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Cavitation Technologies, Inc. - Quarter Report: 2012 September (Form 10-Q)

September 30, 2012 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, 2012

Commission File Number: 0-29901

Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)

 

Nevada
20-4907818
  (State or Other Jurisdiction of Incorporation or Organization) 
(I.R.S. Employer Identification Number)

10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA    91311
(Address, including Zip Code, of Principal Executive Offices )

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


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

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

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

Large accelerated filer    ¨

Accelerated filer    ¨

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

Smaller reporting company    x

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

      As of November 8, 2012, the issuer had 164,469,569 shares of common stock outstanding.



TABLE OF CONTENTS

 

 

Page

Part I.

FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

Consolidated Balance Sheets at September 30, 2012 (unaudited) and June 30, 2012

 

 

 

 

Consolidated Statements of Operations - Three Months Ended September 30, 2012 (unaudited) and September 30, 2011 (unaudited), and the period from January 29, 2007 (Inception) through September 30, 2012

 

 

 

 

Consolidated Statement of Stockholders' Deficit - January 29, 2007 (Inception) through September 30, 2012

 

 

 

 

Consolidated Statements of Cash Flows - Three Months Ended September 30, 2012 (unaudited) and September 30, 2011 (unaudited), and the period from January 29, 2007 (Inception) through September 30, 2012

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

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

17

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

19

 

 

 

Item 4.

Controls and Procedures

20

 

 

 

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

20

 

 

 

Item 4.  

Mine Safety Disclosures

20

 

 

 

Item 5.  

Other Information

20

 

 

 

Item 6.

Exhibits

21

 

 

 

Signatures

 

22

1


PART I - FINANCIAL INFORMATION

ITEM 1 - Consolidated Financial Statements

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

      September 30,         June 30,    
      2012     2012
      (Unaudited)      
ASSETS            
             
Current assets:            
     Cash and cash equivalents   $ 34,654    $ 137,249 
     Inventory     131,215      141,057 
     Related party advances     23,853      23,853 
          Total current assets     189,722      302,159 
             
Property and equipment, net      144,693      135,615 
Patents, net     132,953      123,158 
Other assets     9,500      9,500 
          Total assets   $ 476,868    $ 570,432 
             
LIABILITIES AND STOCKHOLDERS' DEFICIT
             
Current liabilities:            
     Accounts payable    $ 169,493    $ 187,095 
     Accrued expenses     151,073      126,767 
     Accrued payroll     1,178,502      992,806 
     Deferred revenue     283,977      283,977 
     Convertible notes payable, net of discounts     42,537      29,083 
     Derivative liability     15,149      6,271 
     Related party payables      7,966      59,608 
     Short-term loans - related party      285,000      285,000 
     Short-term loans     89,521      89,521 
     Advances from partner     375,000      125,000 
     Bank loan     281,276      349,276 
          Total current liabilities     2,879,494      2,534,404 
             
Commitments and contingencies, Note 11            
             
Stockholders' deficit:            
     Preferred stock, $0.001 par value, 10,000,000 shares authorized,
          0 shares issued and outstanding as of September 30, 2012 and June 30, 2012.
       
     Common stock, $0.001 par value, 1,000,000,000 shares authorized,
          164,469,569, shares and 165,969,569 shares are issued and outstanding
          as of September 30, 2012 and June 30, 2012, respectively
    164,471      165,971 
     Additional paid-in capital     16,662,831      16,650,959 
     Deficit accumulated during the development stage     (19,229,928)     (18,780,902)
          Total stockholders' deficit     (2,402,626)     (1,963,972)
          Total liabilities and stockholders' deficit   $ 476,868    $ 570,432 

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

2


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

                    January 29, 2007,
                    Inception,
        For the 3 Months Ended     Through
        September 30,     Sept 30,
        2012     2011     2012
        (unaudited)     (unaudited)     (unaudited)
Revenue     $   $ -     $ 777,142 
Cost of revenue           -       131,708 
     Gross profit       -       -       645,434 
General and administrative expenses       361,906      323,310      13,374,503 
Research and development expenses       40,163      28,064      5,480,559 
Total operating expenses       402,069      351,374      18,855,062 
     Loss from operations       (402,069)     (351,374)     (18,209,628)
Interest expense and other       (46,957)     (10,911)     (837,189)
     Loss before income taxes       (449,026)     (362,285)     (19,046,817)
Income tax expense              
     Net loss       (449,026)     (362,285)     (19,046,817)
Deemed dividends to preferred stockholders            (1,500)     (183,111)
     Net loss available to common stockholders     $ (449,026)   $ (363,785)   $ (19,229,928)
                     
Net loss available to common shareholders per share:                    
Basic and Diluted     $ (0.00)   $ (0.00)      
                     
Weighted average shares outstanding:                    
Basic and Diluted       165,089,134      155,226,197       

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

3


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

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

4


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

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

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

5


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

                                  Deficit      
                                  Accumulated      
                                  During the      
    Series A Preferred     Common Stock     Additional Paid-in     Development      
    Shares     Amount     Shares     Amount     Capital     Stage     Total
                                         
Balance at June 30, 2010    111,111    111      130,581,562    130,582    12,656,723    (13,547,060)   (759,644)
                                         
Common stock issued as payment for services on July 8, 2010                349,571      350      52,086            52,436 
Common stock issued as payment for services on August 3, 2010                1,854,009      1,854      350,406            352,260 
Common stock issued as payment for services on August 30, 2010                75,000      75      11,175            11,250 
Common stock issued as payment for services on September 8, 2010                237,192      237      35,342            35,579 
Common stock issued as payment for services on October 1, 2010                473,517      474      70,554            71,028 
Common stock issued as payment for services on November 1, 2010                1,020,482      1,020      131,643            132,663 
Common stock issued as payment for services on November 22, 2010                100,000      100      11,900            12,000 
Common stock issued as payment for services on December 7, 2010                459,056      459      50,037            50,496 
Common stock issued as payment for services on January 10, 2011                116,916      117      13,913            14,030 
Common stock issued as payment for services on February 14, 2011                1,264,883      1,265      137,872            139,137 
Common stock issued as payment for services on March 10, 2011                219,767      220      21,757            21,977 
Common stock issued as payment for services on March 22, 2011                510,000      510      50,490            51,000 
Common stock issued as payment for services on April 1, 2011                816,145      816      80,799            81,615 
Common stock issued as payment for services on May 17, 2011                276,203      276      27,343            27,619 
Common stock issued as payment for services on June 13, 2011                333,924      334      33,058            33,392 
Common stock issued as payment for services on June 14, 2011                8,096,990      8,097      689,603            697,700 
Common stock sold for cash on August 3, 2010                593,211      593      58,728            59,321 
Common stock sold for cash on October 1, 2010                661,000      661      78,659            79,320 
Common stock sold for cash on November 1, 2010                1,400,000      1,400      142,600            144,000 
Common stock sold for cash on November 22, 2010                350,000      350      41,650            42,000 
Common stock sold for cash on January 10, 2011                110,000      110      11,990            12,100 
Common stock sold for cash on February 14, 2011                1,920,000      1,920      190,080            192,000 
Common stock sold for cash on March 2, 2011                290,000      290      28,710            29,000 
Common stock sold for cash on March 10, 2011                176,923      177      14,823            15,000 
Common stock issued as payment of short-term loan into stock on February 14, 2011                1,000,000      1,000      99,000            100,000 
Warrants issued as payment for services on November 22, 2010                            46,735            46,735 
Common stock issued for conversion of note payable on February 8, 2011                30,769      31      1,967            1,998 
Common stock issued for conversion of note payable on February 11, 2011                15,385      15      985            1,000 
Common stock issued for conversion of note payable on February 16, 2011                26,154      26      1,674            1,700 
Common stock issued for conversion of note payable on February 17, 2011                15,385      15      985            1,000 
Common stock issued for conversion of note payable on February 22, 2011                21,927      22      1,475            1,497 
Common stock issued for conversion of note payable on February 28, 2011                55,749      56      3,568            3,624 
Common stock issued for conversion of note payable on March 7, 2011                24,796      25      1,506            1,531 
Common stock issued for conversion of note payable on March 8, 2011                18,100      18      982            1,000 
Common stock issued for conversion of note payable on March 14, 2011                109,783      110      5,956            6,066 
Common stock issued for conversion of note payable on March 28, 2011                51,282      51      2,949            3,000 
Common stock issued for conversion of note payable on March 30, 2011                59,829      60      3,440            3,500 
Common stock issued for conversion of note payable on April 4, 2011                59,829      60      3,440            3,500 
Common stock issued for conversion of note payable on April 5, 2011                24,376      24      1,402            1,426 
Amortization of restricted stock issued for services                            786,275            786,275 
Dividends on preferred stock                                  (6,000)     (6,000)
Net loss                                  (3,295,428)     (3,295,428)
                                         
Balance at June 30, 2011    111,111    111      153,799,715    153,800    15,954,280    (16,848,488)   (740,297)

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

6


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, 2011    111,111    111      153,799,715    153,800    15,954,280    (16,848,488)   (740,297)
                                         
Common stock issued as payment for services on July 13, 2011                379,449      380      25,968            26,348 
Common stock issued as payment for services on August 19, 2011                198,879      199      10,541            10,740 
Common stock issued as payment for services on August 22, 2011                230,000      230      12,191            12,421 
Common stock issued as payment for services on September 29, 2011                366,924      367      13,787            14,154 
Common stock issued for conversion of note payable on August 16, 2011                287,356      287      20,786            21,073 
Common stock issued for conversion of note payable on August 17, 2011                391,850      392      25,949            26,341 
Common stock issued for conversion of note payable on August 19, 2011                391,850      392      25,949            26,341 
Common stock issued for conversion of note payable on August 22, 2011                288,401      288      17,216            17,504 
Common stock issued for conversion of note payable on September 13, 2011                30,769      31      1,508            1,539 
Common stock issued for conversion of note payable on September 15, 2011                46,154      46      2,262            2,308 
Common stock issued for conversion of note payable on September 16 2011                76,923      77      4,538            4,615 
Common stock sold for cash on August 22, 2011                600,000      600      34,400            35,000 
Common stock issued for conversion of note payable on October 4, 2011                130,474      130      4,818            4,948 
Common stock issued for conversion of note payable on October 5, 2011                178,891      179      6,943            7,122 
Common stock issued for conversion of note payable on October 6, 2011                429,338      429      16,663            17,092 
Common stock issued for conversion of note payable on October 10, 2011                35,778      36      1,388            1,424 
Common stock issued for conversion of note payable on October 11, 2011                194,231      194      6,929            7,123 
Common stock issued as payment for services on October 25, 2011                44,000      44      1,653            1,697 
Common stock issued as payment for services on November 1, 2011                353,959     354      13,300            13,654 
Common stock issued as payment for services on November 22, 2011                87,500     88      2,612            2,700 
To record prepayment of convertible promissory note December 6, 2011                            24,591           24,591
Common stock issued for conversion of note payable on January 25, 2012                230,769     231     6,692           6,923
Common stock issued for conversion of note payable on January 26, 2012                179,487     179     5,205           5,384
Common stock issued for conversion of note payable on January 27, 2012                102,564     103     4,000           4,103
Common stock issued for conversion of note payable on January 30, 2012                76,923     77     3,000           3,077
Common stock issued for conversion of note payable on January 31, 2012                338,462     338     13,200           13,538
Common stock issued for conversion of note payable on February 1, 2012                153,846     154     6,000           6,154
Common stock issued for conversion of note payable on February 17, 2012                50,441     50     2,063           2,113
Common stock issued for conversion of note payable on February 21, 2012                249,750     250     9,740           9,990
Common stock issued for conversion of note payable on March 5, 2012                82,124     82     2,382           2,464
Common stock issued for conversion of note payable on March 9, 2012                122,587     123     3,555           3,678
Common stock issued for conversion of note payable on March 12, 2012                183,880     184     5,333           5,517
Common stock issued for conversion of note payable on March 13, 2012                91,940     92     2,666           2,758
Common stock issued for conversion of note payable on March 16, 2012                61,538     62     1,785           1,847
Common stock issued for conversion of note payable on March 26, 2012                200,669     201     5,819           6,020
Common stock issued for conversion of note payable on March 27, 2012                66,890     67     1,940           2,007
Common stock issued for conversion of note payable on March 29, 2012                100,334     100     2,910           3,010
Common stock issued for conversion of note payable on March 30, 2012                196,399     196     5,696           5,892
Issuance of stock options as payment for services on February 16, 2012                            168,928           168,928
Common stock issued as payment for services on January 5, 2012                140,792     141     5,290           5,431
Common stock issued as payment for services on February 7, 2012                87,500     88     1,937           2,025
Common stock issued as payment for services on February 16, 2012                2,000,000     2,000     44,290           46,290
Conversion of Convertible Preferred Shares to Common Shares on March 18, 2012    (111,111)     (111)     442,570     443     17,687           18,019
Common stock issued for conversion of note payable on April 3, 2012                60,096      60      1,743            1,803
Common stock issued for conversion of note payable on April 17, 2012                60,332      60      1,750            1,810
Common stock issued for conversion of note payable on April 19, 2012                66,365      66      1,925            1,991
Common stock issued for conversion of note payable on April 23, 2012                267,559      268      7,758            8,026
Common stock issued for conversion of note payable on April 23, 2012                113,311      113      3,286            3,399
Common stock issued for conversion of note payable on June 1, 2012                        5,136           5,136
Issuance of stock options as payment for services on March 31, 2012                        16,570           16,570
Issuance of stock options as payment for services on March 31, 2012                        570           570
Issuance of stock options as payment for services on June 30, 2012                        34,271           34,271
Issuance of stock options as payment for services on June 30, 2012                        1,172           1,172
Common stock issued as payment for services on June 3, 2012                200,000     200     4,429           4,629
Common stock issued for conversion of note payable on June 6, 2012                1,500,000      1,500      23,960            25,460 
Dividends on Preferred Stock                                  (4,286)     (4,286)
Net loss                                  (1,928,128)     (1,928,128)
Balance at June 30, 2012    -     $ -       165,969,569    $ 165,971    $ 16,650,959    $ (18,780,902)   $ (1,963,972)
Issuance of stock options as payment for services on June 30, 2012                        1,185           1,185
Issuance of stock options as payment for services on Sept 30, 2012                        34,647           34,647
Common stock returned in exchange for payment of convertible debt                 (1,500,000)     (1,500)     (23,960)           (25,460)
Net loss                                  (449,026)     (449,026)
Balance at September 30, 2012  $     $       164,469,569    $ 164,471    $ 16,662,831    $ (19,229,928)   $ (2,402,626)

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

7


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

                        January 29, 2007,
                        inception thru
            Quarter Ended Septeber 30,     Sept 30,
            2012     2011     2012
            (unaudited)     (unaudited)     (unaudited)
Operating activities:                        
Net loss         $ (449,026)   $ (362,285)   $ (19,046,817)
Adjustments to reconcile net loss to net cash                         
     used in operating activities:                        
     Depreciation and amortization           14,166      12,092      115,416 
     Warrants issued in connection with convertible notes payable                   49,245 
     Beneficial conversion feature on convertible notes payable           9,153      39,243      439,602 
     Common stock issued for services               63,663      11,666,060 
     Stock option compensation           39,842          568,865 
     Warrants issued for services                   337,359 
     Change in value of derivatives           (14,291)     (41,694)     (14,101)
     Equipment write-down                   5,399 
     Patent write-down               16,823      35,259 
                         
Effect of changes in:                        
     Inventory           9,842          (91,795)
     Prepaid expenses and other current assets               (20,528)     (20,516)
     Bank overdraft                   (9,500)
     Accounts payable and accrued expenses           (44,938)     (22,978)     281,696 
     Accrued payroll           185,696      112,176      1,438,152 
     Advances - Related Party Payables               (30,000)     59,792 
     Advances from customers                   136,533 
     Deferred revenue               100,000      147,444 
          Net cash used in operating activities           (249,556)     (133,488)     (3,901,907)
                         
Investing activities:                        
     Purchase of property and equipment           (21,989)     -       (143,733)
     Payments for systems                   (152,721)
     Payments for patents           (11,050)     (2,085)     (176,684)
          Net cash used in investing activities           (33,039)     (2,085)     (473,138)
                         
Financing activities:                        
     Proceeds from (payments on) bank loan borrowings           (68,000)     (8,742)     281,276 
     Proceeds from sales of preferred stock               -       725,000 
     Proceeds from convertible notes payable           53,000      52,500      524,212 
     Payments on convertible notes payable           (55,000)     -       (110,000)
     Proceeds from sale of common stock               35,000      2,139,690 
     Proceeds from related party short-term loans               (15,750)     285,000 
     Proceeds from short-term loans               -       213,521 
     Payments on short-term loans               -       (24,000)
     Advances against sales           250,000      100,000      375,000 
          Net cash provided by financing activities           180,000      163,008      4,409,699 
                         
                         
Net increase (decrease) in cash           (102,595)     27,435      34,654 
Cash, beginning of period           137,249     14,779     
Cash, end of period         $ 34,654    $ 42,214    $ 34,654 
                         
Supplemental disclosures of cash flow information:                        
     Cash paid for interest         $ 5,770    $ 9,259    $ 262,872 
     Cash paid for income taxes         $   $   $ 8,328 
Supplemental disclosure of non-cash investing and financing activities:                        
     Warrants issued in connection with preferred stock         $   $   $ 155,714 
     Beneficial conversion feature on preferred stock         $   $   $ 11,111 
     Conversion of preferred to common shares in reverse merger         $   $   $ 625,000 
     Proceeds from sales of preferred shares used to purchase shares of Bio         $   $   $ 400,000 
     Conversion of note payable to common stock         $   $   $ 278,922 
     Accrued dividends issued to preferred stockholders         $   $ 1,500    $ 13,733 
     Conversion of convertible notes payable and accrued interest to common stock         $   $ 49,200    $ 373,773 

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

8


CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2012

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. (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. CTi is a California-based development stage company that has developed, patented, and commercialized proprietary technology for processing soybean oil through a device called the Nano ® (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, 2012 are not indicative of the results that may be expected for the fiscal year ending June 30, 2013. 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, 2012.

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, 2012, generated a net loss of $19,046,817. Since inception, we recorded revenue of $777,142; we recorded no revenue in the first quarter of fiscal 2013. The Company also has negative cash flow from operations and negative net equity. Cumulative net cash used in operating activities of $3,901,907 was funded largely with $2.8 million in equity, $1.3 million in debt and $375,000 in advances against sales. These factors, among others, raise doubt about the Company's ability to continue as a going concern.

Management's plan is to generate income from operations by licensing our technology globally through our strategic partner, the Desmet Ballestra Group. Desmet has agreed to provide us limited monthly advances against future sales. As of September 30, 2012, advances received amounted to $375,000. Minimum monthly advances from Desmet amount to $125,000. In addition, in the first quarter of fiscal 2013, the Company signed an agreement with the GEA Westfalia Separator Group. The purpose of the agreement is to jointly develop and patent new process applications using CTi's technology.

We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

9


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, 2012, 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.

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, 2012, the Company had incurred $132,953 in net patent costs comprised of $140,384 of gross capitalized patents and $7,431 in cumulative amortization. This compares with a net of $123,158 at June 30, 2012 comprised of $129,334 in gross capitalized costs and $6,176 in cumulative amortization. The Company has designed, developed, and patented two proprietary Nano Reactors (Nano Reactor®) and has eight US and nine PCT/international applications pending in processes such as vegetable oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.

At September 30, 2012, future amortization of patent costs is estimated as follows:

Year Ended      
June 30,     Amount
2013   $ 5,640 
2014     14,771 
2015     22,988 
2016     25,536 
2017     21,711 
Thereafter     42,307 
Total   $ 132,953 

Advertising and Promotion Costs

Advertising costs incurred in the normal course of operations are expensed as incurred. Advertising (and marketing) expenses amounted to $630, $0, and $271,182 for the three months ended September 30, 2012 and 2011, and the period from January 29, 2007 (date of inception) through September 30, 2012, respectively.

Related Party Advances

The outstanding balance of $23,853 at Sept. 30, 2012 corresponds to an advance of $16,500 to our Chief Technology Officer (who is no longer an officer of the company) and $7,353 to our CEO.

Deferred Revenue

During fiscal 2012, we received an advance of $100,000 from Desmet Ballestra associated with a license fee for a European client. Once the system is installed, meets performance specifications, and is accepted by the client, we will recognize revenue.

10


As of September 30, 2012, the Company had received cash payments of $147,444 relating to license fees associated with two NANO Neutralization Systems for two clients in Argentina. Once the systems meet performance specifications and have been accepted by the client, then we will recognize revenue. Until then, this amount will remain in Deferred Revenue on the accompanying consolidated balance sheet.

Fair Value Measurement

FASB Accounting Standards Codification ("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2012 and 2011, the carrying value of certain accounts such as inventory, accounts payable, accrued expenses, accrued payroll and short-term loans approximate fair value due to the short-term nature of such instruments.

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, 2012 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:

  • Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
  • Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
  • Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
      Fair Value     Fair Value Measurements at September 30, 2012
      as of     Using Fair Value Heirarchy
Financial Instruments     September 30, 2012     Level 1     Level 2     Level 3
                         
Liabilities:                        
     Derivative liability   $ 15,149    $ -     $ -     $ 15,149 
Total   $ 15,149    $ -     $ -     $ 15,149 

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, 2012 $ 6,271 
Total (gains) losses included in interest expense and other   (10,281)
Creation - convertible note issuances   15,149 
Settlements - note conversions   4,010 
Balance at September 30, 2012 $ 15,149 

Reclassifications

Certain numbers in the prior year have been reclassified to the current year's presentation.

11


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, 2012, the Company had 13,560,957 stock options and 10,924,183 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. The Company also had $53,000 of convertible notes payable, before discounts, which are convertible into 4,416,667 shares of common stock as of September 30, 2012. These items were also not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.

Note 5 - Property and Equipment

Property and equipment consisted of the following as of September 30, 2012 and June 30, 2011.

    September 30,         June 30,    
    2012     2012
           
Leasehold improvement $ 2,475    $ 2,475 
Furniture     26,837      26,837 
Office equipment   1,500      1,499 
Equipment   68,380      68,380 
Systems   157,015      135,027 
           
    256,207      234,218 
           
Less: accumulated depreciation and amortization   (111,514)     (98,603)
           
Property and equipment, net $ 144,693    $ 135,615 

Depreciation and amortization expense amounted to $12,911, $11,570, and $111,514 for the three months ended September 30, 2012 and 2011, and the period from January 29, 2007 (date of inception) through September 30, 2012, respectively.

Note 6 -Bank Loan

On November 1, 2011, the maturity of the variable rate loan with the National Bank of California was extended to February 1, 2013. Monthly payments include 14 principal payments of $6,000 plus interest. In addition, CTi is to make a quarterly principal payment of $50,000. The remaining principal and accrued interest of approximately $110,000 is due February 1, 2013. As of September 30, 2012, the outstanding balance on the loan was $281,276. The Company provided the National Bank of California a security interest in the assets of the Company as collateral for the loan. In addition, the personal assets of our two founders were pledged as collateral.

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Note 7 - Short-Term Loans and Short Term Loans - related parties

Short Term Loans

On October 26, 2010, the Company entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000. The outstanding balance on September 30, 2012 was $55,000 with accrued interest of $6,875.

As of September 30, 2012, we had received $34,521 from a third party, and we recorded these funds in Short Term Loans which are due on demand and pay an annual interest rate of 12%. Accrued interest amounts to $1,843 at September 30, 2012.

Short Term Loans - related parties

As of September 30, 2012, we had received $185,000 from West Point Partners, LLC, whose managing principal is our director of operations. These funds are due on demand, and pay an annual interest rate of 12%. Accrued interest which is included in Accrued Expenses amounts to $10,050.

On December 28, 2011, the CEO, Todd Zelek, extended to the company a $100,000 short-term loan due on demand at an annual interest rate of 12%. The outstanding amount at September 30, 2012 was $100,000 and Accrued Interest of $9,000 is included in Accrued Expenses.

Note 8 - Convertible Notes Payable

On December 6, 2011 we issued a convertible promissory note payable to the Prolific Group, LLC, in the amount of $25,000 with an interest rate of 6% p.a. and due December 6, 2012. During June 2012, a conversion request was submitted for $21,450 corresponding to 1,500,000 shares. These shares were subsequently returned to the Company in the first quarter of fiscal 2013, and the note was paid in full including a pre-payment premium of $12,593.

On December 6, 2011 we issued a convertible promissory note payable to the Tripod Group, LLC, in the amount of $30,000 with an interest rate of 6% p.a. and due December 6, 2012. During the first quarter of fiscal 2013, the note was paid in full including a pre-payment premium of $15,122.

On July 12, 2012 we entered into a convertible promissory note with Asher Enterprises, Inc. under which we issued a $53,000 convertible promissory note. The note is due April 13, 2013 and bears interest at 8% p.a. The note is convertible into shares of our common stock at a conversion price equal to 60% of the average of the lowest three (3) Trading Prices for the Common Stock during the ten Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The note was issued in reliance on Section 4(2) of the Securities Act of 1933. The note was not offered via general solicitation to the public. No sales commissions or other remuneration was paid in connection with the issuance of this note.

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Note 9 - Stockholders' Equity

Preferred Stock

The Company has 5,000,000 shares of Series A Preferred Stock authorized with no shares outstanding. The Company 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, 2012 is presented below.

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Options     Price   (Years)
               
               
Outstanding June 30, 2012   13,560,957      $ 0.10    8.95 
               
- Granted       -    
- Forfeited       -    
- Exercised       -    
- Expired       -    
               
Outstanding September 30, 2012   13,560,957      $ 0.10    8.73 
               
Vested and expected to vest at               
     September 30, 2012   8,560,957          
               
Exercisable at September 30, 2012   8,060,957      $ 0.15    8.28 

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The following table summarizes information about outstanding stock options as of September 30, 2012.

      Options Outstanding   Options Exercisable
          Weighted     Weighted         Weighted
          Average     Average         Average
  Exercise   Number   Remaining     Exercise   Number     Exercise
  Price   of Shares   Life (Years)     Price   of Shares     Price
                           
$ 0.03   11,750,000    9.38    $ 0.03    6,250,000    $ 0.03 
$ 0.33   637,297    4.06    $ 0.33    637,297    $ 0.33 
$ 0.67   1,173,660    4.36    $ 0.67    1,173,660    $ 0.67 
      13,560,957              8,060,957       

Warrants

A summary of the warrant activity for the three months ended September 30, 2012 is presented below.

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Warrants     Price   (Years)
               
Outstanding at June 30, 2012   11,222,287    $ 0.42    0.85 
Granted   -       -     -  
Exercised   -       -     -  
Expired   298,104    $ 0.36    -  
               
Outstanding at September 30, 2012   10,924,183    $ 0.42    0.62 
               
Vested and expected to vest at September 30, 2012   10,924,183    $ 0.42    0.62 
               
Exercisable at September 30, 2012   10,924,183    $ 0.42    0.62 

The following table summarizes information about outstanding warrants as of September 30, 2012.

      Warrants Outstanding   Warrants Exercisable
          Weighted     Weighted         Weighted
          Average     Average         Average
  Exercise   Number   Remaining     Exercise   Number     Exercise
  Price   of Shares   Life (Years)     Price   of Shares     Price
                           
$ 0.20 - 0.37   1,939,374    1.03    $ 0.26    1,939,374    $ 0.26 
$ 0.42 - 0.58   8,984,809    0.51    $ 0.45    8,984,809    $ 0.45 
      10,924,183              10,924,183       

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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, 2013, 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, 2012.

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 interest or penalties since inception.

Note 11 - Commitments and Contingencies

Lease Agreements

Total rent expense was $13,532, $17,510, and $278,213 for the three months ended September 30, 2012 and 2011, and for the period from January 29, 2007 (date of inception) through September 30, 2012, respectively. The Company's lease agreement extends through February 1, 2013 with monthly rental payments of $4,378.

Royalty Agreements

On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two parties, our President as well as our former CEO/current CTO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by these two individuals have been assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of these two individuals 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 September 30, 2012.

On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical Department (the "Inventor")who 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 the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of September 30, 2012, no patents have been granted in which this person is the legally named inventor.

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Licensing Agreement

On May 14, 2012, we signed a 3-year R and D, Marketing and Technology License Agreement (the "Agreement") with n.v. Desmet Ballestra Group, s.a. ("Desmet"). The Agreement provides Desmet (licensee) an exclusive license and right to develop, design and supply systems which incorporate Nano Reactor® devices on a global basis but limited to oils and fats and oleo chemical applications. CTi (licensor) remains owner of the current patents and patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet has agreed to provide limited monthly advance payments on future sales to CTi, if necessary. Payments made by Desmet during the quarter ended September 30, 2012 amounted to $250,000.

Note 12 - Subsequent Events

On October 3, 2012 the Company received a purchase order of $50,000 from the Desmet Ballestra Group for a Nano Reactor® relating to a transaction in Argentina.

In October 2012, the Company received a purchase order of $50,575 from the Desmet Ballestra Group for a Nano Reactor® relating to a prospective client in Italy.

On October 12, 2012, the Company accepted the resignation Todd Zelek as CEO. During the course of fiscal 2012, Mr. Zelek received compensation in the form of shares and options. As part of his Separation Agreement and Release (submitted as exhibit to 8K Report filed October 12, 2012), this share-based compensation was forfeited/returned, and new compensation was included in the agreement.

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 of our Business

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 Reactor (the "Reactor" that employs proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors. The Reactor is the critical component of the Nano Neutralization System - a vegetable oil refining system which is designed to reduce operating costs and increase yields.

During the quarter ended September 30, 2012, we recorded no revenue. Cumulative loss since inception on January 29, 2007 is $19,046,817 including $11,666,060 in common stock issued for services. Cumulative net cash used in operating activities of $3,901,907 was funded largely with $2.8 million in equity, $780K in loans, and $524K in convertible notes.

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, 2012 generated a net loss of $19,046,817. 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.

17


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, 2012, and did not change for the three months ended September 30, 2012.

Results of Operations

The following is a comparison of our results of operations for the three months ended September 30, 2012 and 2011.

        For the Quarter Ended          
        September 30,          
        2012     2011     $ Change   % Change
                         
Revenue     $   $   $   0.0%
Cost of revenue                 0.0%
     Gross profit                 0.0%
General and administrative expenses       361,906      323,310      38,596    11.9%
Research and development expenses       40,163      28,064      12,099    43.1%
Total operating expenses       402,069      351,374      50,695    14.4%
     Loss from operations       (402,069)     (351,374)     (50,695)   14.4%
Interest expense and other       (46,957)     (10,911)     (36,046)   330.4%
     Net loss before income tax       (449,026)     (362,285)     (86,741)   23.9%
Income tax expense                
     Net loss     $ (449,026)   $ (362,285)   $ (86,741)   23.9%

Revenue

We recorded no revenue in the first quarter of fiscal 2013 or fiscal 2012.

Operating Expenses

Operating expenses for the three months ended September 30, 2012 amounted to $402,069 compared with $351,374 for the same period in 2011, an increase of $50,695, or 14.4%. In both periods, the major expense component was compensation most of which was accrued. In the first quarter of fiscal 2013, compensation amounted to $236,999, or 60% of total costs compared with $120,184, or 34% in the first quarter of fiscal 2012.This increase in compensation in the first quarter of fiscal 2013 was attributable largely to the addition of new management.

During the first quarter of 2013, the other major component of operating expense was professional service fees related to auditors, accounting, and legal services which amounted to $43,046, or 11% of total operating expenses versus $138,253, or 39% in the first quarter of fiscal 2012. These expenses were substantially lower in the first quarter of fiscal 2013 as we reduced reliance on third-party service providers.

R&D expenses remained relatively low as we continued to rely on Desmet Ballestra for support in R&D. It is our intention to pursue R&D as our cash position permits.

18


Interest Expense

In the first quarter of fiscal 2013, Interest Expense of $46,957 consisted of a non-cash expense of $26,587 relating to convertible notes and $14,600 in non-cash, accrued interest relating primarily to short term loans. Cash interest payments on our loan from the National Bank of California declined to $5,770 as the outstanding balance declined from $477,368 on Sept. 30, 2011 to $281,276 on Sept. 30, 2012. This compares with total interest expenses of $10,911 during the first quarter of fiscal 2012 composed of non-cash expenses of $180 relating to convertible notes, $1,471in miscellaneous interest expense, and $9,259 cash interest on the bank loan.

As of September 30, 2012, the gross face value of convertible notes issued was $53,000. 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, 2012, CTi recorded a non-cash gain on Change in Value of Derivative Liability of $10,281. The gain was offset by non-cash interest expense of $36,868 attributable to the Amortization of Discounts on the issuance of convertible notes payable as well as interest expense associated with pre-payment of the Prolific and Tripod convertible notes. During the three months ended September 30, 2011, CTi recorded a non-cash gain on Change in Value of Derivative Liability of $41,694. The gain was offset by non-cash interest expense of $41,874 associated with the convertible notes.

Liquidity and Capital Resources

CTi's primary sources of liquidity derived largely from advances on future sales from Desmet Ballestra as well as convertible promissory notes and short-term loans. See Note 7 "Short-Term Loans and Short Term Loans - related parties, and Note 8 "Convertible Notes Payable," for more information.

Cash Flow

Net cash used in operating activities during the three months ended September 30, 2012 amounted to $249,556 compared with $133,488 for the same period in fiscal 2012. For the first quarter of fiscal 2013, cash was used to pay $42,394 in fixed operating costs, $58,325 in compensation, $57,920 in professional service fees, $8,926 in manufacturing costs, $16,701 in marketing and sales and $35,355 in interest payments. We paid other obligations amounting to $32,192. For the first quarter of fiscal 2012, $133,488 was used to pay similar expenses.

Net cash used in investing activities during the three months ended September 30, 2012 was $11,050 relating to capitalized patents and $21,989 for property, plant, and equipment. During the same period ended September 30, 2011, we invested $2,085 in capitalized patents.

For the first quarter of fiscal 2013, funding was provided by $250,000 in advances against sales from Desmet along with $53,000 in convertible debt. We used the convertible note funding to repay $55,000 in existing convertible debt. We used $250,000 to pay $68,000 in principal on the bank loan. The remaining $180,000 along with a drawdown in cash of $102,595 was used to fund $249,556 in operating activities and $33,039 in financing activities. 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.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable for smaller reporting companies.

19


ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Principal Executive Officer and Principal Accounting 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 internal control over financial reporting during the first quarter of fiscal 2013 that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1 Legal Proceedings

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

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

The following is a listing of unregistered security activity during the three months ended September 30, 2012.

Issuance of Common Stock for Conversion of Indebtedness

On June 6, 2012, a conversion request was submitted by the Prolific Group, LLC for $21,450 of outstanding convertible notes corresponding to 1,500,000 shares of common stock. These shares were issued but subsequently returned to the Company in the first quarter of fiscal 2013, and the note of $25,000 was paid in full in two payments of $15,000 on July 12 and $10,000 on August 7 plus a pre-payment premium of $12,593 recorded as interest expense in the Statements of Operations.

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 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
10.8 Board of Director Agreement - James Fuller   10-Q December 31, 2011 10.12 October 20, 2011
10.90 Technology and License Agreement with Desmet Ballestra dated 14 May 2012   10-K June 30, 2012 10.1 October 15, 2012
10.10 Short Term Loan Agreement - CEO   10-K June 30, 2012 10.11 October 15, 2012
10.11 Loan Agreement - Desmet Ballestra - Oct. 26, 2010          
             
14.1 Code of Business Conduct and Ethics*   10-K June 30, 2011 14.1 September 28, 2011
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 X        
31.2 Certificate 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 (1)        
101.SCH** XBRL Taxonomy Extension Schema (1)        
101.CAL** XBRL Taxonomy Extension Calculation Linkbase (1)        
101.DEF** XBRL Taxonomy Extension Definition Linkbase (1)        
101.LAB** XBRL Taxonomy Extension Label Linkbase (1)        
101.PRE** XBRL Taxonomy Extension Presentation Linkbase (1)        
             
* 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.
             
(1) Pursuant to Rule 405(a)(2) of Regulation S-T, the registrant is relying upon the applicable 30-day grace period for the initial filing of its first Interactive Data File required to contain detail-tagged footnotes and schedules. The registrant intends to file the required detail-tagged footnotes or schedules by the filing of an amendment to this Quarterly Report on Form 10-Q within the 30-day period.

 

21


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/ Igor Gorodnitsky   President; Member of Board of Directors   November 13, 2012
Igor Gorodnitsky   (Principal Executive Officer)    
         
/s/ N. Voloshin   Principal Accounting Officer   November 13, 2012
N. Voloshin        
         
/s/ Jim Fuller   Audit Committee Chairman, Independent Financial Expert   November 13, 2012
Jim Fuller        

 

 

 

 

22