less oil loss and a smaller consumption of the degumming reagents.  The global demand for processed edible oils has grown consistently over the past five years from 118 million metric tons in 2005/6 to about 174 million metric tons in 2009/10.  The global target market for our Green D+ includes approximately 7,000 worldwide vegetable oil de-gumming processors.  We intend to license our technology/systems globally through a distribution network of strategic partners who are recognized leaders in their field and who design, build, install and recommend our systems.  On January 15, 2010 the Company signed a worldwide license and distribution agreement with the Desmet Ballestra Group (DBG) for marketing the Company’s Green D+ Systems.  With DBG’s help, we are in the process of installing a 40 gallon/minute Green D+ pilot system in a vegetable oil refining plant in South Carolina.  We expect the results of these two pilot systems to be known no later than June 2010.  We expect to generate meaningful revenue within 12 months of satisfactorily completing these tests.  We expect to be able to compete with well-known companies that supply older, less efficient technology and equipment by offering systems with greater efficiency and productivity.  To date the Company has sold no products nor recognized revenue related to our Green D+ system.

The biodiesel industry has been negatively impacted by the failure of Congress to extend the $1/gallon tax credit for more than one year.  Without assurance that the credit will remain in effect, it is very difficult for biodiesel producers to be profitable.  Lack of cost-effective feedstock and the relatively low price of petroleum-based diesel fuel also hamper the development of the biodiesel industry.  Uncertainty in the biodiesel industry has negatively affected our business.  Our Bioforce 9000 was incorporated into a biodiesel plant that was scheduled to begin operations in September 2009 in Moberly, Missouri.  Due to lack of funds, the plant is not in operation.  We do not know when or if this plant will become operational.  Relationships with other potential partners have been slow to evolve because of the challenges facing the biodiesel industry.  To date the Company has sold no products nor recognized revenue related to our Bioforce 9000.

Both the Bioforce 9000 and the Green D+ Plus Systems use our unique patents pending, continuous flow-through, hydrodynamic NANO Cavitation Technology in the form of one or more reliable, cost effective, multi-stage, continuous flow-through, hydrodynamic NANO cavitation reactors manufactured by Canyon Engineering Products.  Our NANO technology process creates particles smaller than one micron (nano particles) and bonds these particles at the molecular level in nano seconds thereby creating a low cost, high quality finished product that can reduce energy requirements and other operating costs and can improve yield versus other solutions.  These reactors have no moving parts and are scalable to high volumes.  There are numerous competitors within the biodiesel industry and there is at least one other company that professes to offer hydrodynamic cavitation technology.  Other competitors in the biodiesel industry offer what we believe are less efficient technologies.  We differentiate ourselves by the designs, processes, and applications described in our patents pending applications.  We compete by offering solutions that we believe can reduce operating expenses vis-à-vis current technology.
 
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Our success depends in part on our ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others both in the United States and other countries. We have eight US and six international patent applications pending which apply to our reactors, systems, and processes.  We intend to apply for new and improved patents on a regular basis.  Our patents pending apply to potential commercial applications in markets such as vegetable oil processing, renewable fuels, water purification, water–oil emulsions, alcoholic beverage enhancement, and algae processing.  There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company. Due to the nature of our products, we have incurred no costs with respect to environmental compliance.
 
We have no significant operating history and from January 29, 2007 (date of inception) through March 31, 2010, we generated net losses aggregating $11,870,830. Management’s plan is to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

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

Results of Operations
 
The following is a comparison of the results of operations for the Company for the three and nine months ended March 31, 2010 and 2009.
 
   
Nine Months Ended
             
   
March 31,
             
   
2010
   
2009
   
$ Change
   
% Change
 
General and administrative expenses
  $ 6,444,167     $ 1,469,702     $ 4,974,465       338 %
Research and development expenses
    202,306       257,625       (55,319 )     -21 %
Total operating expenses
    6,646,473       1,727,327       4,919,146       285 %
Loss from operations
    (6,646,473 )     (1,727,327 )     (4,919,146 )     285 %
Interest expense
    (103,362 )     (69,912 )     (33,450 )     48 %
Loss before income taxes
    (6,749,835 )     (1,797,239 )     (4,952,596 )     276 %
Income tax expense
    -       -       -       0 %
Net loss
  $ (6,749,835 )   $ (1,797,239 )   $ (4,952,596 )     276 %
 
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Three Months Ended
             
   
March 31,
             
   
2010
   
2009
   
$ Change
   
% Change
 
General and administrative expenses
  $ 2,116,779     $ 460,170     $ 1,656,609       360 %
Research and development expenses
    47,373       79,079       (31,706 )     -40 %
Total operating expenses
    2,164,151       539,249       1,624,902       301 %
Loss from operations
    (2,164,151 )     (539,249 )     (1,624,902 )     -301 %
Interest expense
    (9,614 )     (48,593 )     38,979       -80 %
Loss before income taxes
    (2,173,765 )     (587,842 )     (1,585,923 )     270 %
Income tax expense
    -       -       -       -  
Net loss
  $ (2,173,765 )   $ (587,842 )     (1,585,923 )     270 %
 
Revenues

We had no revenue for the three and nine months ended March 31, 2010 and 2009. For the three month period ended March 31, 2010 we recorded deferred revenue of $17,261 as a deposit for a potential future sale/lease/license. This amount is included in deferred revenue on the accompanying balance sheet as of March 31, 2010.  We expect to be able to achieve revenue during the fiscal year ending June 30, 2011.

General and Administrative Expenses
 
Our general and administrative expenses increased $1,656,609 and $4,974,465 for the three and nine months ended March 31, 2010, respectively.  The increase is primarily attributed to the issuance of 6,399,986 common shares valued at $1,359,512 and 25,998,167 common shares valued at  $5,088,664, as compensation for services rendered by consultants and key personnel during the three and nine months ended March 31, 2010, respectively. We issued 827,115 common shares valued at $234,923, and 255,000 stock option s valued at $50,571, during the three months ended March 31, 2009 as compensation for services rendered by consultants and key personnel.  We issued 1,877,115 common shares valued at $689,523, and 930,000 stock options valued at $249,191 as compensation for services rendered by consultants and key personnel during the nine months ended March 31, 2009.  Other expenses contributing to the increase in general and administrative expenses for the three ended March 31, 2010 include legal fees and salaries in the amount of $73,870 and $168,422, respectively.  Legal fees and salaries for the three months ended March 31, 2009 totaled $53,538 and $162,885, respectively.  Other expenses contributing to the increase in general and administrative expenses for the nine months ended March 31, 2010 include legal fees and salaries in the amounts of $226,998 and $393,746, respectively.  For the nine months ended March 31, 2009, legal fees and salaries totaled $70,958 and $285,744, respectively.
 
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Research and Development
 
Research and development expenses decreased by $31,706 and $55,319 for the three and nine months ended March 31, 2010 when compared to the three and nine months ended March 31, 2009, respectively. Research and development expenses decreased because we focused more resources on advertising and marketing of our existing products and we focused fewer resources on the development potential of commercial products. Nevertheless, we did continue to conduct research and development on our NANO Technology for potential commercial applications in markets such as vegetable oil refining, water recycling and desalination, alcoholic beverage enhancement, crude oil yield enhancement, and water-diesel emulsion. There were 75,000 common shares valued at $16,125 and 175,500 valued at $50,205 issued for research and development services during the three and nine months ended March 31, 2010, respectively.

Interest Expense
 
Interest expense decreased by $38,979 and increased by $33,450 for the three and nine months ended March 31, 2010, respectively, when compared to the three and nine months ended March 31, 2009.  The decrease in interest expense for the three and nine months ended March 31, 2010 is attributed to lower bank loan levels.
 
Liquidity and Capital Resources

At March 31, 2010 and June 30, 2009, we had cash of $599 and $5,038, respectively.    Our net cash used by operating activities increased by $141,947 from $777,906 to $919,853 during the nine months ended March 31, 2010 and 2009, respectively.  Our net cash used by investing activities increased by $21,020 from $0 to $21,020 during the nine months ended March 31, 2010 and 2009, respectively.  Our net cash provided by financing activities increased by $467,474 from $469,061 to $936,535 during the nine months ended March 31, 2010 and 2009, respectively.

At March 31, 2010 and June 30, 2009 we had a negative working capital, excluding the aforementioned bank loan, of $566,515 and $601,236, respectively.  Our working capital improved primarily because of the conversion of the convertible notes payable to common shares offset by an increase in accounts payable and accrued expense and accrued officer salary.

It is our intent to raise additional debt and/or equity financing to fund operations. In addition, we expect to fund our operations from revenue generated in fiscal 2010. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should we fail to obtain such financing, the company may curtail its operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to stock options, warrants, and common stock issued for services, among others. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
 
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Share-Based Compensation 
 
Compensation costs related to stock options are determined in accordance with ASC 718, “Share-Based Payments”. Under this method, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.

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

Recently Issued Accounting Standards

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.  This guidance amends the disclosure requirements related to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for the reporting period beginning January 1, 2011. The Company’s adoption of this updated guidance was not significant to our consolidated financial statements.

In February 2010, the FASB issued updated guidance related to subsequent events.  As a result of this updated guidance, public filers must still evaluate subsequent events through the issuance date of their financial statements; however, they are not required to disclose the date in which subsequent events were evaluated in their financial statements disclosures.  This amended guidance became effective upon its issuance on February 24, 2010 at which time the Company adopted this updated guidance.  
 
ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
ITEM 4.  Controls and Disclosures
 
Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2010, our disclosure controls and procedures were ineffective due to lack of certain policies and procedures with respect to financial reporting.  These policies and procedures are currently being established and will be remediated by June 30, 2010.
 
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There were no changes in our internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
Item 1  Legal Proceedings

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

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds

We sold 2,042,980 common shares for $347,307 during the three months ended March 31, 2010.

We issued 6,474,986 common shares as compensation for services rendered during the three months ended March 31, 2010.

Item 3 – Defaults Upon Senior Securities

None

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

None

Item 5 – Other Information

None

Item 6 – Exhibits

Part I Exhibits

31.1              Principal Executive Officer Certification

31.2              Principal Financial Officer Certification

32.1              Section 1350 Certification
 
Part II Exhibits

None.
 
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SIGNATURES

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


SIGNATURE
 
TITLE
 
DATE
         
         
/s/ Roman Gordon
 
Chief Executive Officer and Director
 
May 17, 2010
Roman Gordon
 
(Principal Executive Officer)
Chairman of the Board
   
         
/s/ Igor Gorodnitsky
 
President
 
May 17, 2010
Igor Gorodnitsky
       
         
         
/s/ R.L. Hartshorn
 
Chief Financial Officer
 
May 17, 2010
R.L. Hartshorn
 
(Principal Financial Officer and Accounting Officer)
   
 
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