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	2

Item 1.	Consolidated Financial Statements	2

	Consolidated Balance Sheets at September 30, 2012 (unaudited) and June 30, 2012	2

	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	3

	Consolidated Statement of Stockholders' Deficit - January 29, 2007 (Inception) through September 30, 2012	4

	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	8

	Notes to Consolidated Financial Statements (unaudited)	9

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

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

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

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)

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

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

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

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

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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.

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

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.

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

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

Similar companies