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Cavitation Technologies, Inc. - Quarter Report: 2011 September (Form 10-Q)

September 30, 2011 DOC


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




FORM 10-Q



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

For the quarterly period ended September 30, 2011

OR

[  ] 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 Number)

10019 CANOGA AVENUE
CHATSWORTH, CALIFORNIA    91311

(Address of Principal Executive Offices including Zip Code)

(818) 718-0905
(Registrant's Telephone Number, Including Area Code)


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

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

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

Large accelerated filer    ¨

Accelerated filer    ¨

Non-accelerated filer    ¨
(Do not check if a smaller reporting company)

Smaller reporting company    x

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES    ¨        NO    x

      Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: as of November 8, 2011, the issuer had 158,455,035 shares of common stock outstanding.



TABLE OF CONTENTS

 

 

Page

Part I.

FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

Consolidated Balance Sheets at September 30, 2011 (unaudited) and June 30, 2011

 

 

 

 

Consolidated Statements of Operations - Three Months Ended September 30, 2011 (unaudited) and September 30, 2010 2010 (unaudited), and the period from January 29, 2007 (Inception) through September 30, 2011

 

 

 

 

Consolidated Statement of Stockholders' Deficit - January 29, 2007 (Inception) through September 30, 2011

4

 

 

 

 

Consolidated Statements of Cash Flows - Three Months Ended September 30, 2011 (unaudited) and September 30, 2010 (unaudited), and the period from January 29, 2007 (Inception) through September 30, 2011

7

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

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

16

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

19

 

 

 

Item 4.

Controls and Procedures

19

 

 

 

Part II.

OTHER INFORMATION

20

 

 

 

Item 1.  

Legal Proceedings

20

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 3.  

Defaults Upon Senior Securities

22

 

 

 

Item 4.  

(Removed and Reserved)

22

 

 

 

Item 5.  

Other Information

22

 

 

 

Item 6.

Exhibits

23

 

 

 

Signatures

 

24


PART I - FINANCIAL INFORMATION

ITEM 1 - Consolidated Financial Statements

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

      September 30,         June 30,    
      2011     2011
      (Unaudited)      
ASSETS
             
Current assets:            
     Cash and cash equivalents   $ 42,214    $ 14,779 
     Inventory     92,475      92,475 
     Prepaid expenses and other current assets     23,865      3,337 
     Related party advances     30,000     
          Total current assets     188,554      110,591 
             
Property and equipment, net      147,774      159,344 
Patents, net     102,892      118,153 
Other assets     9,500      9,500 
          Total assets   $ 448,720    $ 397,588 
             
LIABILITIES AND STOCKHOLDERS' DEFICIT
             
Current liabilities:            
     Accounts payable    $ 126,031    $ 143,949 
     Accrued expenses     49,485      54,745 
     Accrued payroll     261,492      149,316 
     Advances     136,533      36,533 
     Deferred revenue     116,951      16,951 
     Convertible notes payable, net of discounts     68,825      52,852 
     Derivative liability     57,733      121,679 
     Related party short-term loan         15,750 
     Short-term loan     60,000      60,000 
     Bank loan     477,368      486,110 
          Total current liabilities     1,354,418      1,137,885 
             
             
Commitments and contingencies, Note 11            
             
Stockholders' deficit:            
     Preferred stock, $0.001 par value, 10,000,000 shares authorized,
     111,111 shares issued and outstanding as of September 30, 2011
     and June 30, 2011.
    111      111 
     Common stock, $0.001 par value, 1,000,000,000 shares
     authorized, 157,088,270, shares and 153,799,715 shares are
     issued and outstanding as of September 30, 2011 and
     June 30, 2011, respectively
    157,089      153,800 
     Additional paid-in capital     16,149,375      15,954,280 
     Deficit accumulated during the development stage     (17,212,273)     (16,848,488)
          Total stockholders' deficit     (905,698)     (740,297)
          Total liabilities and stockholders' deficit   $ 448,720    $ 397,588 

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

2


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

                    January 29, 2007,
                    Inception,
        For the Three Months Ended     Through
        September 30,     September 30,
        2011     2010     2011
                     
                     
Revenue     $ -     $ -     $ 589,926 
Cost of revenue       -       -       91,144 
     Gross profit       -       -       498,782 
General and administrative expenses       323,310      909,131      11,615,592 
Research and development expenses       28,064      241,253      5,316,458 
Total operating expenses       351,374      1,150,384      16,932,050 
     Loss from operations       (351,374)     (1,150,384)     (16,433,268)
Interest expense and other       (10,911)     (12,693)     (598,680)
     Loss before income taxes       (362,285)     (1,163,077)     (17,031,948)
Income taxes               -  
     Net loss       (362,285)     (1,163,077)     (17,031,948)
Deemed dividends to preferred stockholders       (1,500)     (1,500)     (180,325)
     Net loss available to common stockholders     $ (363,785)   $ (1,164,577)   $ (17,212,273)
                     
Net loss available to common shareholders per share:                    
Basic and Diluted     $ (0.00)   $ (0.01)      
                     
Weighted average shares outstanding:                    
Basic and Diluted       155,226,197      132,525,540       

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

3


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

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

4


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

                                  Deficit      
                                  Accumulated      
                                  During the      
    Series A Preferred     Common Stock     Additional Paid-in     Development      
    Shares     Amount     Shares     Amount     Capital     Stage     Total
                                         
Balance at June 30, 2009    111,111    111      88,984,593    88,985    4,089,602    (5,344,598)   (1,165,900)
                                         
Common stock issued as payment for services on July 27, 2009                17,358,000      17,358      3,886,279            3,903,637 
Common stock issued as payment for services on August 5, 2009                165,000      165      44,935            45,100 
Common stock issued as payment for services on September 16, 2009                190,011      190      42,209            42,399 
Common stock issued as payment for services on October 7, 2009                130,500      131      42,500            42,631 
Common stock issued as payment for services on October 16, 2009                100,911      101      34,209            34,310 
Common stock issued as payment for services on October 23, 2009                30,000      30      9,270            9,300 
Common stock issued as payment for services on October 29, 2009                37,500      38      13,463            13,501 
Common stock issued as payment for services on November 3, 2009                37,500      37      13,464            13,501 
Common stock issued as payment for services on November 10, 2009                35,102      35      12,251            12,286 
Common stock issued as payment for services on November 16, 2009                1,505,000      1,505      405,944            407,449 
Common stock issued as payment for services on November 30, 2009                60,000      60      17,340            17,400 
Common stock issued as payment for services on December 4, 2009                49,157      49      12,240            12,289 
Common stock issued as payment for services on January 11, 2010                121,286      121      30,200            30,321 
Common stock issued as payment for services on February 1, 2010                5,125,102      5,125      1,071,146            1,076,271 
Common stock issued as payment for services on February 11, 2010                500,000      500      109,500            110,000 
Common stock issued as payment for services on February 15, 2010                127,500      128      26,648            26,776 
Common stock issued as payment for services on February 23, 2010                135,000      135      26,865            27,000 
Common stock issued as payment for services on March 5, 2010                346,098      346      82,897            83,243 
Common stock issued as payment for services on March 12, 2010                70,000      70      13,455            13,525 
Common stock issued as payment for services on March 22, 2010                50,000      50      8,450            8,500 
Common stock issued as payment for services on April 12, 2010                127,282      127      16,420            16,547 
Common stock issued as payment for services on April 19, 2010                100,000      100      16,900            17,000 
Common stock issued as payment for services on April 29, 2010                1,700,000      1,700      253,300            255,000 
Common stock issued as payment for services on May 10, 2010                773,750      774      115,288            116,062 
Common stock issued as payment for services on May 24, 2010                219,092      219      43,599            43,818 
Common stock issued as payment for services on June 1, 2010                163,794      164      29,319            29,483 
Common stock issued as payment for services on June 9, 2010                333,333      333      59,667            60,000 
Common stock issued as payment for services on June 14, 2010                46,544      47      8,331            8,378 
Common stock issued for debt and accrued interest conversion on August 7, 2009                1,122,375      1,122      189,681            190,803 
Conversion feature on convertible notes payable                            63,601            63,601 
Common stock sold for cash on October 13, 2009                208,104      208      34,156            34,364 
Common stock sold for cash on October 16, 2009                2,980,734      2,981      493,808            496,789 
Common stock sold for cash on November 4, 2009                217,117      217      36,183            36,400 
Common stock sold for cash on November 17, 2009                421,529      422      71,748            72,170 
Common stock sold for cash on December 4, 2009                352,451      352      59,565            59,917 
Common stock sold for cash on January 6, 2010                58,058      58      9,812            9,870 
Common stock sold for cash on February 4, 2010                888,235      888      150,112            151,000 
Common stock sold for cash on March 2, 2010                743,746      744      125,693            126,437 
Common stock sold for cash on March 12, 2010                352,941      353      59,647            60,000 
Common stock sold for cash on April 19, 2010                125,000      125      14,875            15,000 
Common stock sold for cash on June 1, 2010                 700,000      700      69,300            70,000 
Common stock issued for conversion of note payable on June 1, 2010                2,789,217      2,789      276,133            278,922 
Common stock sold for cash on June 24, 2010                 1,000,000      1,000      99,000            100,000 
Warrants issued as payment for services on July 15, 2009                            13,205            13,205 
Warrants issued as payment for services on February 11, 2010                            131,376            131,376 
Conversion feature of note payable on June 1, 2010                            223,137            223,137 
Dividends on preferred stock                                  (6,000)     (6,000)
Net loss                                  (8,196,462)     (8,196,462)
                                         
Balance at June 30, 2010    111,111    111      130,581,562    130,582    12,656,723    (13,547,060)   (759,644)

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

5


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

                                  Deficit      
                                  Accumulated      
                                  During the      
    Series A Preferred     Common Stock     Additional Paid-in     Development      
    Shares     Amount     Shares     Amount     Capital     Stage     Total
Common stock issued as payment for services on July 8, 2010                349,571      350      52,086            52,436 
Common stock issued as payment for services on August 3, 2010                1,854,009      1,854      350,406            352,260 
Common stock issued as payment for services on August 30, 2010                75,000      75      11,175            11,250 
Common stock issued as payment for services on September 8, 2010                237,192      237      35,342            35,579 
Common stock issued as payment for services on October 1, 2010                473,517      474      70,554            71,028 
Common stock issued as payment for services on November 1, 2010                1,020,482      1,020      131,643            132,663 
Common stock issued as payment for services on November 22, 2010                100,000      100      11,900            12,000 
Common stock issued as payment for services on December 7, 2010                459,056      459      50,037            50,496 
Common stock issued as payment for services on January 10, 2011                116,916      117      13,913            14,030 
Common stock issued as payment for services on February 14, 2011                1,264,883      1,265      137,872            139,137 
Common stock issued as payment for services on March 10, 2011                219,767      220      21,757            21,977 
Common stock issued as payment for services on March 22, 2011                510,000      510      50,490            51,000 
Common stock issued as payment for services on April 1, 2011                816,145      816      80,799            81,615 
Common stock issued as payment for services on May 17, 2011                276,203      276      27,343            27,619 
Common stock issued as payment for services on June 13, 2011                333,924      334      33,058            33,392 
Common stock issued as payment for services on June 14, 2011                8,096,990      8,097      689,603            697,700 
Common stock sold for cash on August 3, 2010                593,211      593      58,728            59,321 
Common stock sold for cash on October 1, 2010                661,000      661      78,659            79,320 
Common stock sold for cash on November 1, 2010                1,400,000      1,400      142,600            144,000 
Common stock sold for cash on November 22, 2010                350,000      350      41,650            42,000 
Common stock sold for cash on January 10, 2011                110,000      110      11,990            12,100 
Common stock sold for cash on February 14, 2011                1,920,000      1,920      190,080            192,000 
Common stock sold for cash on March 2, 2011                290,000      290      28,710            29,000 
Common stock sold for cash on March 10, 2011                176,923      177      14,823            15,000 
Common stock issued as payment of short-term loan into stock on February 14, 2011                1,000,000      1,000      99,000            100,000 
Warrants issued as payment for services on November 22, 2010                            46,735            46,735 
Common stock issued for conversion of note payable on February 8, 2011                30,769      31      1,967            1,998 
Common stock issued for conversion of note payable on February 11, 2011                15,385      15      985            1,000 
Common stock issued for conversion of note payable on February 16, 2011                26,154      26      1,674            1,700 
Common stock issued for conversion of note payable on February 17, 2011                15,385      15      985            1,000 
Common stock issued for conversion of note payable on February 22, 2011                21,927      22      1,475            1,497 
Common stock issued for conversion of note payable on February 28, 2011                55,749      56      3,568            3,624 
Common stock issued for conversion of note payable on March 7, 2011                24,796      25      1,506            1,531 
Common stock issued for conversion of note payable on March 8, 2011                18,100      18      982            1,000 
Common stock issued for conversion of note payable on March 14, 2011                109,783      110      5,956            6,066 
Common stock issued for conversion of note payable on March 28, 2011                51,282      51      2,949            3,000 
Common stock issued for conversion of note payable on March 30, 2011                59,829      60      3,440            3,500 
Common stock issued for conversion of note payable on April 4, 2011                59,829      60      3,440            3,500 
Common stock issued for conversion of note payable on April 5, 2011                24,376      24      1,402            1,426 
Amortization of restricted stock issued for services                            786,275            786,275 
Dividends on preferred stock                                  (6,000)     (6,000)
Net loss                                  (3,295,428)     (3,295,428)
                                         
Balance at June 30, 2011    111,111    111      153,799,715    153,800    15,954,280    (16,848,488)   (740,297)
                                         
Common stock issued as payment for services on July 13, 2011                379,449      380      25,968            26,348 
Common stock issued as payment for services on August 19, 2011                198,879      199      10,541            10,740 
Common stock issued as payment for services on August 22, 2011                230,000      230      12,191            12,421 
Common stock issued as payment for services on September 29, 2011                366,924      367      13,787            14,154 
Common stock issued for conversion of note payable on August 16, 2011                287,356      287      20,786            21,073 
Common stock issued for conversion of note payable on August 17, 2011                391,850      392      25,949            26,341 
Common stock issued for conversion of note payable on August 19, 2011                391,850      392      25,949            26,341 
Common stock issued for conversion of note payable on August 22, 2011                288,401      288      17,216            17,504 
Common stock issued for conversion of note payable on September 13, 2011                30,769      31      1,508            1,539 
Common stock issued for conversion of note payable on September 15, 2011                46,154      46      2,262            2,308 
Common stock issued for conversion of note payable on September 16 2011                76,923      77      4,538            4,615 
Common stock sold for cash on August 22, 2011                600,000      600      34,400            35,000 
Dividends on preferred stock                                  (1,500)     (1,500)
Net loss                                  (362,285)     (362,285)
                                         
Balance at September 30, 2011    111,111    111      157,088,270    157,089    16,149,375    (17,212,273)   (905,698)

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

6


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

                January 29, 2007,
                Inception,
    For the Three Months Ended     Through
    September 30,     September 30,
    2011     2010     2011
                 
Operating activities:                
Net loss (362,285)   (1,163,077)   (17,031,948)
Adjustments to reconcile net loss to net cash                 
     used in operating activities:                
     Depreciation and amortization   12,092      5,110      62,802 
     Warrants issued in connection with convertible notes payable   -           49,245 
     Amortization of convertible loan discount   39,243          360,705 
     Common stock issued for services   63,663      846,810      11,594,264 
     Stock option compensation   -           307,512 
     Warrants issued for services   -           337,359 
     Change in value of derivatives   (41,694)         (22,497)
     Equipment write-down   -           5,399 
     Patent write-down   16,823          30,323 
Effect of changes in:                
     Inventory   -           (53,056)
     Prepaid expenses and other current assets   (20,528)     423      (23,865)
     Advances to related parties   (30,000)         (30,000)
     Deposits   -           (9,500)
     Bank overdraft, net   -       (2,747)     -  
     Accounts payable and accrued expenses   (22,978)     52,745      174,416 
     Accrued payroll   112,176      (9,898)     540,413 
     Deferred revenue   100,000      53,723      116,951 
          Net cash used in operating activities   (133,488)     (216,911)     (3,591,477)
                 
Investing activities:                
     Purchase of property and equipment   -       -       (99,192)
     Payments for systems   -       (89,441)     (152,721)
     Payments for patents   (2,085)         (136,697)
          Net cash used in investing activities   (2,085)     (89,441)     (388,610)
                 
Financing activities:                
     Proceeds from (payments on) bank loan borrowings   (8,742)     (12,875)     477,368 
     Proceeds from sales of preferred stock   -       -       725,000 
     Proceeds from convertible notes payable   52,500      -       438,712 
     Payments on convertible notes payable   -       -       (55,000)
     Proceeds from sales of common stock   35,000      59,321      2,139,688 
     Payments on related party short-term loans   (15,750)     -       (15,750)
     Proceeds from related party short-term loans   -       -       15,750 
     Proceeds from short-term loans   -       270,165      160,000 
     Advances   100,000      -       136,533 
          Net cash provided by financing activities   163,008      316,611      4,022,301 
Net increase in cash   27,435      10,259      42,214 
Cash, beginning of period   14,779      270     
Cash, end of period $ 42,214    $ 10,529    $ 42,214 
                 
Supplemental disclosures of cash flow information:                
     Cash paid for interest $ 9,259    $ 12,693    $ 202,851 
     Cash paid for income taxes $   $ 1,600    $ 6,728 
Supplemental disclosure of non-cash investing and financing activities:                
     Warrants issued in connection with preferred stock $   $   $ 155,714 
     Beneficial conversion feature on preferred stock $   $   $ 11,111 
     Conversion of preferred to common shares in reverse merger $   $   $ 625,000 
     Proceeds from sales of preferred shares used to purchase shares of Bio $   $   $ 400,000 
     Conversion of note payable to common stock $   $   $ 278,922 
     Conversion of short-term loan to common stock $   $   $ 100,000 
     Accrued dividends issued to preferred stockholders $ 1,500    $ 1,500    $ 15,233 
     Conversion of convertible notes payable and accrued interest to common stock $ 49,200    $   $ 270,846 

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)
September 30, 2011

Note 1 - Nature of Operations and Basis of Presentation

Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly owned subsidiary of Cavitation Technologies, Inc., a Nevada corporation originally incorporated under the name Bio Energy, Inc. Cavitation Technologies, Inc. has developed, patented, and commercialized proprietary technology for processing soybean oil through a device called the Nano Neutralization™ Reactor (the "Reactor"). The Reactor is the critical component of the Nano Neutralization System which is designed to reduce operating costs and increase yields in the refining of vegetable oils.

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

Note 2 - 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 September 30, 2011, generated a net loss of $17,031,948. To date, we recorded revenue of $589,926 in fiscal 2011; we recorded no revenue in the first quarter of fiscal 2012. The Company also has negative cash flow from operations and negative net equity. Cumulative net cash used in operating activities of $3,591,477 was funded largely with $3,300,900 in equity and $477,368 in a bank loan. These factors, among others, raise doubt about our ability to continue as a going concern.

Management's plan is to generate income from operations by licensing our technology globally through our strategic partner, the Desmet Ballestra Group. We will also attempt to raise additional debt and/or equity financing to fund 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.

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

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

8


Note 3 - Summary of Significant Accounting Policies

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with Accounting Standards Codification ("ASC") 350-30, General Intangibles Other Than Goodwill. As of September, 30, 2011, the Company had incurred $102,892 in net patent costs which are capitalized in the accompanying consolidated balance sheet. Amortization amounted to $522 and $569 for the three months ended September 30, 2011 and 2010. Net Patents declined by $15,261 for the three months ending September 30, 201 as three patent applications expired or were abandoned. On October 25, 2011, the Company had a patent granted for its Multi-Stage Cavitation Device which will be amortized over an estimated useful life of 4 years. The Company has been issued two patents and has seven US and six PCT/international applications pending.

At September 30, 2011, future amortization of patent costs is estimated as follows:

Year Ended      
June 30,     Amount
2012   $ 4,365 
2013     11,431 
2014     17,791 
2015     19,762 
2016     16,802 
Thereafter     32,741 
Total   $ 102,892 

Related Party Advances

The Company advanced Igor Gorodnitsky, President, and Roman Gordon, Chief Technology Officer, $15,000 each for operating expenditures that will be incurred on behalf of the Company subsequent to September 30, 2011.

Deferred Revenue

The Company received a license fee of $100,000 from the Desmet Ballestra Group ("Desmet") during the three months ended September 30, 2011 for CTi Nano Reactors that are expected to be delivered to Desmet during the three months ended December 31, 2011.

Fair Value Measurement

ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2011, the carrying value of certain accounts such as inventory, accounts payable, accrued expenses, accrued payroll and short-term loans approximates fair value due to the short-term nature of such instruments.

9


The following table presents information about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of September 30, 2011 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:

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

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

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

      Fair Value     Fair Value Measurements at September 30, 2011
      as of     Using Fair Value Heirarchy
Financial Instruments     September 30, 2011     Level 1     Level 2     Level 3
                         
Liabilities:                        
     Derivative liability     57,733      -       -       57,733 
Total   $ 57,733    $ -     $ -     $ 57,733 

The derivative liability attributed to the convertible notes' conversion feature is measured using the Black-Sholes option valuation model. Refer to Note 8, "Convertible Notes Payable" for the inputs to the Black-Sholes option valuation model.

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

Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
     
    Derivative Liability
     
Balance at June 30, 2011 $ 121,679 
Total (gains) losses included in interest expense and other   (41,694)
Creation - convertible note issuances   28,269 
Settlements - note conversions   (50,521)
Balance at September 30, 2011 $ 57,733 

Advertising and Promotion Costs

Advertising costs incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $0, $350, and $236,438 for the three months ended September 30, 2011 and 2010, and the period from January 29, 2007 (date of inception) through September 30, 2011, respectively.

10


Note 4 - Net Loss per Share - Basic and Diluted

The Company computes the loss per common share using ASC 260, Earnings Per Share. The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period. The diluted loss per common share is 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 September 30, 2011, the Company had 1,810,957 stock options and 13,145,618 warrants outstanding to purchase common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive. In addition, the Company had 111,111 shares of Series A Preferred Stock outstanding which are convertible into approximately 333,333 shares of common stock. The Company also had $125,610 of outstanding convertible notes payable, before any discounts, which are convertible into 3,960,748 shares of common stock as of September 30, 2011. These items were also not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.

Note 5 - Property and Equipment

Property and equipment consisted of the following as of September 30, 2011 and June 30, 2011.

    September 30,         June 30,    
    2011     2011
           
Leasehold improvement $ 2,475    $ 2,475 
Furniture     26,837      26,837 
Office equipment   1,500      1,500 
Equipment   68,380      68,380 
Systems   112,474      112,474 
           
    211,666      211,666 
           
           
Less: accumulated depreciation and amortization   (63,892)     (52,322)
           
  $ 147,774    $ 159,344 

Depreciation expense amounted to$11,570, $4,541, and $59,321 for the three months ended September 30, 2011 and 2010, and the period from January 29, 2007 (date of inception) through September 30, 2011, respectively.

Note 6 -Bank Loan

On November 1, 2010, we renewed our loan with National Bank of California 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 September 30, 2011, the outstanding balance on the loan was $477,368. The Company is in the process of negotiating a renewal of the terms of this loan. We provided the National Bank of California a security interest in the assets of the Company as collateral for a loan.

Note 7 - Short-Term Loans and Advances

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 outstanding balance on September 30, 2011 was $60,000. Accrued interest on the late payments amounted to $1,625 as of September 30, 2011.

11


On September 21, 2011, the Company received $100,000 from the Desmet Ballestra Group as an advance for a Site User Nano Reactor license fee. CTi will repay this advance when proceeds from the Site User license fee are received by CTi.

Note 8 - Convertible Notes Payable

On February 1, 2011, the Company issued convertible promissory notes to the Tripod Group, LLC, (the "Tripod Notes") for an aggregate total amount of $61,212. During the quarter ended September 30, 2011, $5,000 of the Tripod outstanding Notes was converted into 153,846 shares of common stock, and $3,462 of the beneficial conversion feature was reclassified to additional paid in capital. As a result, the carrying value of the Tripod Notes as of September 30, 2011 amounted to $13,357 consisting of outstanding principal of $25,610 less the discount of $12,253.

On February 8, 2011, the Company issued a convertible promissory note payable to Asher Enterprises, Inc., (the "Asher Note"), in the amount of $42,500. During the quarter ended September 30, 2011, the entire $42,500 was converted into 1,359,457 shares of common stock at a value of $91,258, and the $47,059 beneficial conversion feature was reclassified to additional paid in capital.

On June 6, 2011, the Company issued a convertible promissory note payable to Asher Enterprises, Inc., (the "Second Asher Note") in the amount of $47,500. As of September 30, 2011,the carrying value of the Second Asher Note amounted to $23,668 consisting of outstanding principal of $47,500 less the discount of $23,832.

On June 24, 2011, we issued a convertible promissory note payable to GEL Properties, LLC, (the "GEL Note") in the amount of $52,500. The Note is due June 24, 2012 and bears interest at a rate of six percent per annum. The Note is convertible into shares of our common stock at a conversion price equal to 65% of the average day's lowest closing bid out of the 5 trading days prior to conversion. The transaction was funded July 12, 2011. The issuance of the GEL Note amounted in a beneficial conversion feature of $28,269 on the issue date, which has been recorded as a discount to the carrying value of the note. As of September 30, 2011, the remaining discount balance amounted to $20,700. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives and Hedging, and is measured using the Black-Sholes option valuation model. Accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet. Refer to the table below for the inputs used in the Black-Scholes option valuation model.

On September 30, 2011, the outstanding balance as recorded on the balance sheet amounted $68,825 consisting of outstanding principal of $125,610 less discount of $56,784. By virtue of the variable conversion ratios of the Tripod, Asher, and GEL Notes, the conversion feature of the above notes is a derivative under ASC 815-40, Derivatives and Hedging. Accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet. As of September 30, 2011, the aggregate value of the conversion features associated with the above notes amounted to $57,733. The beneficial conversion feature is measured using the Black-Scholes option valuation model. The inputs used for the Black-Scholes option valuation model were as follows:

    Quarter Ended
    September 30,
    2011
     
Expected life in years    0.3 - 1.0
Stock price volatility    0.0%
Risk free interest rate    0.06% - 0.16%
Expected dividends   None 
Forfeiture rate   0%

12


Note 9 - Stockholders' Equity

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 September 30, 2011, cumulative dividends amounted to $15,233. As of September 30, 2011, none of the cumulative dividends have been paid and are recorded in accrued expenses on the accompanying consolidated balance sheet.

The Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock. The Board of Directors can establish the rights, preferences and privileges of the Series B Preferred Stock. There are no shares of Series B Preferred Stock outstanding.

Stock Options

A summary of the stock option activity for the three months ended September 30, 2011 is presented below.

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Options     Price   (Years)
               
Outstanding at June 30, 2011   1,810,957    $ 0.55    5.73 
Granted   -            
Forfeited   -            
Exercised   -            
Outstanding at September 30, 2011   1,810,957    $ 0.55    5.48 
               
Vested and expected to vest              
     at September 30, 2011   1,810,957    $ 0.55    5.48 
               
Exercisable at September 30, 2011   1,810,957    $ 0.55    5.48 

13


The following table summarizes information about outstanding stock options as of September 30, 2011.

      Options Outstanding   Options Exercisable
          Weighted     Weighted         Weighted
          Average     Average         Average
  Exercise   Number   Remaining     Exercise   Number     Exercise
  Price   of Shares   Life (Years)     Price   of Shares     Price
                           
                           
$ 0.33   637,297    5.10    $ 0.33    637,297    $ 0.33 
  0.67   1,173,660    5.74      0.67    1,173,660      0.67 
      1,810,957              1,810,957       

Warrants

A summary of the warrant activity for the three months ended September 30, 2011is presented below.

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Warrants     Price   (Years)
               
Outstanding at June 30, 2011   13,145,618    $ 0.41    1.69 
Granted   -       -      
Exercised   -       -      
Outstanding at September 30, 2011   13,145,618    $ 0.41    1.44 
               
Vested and expected to vest              
     at September 30, 2011   13,145,618    $ 0.41    1.44 
               
Exercisable at September 30, 2011   13,145,618    $ 0.41    1.44 

14


The following table summarizes information about outstanding warrants as of September 30, 2011.

      Warrants Outstanding   Warrants Exercisable
          Weighted     Weighted         Weighted
          Average     Average         Average
  Exercise   Number   Remaining     Exercise   Number     Exercise
  Price   of Shares   Life (Years)     Price   of Shares     Price
                           
$ 0.20 - 0.37   2,939,374    1.52    $ 0.29    2,939,374    $ 0.29 
  0.42 - 0.58   10,206,244    1.42      0.45    10,206,244      0.45 
      13,145,618              13,145,618       

Note 10 - Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 270, Interim Financial Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections. The Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the Company will generate net operating losses in the year ending June 30, 2012, 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 September 30, 2011.

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

15


Note 11 - Commitments and Contingencies

Lease Agreements

Total rent expense was $17,510, $12,750 and $264,681 for the three months ended September 30, 2011 and 2010, and for the period from January 29, 2007 (date of inception) through September 30, 2011, respectively. The Company's lease agreement extends through February 1, 2012 with monthly rental payments of $4,378.

Royalty Agreements

On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with our President and former CEO, and current CTO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CTO have been assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the CTO and President for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company's CTO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2011. The royalty agreements with our CTO and President are in effect as of July 1, 2011. No royalties were accrued or paid during the three months ended September 30, 2011 as the Company generated no revenue during the period.

On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment agreement with Varvara Grichko who became a member of the Board of Directors in September 2010. Mrs. Grichko shall receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which Mrs. Grichko was the legally named inventor, and 3% of actual gross royalties received by the Company from the patent in each subsequent year. As of September 30, 2011, no patents have been granted in which Mrs. Grichko is the legally named inventor.

Note 12 - Subsequent Events

In October 2011, the Company received an advance of $100,000 related to a Site User Nano Reactor license fee from the Desmet Ballestra Group for a transaction in Argentina.

In October 2011, the company's stock was delisted on the Frankfurt Stock Exchange because of new listing requirements. Our stock will continue to be traded on the Stuttgart and Berlin Exchanges with symbol WTC.

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. was incorporated January 29, 2007 as a California corporation. It is a wholly owned subsidiary of Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as "the Company," "CTi," "we," "us," and "our") a Nevada corporation originally incorporated under the name Bio Energy, Inc. Cavitation Technologies, Inc. has developed, patented, and commercialized proprietary technology for processing soybean oil through a device called the Nano Neutralization™ Reactor (the "Reactor"). The Reactor is the critical component of the Nano Neutralization System which is designed to reduce operating costs and increase yields in the refining of vegetable oils.

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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 principle market for our systems includes global soybean oil refiners who process oils in order to produce products that are used for human consumption and other uses. In fiscal 2011, we recognized revenue of $589,926.

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 September 30, 2011 generated a net loss of $17,031,948. 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 licensing our technology globally through our strategic partner, the Desmet Ballestra Group. We will also attempt to raise additional debt and/or equity financing to fund 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

CTi's critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended June 30, 2011, and did not change for the three months ended September 30, 2011.

Results of Operations

The following is a comparison of our results of operations for the three months ended September 30, 2011 and 2010.

        For the Three Months Ended          
        September 30,          
        2011     2010     $ Change   % Change
                         
General and administrative expenses     $ 323,310    $ 909,131    $ (585,821)   -64.4%
Research and development expenses       28,064      241,253      (213,189)   -88.4%
Total operating expenses       351,374      1,150,384      (799,010)   -69.5%
     Loss from operations       (351,374)     (1,150,384)     799,010    -69.5%
Interest expense and other       (10,911)     (12,693)     1,782    -14.0%
     Loss before income taxes       (362,285)     (1,163,077)     800,792    -68.9%
Income tax expense               -      
     Net loss     $ (362,285)   $ (1,163,077)     800,792    -68.9%

Revenue

We recorded no revenue in the first quarter of fiscal 2012 or fiscal 2011.

17


Operating Expenses

Our operating expenses for the three months ended September 30, 2011 amounted to $351,374 compared with $1,150,384 for the same period in 2010, a decrease of $799,010, or 69.5%. The decrease consisted of a decrease in general and administrative (G&A) expenses of $585,821, or 64.4%. This decrease reflects reductions of $396,635 in a one-time bonus expense and $163,658 in consulting fees. The remaining G&A expenses for the periods ending September 30, 2011 and 2010 consisted primarily of salaries and professional fees such as legal, audit, and accounting services.

R&D expenses declined $213,189, or 88.4% for the three months ended September 30, 2011 largely reflecting a one-time $190,000 share based payment to our principle research scientist during the quarter ending September 30, 2010.

Interest Expense

Interest expense and other consists of interest expense on bank loans, the amortization of the discount on convertible notes payable and changes in value of derivatives. Interest expense decreased $1,782, or 14.0%, for the three months ended September 30, 2011 compared with 2010.

As of September 30, 2011, the gross face value of convertible notes issued was $125,610. By virtue of the variable conversion ratios contained in the provisions of the agreements, the conversion features of the notes are a derivative and classified as a derivative liability on the accompanying balance sheet. During the three months ended September 30, 2011, CTi recorded a non-cash gain on Change in Value of Derivative Liability of $41,695. The gain was offset by non-cash interest expense of $39,243 attributed to the Amortization of Discounts on the issuance of convertible notes payable. There was no such expense during the three months ended September 30, 2010.

Interest expense paid in cash declined from $12,693 for the 3 months ending September 30, 2010 to $9,259 for the 3 months ending September 30, 2011 as the principal amount on our bank loan declined from $511,875 on September 30, 2010 to $477,368 on September 30, 2011.

Liquidity and Capital Resources

CTi's primary sources of liquidity have been issuances of restricted common stock to service providers, sale of common stock for cash, issuances of convertible promissory notes, and short-term loans and advances from a strategic partner.

See Note 7 "Short-Term Loans and Advances, Note 8 "Convertible Notes Payable," and Note 9, "Stockholder's Equity" for more information. CTi's ability to continue to issue restricted common stock in exchange for services may be adversely affected by the performance of our stock price. Additionally, CTi's ability to issue long-term debt and obtain short-term loans may be negatively impacted by domestic economic conditions that create a tight credit environment, particularly for development stage companies. It is our intention to rely less on the issuance of stock as payment to service providers, and more on cash generated from operations by licensing our technology globally through our strategic partner, Desmet Ballestra.

Bank Loan

On August 1, 2010 the Company renewed its loan with National Bank of California until November 1, 2010 for $520,516. The terms and conditions remained 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

September 30, 2011, the outstanding balance on the loan was $477,368. We are in the process of negotiating a renewal of the terms of this loan.

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Common Stock

During the three months ended September 30, 2011, we issued 600,000 shares of common stock for $35,000 compared with 593,211 shares of common stock for $59,321 cash in the first quarter of fiscal 2011.

Share-based Compensation

During the three months ended September 30, 2011, we issued 1,175,252 shares of common stock valued at $63,663 as payment to service providers. During the three months ended September 30, 2010, we issued 2,515,772 shares of common stock valued at $451,525. Also during the three months ended September 30, 2010, we incurred $395,285 of expenses relating to the amortization of restricted stock issued during the year ended June 30, 2010.

Cash Flow

Net cash used in operating activities during the three months ended September 30, 2011 amounted to $133,488 compared with $216,911 for the same period in fiscal 2011. During the three months ended September 30, 2011, our net loss amounted to $362,285, including non-cash operating expenses of $90,127 arising primarily from $63,663 in common stock issued for services. The remaining net cash of $272,158 from operations was used largely to pay salaries and related expenses, research and development, interest expense and professional fees such as attorneys and accountants. During the three months ended September 30, 2010, our net loss amounted to $1,163,077 including non-cash operating expenses of $851,920 arising primarily from common stock issued for services. The remaining net cash of $311,157 was used largely to pay salaries and expenses associated with professional services.

Net cash used in investing activities during the three months ended September 30, 2011 amounted to $2,085 related to capitalized patent costs. During the three months ended September 30, 2010, our net cash used in investing activities amounted to $89,441 spent on the customization of systems.

Net cash provided by financing activities during the three months ended September 30, 2011 amounted to $163,088 arising largely from the issuance of convertible notes of $52,500, $35,000 in common stock sold for cash and advances from our strategic partner of $100,000, offset by $15,750 in payments of related party short-term loans. During the three months ended September 30, 2010, net cash from financing activities amounted to $316,611 arising from the sale of stock of $59,321 and proceeds from short-term loans of $270,165 offset by the payment of the bank loan of $12,875.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable for smaller reporting companies.

ITEM 4. Controls and Procedures

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

There were no changes in financial control over financial reporting during the first quarter of fiscal 2012 that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.

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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

The following is a listing of unregistered security activity during the three months ended September 30, 2011.

Issuance of Common Stock

On August 22, 2011, the Company issued 300,000 shares of common stock to for a total consideration of $15,000 to Charles Collier, a non-affiliated accredited investor. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to Charles Collier. The Company issued restricted shares in connection with this issuance. No sales commissions or other remuneration was paid in connection with these issuances.

On August 22, 2011, the Company issued 300,000 shares of common stock to for a total consideration of $20,000 to Catherine Shaw, a non-affiliated accredited investor. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to Charles Collier. The Company issued restricted shares in connection with this issuance. No sales commissions or other remuneration was paid in connection with these issuances.

Issuance of Restricted Common Stock for Services

On July 13, 2011, we issued 110,342 shares of common stock with a recorded value of $7,662 to Michael Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 July 13, 2011, we issued 13,075 shares of common stock with a recorded value of $908 to Silvio Nardoni for legal services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 July 13, 2011, we issued 156,477 shares of common stock with a recorded value of $10,865 to New Venture Attorneys for legal/SEC services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 July 13, 2011, we issued 35,000 shares of common stock with a recorded value of $2,430 to Varvara Grichko for services as a member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 July 13, 2011, we issued 55,555 shares of common stock with a recorded value of $3,857 to Sonia Luna for SOX consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 July 13, 2011, we issued 9,000 shares of common stock with a recorded value of $625 to Shannon Stokes for office management services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 August 19, 2011, we issued 64,594 shares of common stock with a recorded value of $3,488 to Michael Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 August 19, 2011, we issued 46,785 shares of common stock with a recorded value of $2,527 to New Venture Attorneys PC for SEC/legal services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 August 19, 2011, we issued 50,000 shares of common stock with a recorded value of $2,700 to Kirk Wiggins for marketing and sales services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 August 19, 2011, we issued 37,500 shares of common stock with a recorded value of $2,025 to James Fuller for services as a member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 August 22, 2011, we issued 230,000 shares of common stock with a recorded value of $12,421 to Pinnacle Financial Group for investor relations and marketing services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 September 29, 2011, we issued 356,924 shares of common stock with a recorded value of $13,768 to Mike Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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 September 29, 2011, we issued 10,000 shares of common stock with a recorded value of $386 to Varvara Grichko for services as member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The 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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With the exception of Varvara Grichko and Jim Fuller who are affiliates of the company, none of the aforementioned service providers are affiliates of the Company.

Issuance of Common Stock for Conversion of Indebtedness

On August 16, 2011, we issued 287,356 shares of common stock to Asher Enterprises, Inc. as conversion of $10,000 in outstanding convertible notes payable. On August 17, 2011, we issued 391,850 shares of common stock to Asher as conversion of $12,500 in outstanding convertible notes payable. On August 19, 2011, we issued 391,850 shares of common stock to Asher as conversion of $12,500 in outstanding convertible notes. On August 22, 2011, we issued 288,401 shares of common stock to Asher as conversion of $7,500 in outstanding convertible notes payable and $1,700 in accrued interest. 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 Asher Enterprises, Inc. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.

On September 13, 2011, we issued 30,769 shares of common stock to Tripod Group, LLC as conversion of $1,000 of outstanding convertible notes payable. On September 15, 2011, we issued an additional 46,154 shares of common stock to Tripod Group, LLC as conversion of $1,500 of outstanding convertible notes. On September 16, 2011, we issued 76,923 shares of common stock to Tripod Group, LLC as conversion of $2,500 of outstanding convertible notes payable. 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.

Item 3 - Defaults Upon Senior Securities

None

Item 4 - (Removed and Reserved)

Item 5 - Other Information

None

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Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES

      Incorporated by Reference
Exhibit   Filed        
Number Exhibit Description Herewith Form Pd. Ending Exhibit Filing Date
             
3(i)(a) Articles of Incorporation - original name of Bioenergy, Inc.   SB-2 N/A 3.1 October 19, 2006
3(i)(b) Articles of Incorporation - Amended and Restated   10-Q December 31, 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 September 30, 2009 3-1 November 16, 2009
             
10.1 Patent Assignment Agreement between the Company and Roman Gordon dated July 1, 2008.   8K June 30, 2009 10.1 May 18, 2010
10.2 Patent Assignment Agreement between the Company and Igor Gorodnitsky dated July 1, 2008.   8K June 30, 2009 10.2 May 18, 2010
10.3 Assignment of Patent Assignment Agreement between the Company and Roman Gordon   8K June 30, 2009 10.3 May 18, 2010
10.4 Assignment of Patent Assignment Agreement between the Company and Igor Gorodnitsky   8K June 30, 2009 10.4 May 18, 2010
10,.5 Employment Agreement between the Company and Roman Gordon date March 17, 2008   10K/A June 30, 2009 10.3 October 20, 2011
10.6 Employment Agreement between the Company and Igor Gorodnitsky dated March 17, 2008   10K/A June 30, 2009 10.4 October 20, 2011
10.7 Consulting Agreement with R.L. Hartshorn dated September 22, 2009   10-Q December 31, 2010 10.2 February 11, 2011
10.8 Employment and Confidentiality and Invention Assignment Agreement between the Company and Varvara Grichko dated April 30, 2008   10-Q December 31, 2010 10.3 February 11, 2011
10.9 Revolving Line of Credit Agreement with National Bank of California dated Feb. 7, 2007   10K/A June 30, 2009 10.7 October 20, 2011
10.10 Line of Credit Agreement from Nat. Bank of Ca. - amendment dated Aug 1, 2010   10K/A June 30, 2010 10.10 October 20, 2011
10.11 Marketing and Collaboration Agreement with Desmet Ballestra Group - dated Nov. 1, 2010   10-Q December 31, 2010 10.1 February 11, 2011
             
10.12 Board of Director Agreement - James Fuller X        
             
14.1 Code of Business Conduct and Ethics*   10-K June 30, 2011   September 28, 2011
             
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.          
             
101.INS** XBRL Instance Document X        
101.SCH** XBRL Taxonomy Extension Schema X        
101.CAL** XBRL Taxonomy Extension Calculation Linkbase X        
101.DEF** XBRL Taxonomy Extension Definition Linkbase X        
101.LAB** XBRL Taxonomy Extension Label Linkbase X        
101.PRE** XBRL Taxonomy Extension Presentation Linkbase X        
             
* In accordance with Regulation S-K 406 of the Securities Act of 1934, we undertake to provide to any person          
  without charge, upon request, a copy of our "Code of Business Conduct and Ethics". A copy may be requested          
  by sending an email to info@cavitationtechnologies.com.          
             
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934
and otherwise are not subject to liability.
         

23


SIGNATURES

Pursuant to the requirements of the securities 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/ Todd Zelek

 

Chairman of the Board, Chief Executive Officer and Secretary

 

November 10, 2011

Todd Zelek

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/  R.L. Hartshorn

 

Chief Financial Officer

 

November 10, 2011

R.L. Hartshorn

 

(Principal Financial Officer)

 

 

 

 

 

 

 

/s/  Igor Gorodnitsky

 

President and Director

 

November 10, 2011

Igor Gorodnitsky

 

 

 

 

24