Cavitation Technologies, Inc. - Quarter Report: 2012 March (Form 10-Q)
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 March 31, 2012
Commission File Number: 0-29901
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
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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):
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Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨
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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).
As of May 11, 2012, the issuer had 163,701,906 shares of common stock outstanding.
TABLE OF CONTENTS Page Part I. FINANCIAL INFORMATION 2 Item 1. Consolidated Financial Statements 2 Consolidated Balance Sheets at March 31, 2012 (unaudited) and June 30, 2011 2 Consolidated Statements of Operations - Three and Nine Months Ended March 31, 2012 (unaudited) and March 31, 2011
(unaudited), and the period from January 29, 2007 (Inception) through March 31, 2012 3 Consolidated Statement of Stockholders' Deficit - January 29, 2007 (Inception) through March 31, 2012 4 Consolidated Statements of Cash Flows - Nine Months Ended March 31, 2012 (unaudited) and March 31, 2011
(unaudited), and the period from January 29, 2007 (Inception) through March 31, 2012 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 Part II. OTHER INFORMATION 21 Item 1. Legal Proceedings 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 25 Item 4. Mine Safety Disclosures 26 Item 5. Other Information 26 Item 6. Exhibits 26 Signatures 27 1
PART I - FINANCIAL INFORMATION ITEM 1 - Consolidated Financial Statements CAVITATION TECHNOLOGIES, INC. See accompanying notes, which are an integral part of these financial statements 2
CAVITATION TECHNOLOGIES, INC. See accompanying notes, which are an integral part of these financial statements 3
CAVITATION TECHNOLOGIES, INC. 4
CAVITATION TECHNOLOGIES, INC. See accompanying notes, which are an integral part of these financial statements 5
CAVITATION TECHNOLOGIES, INC. See accompanying notes, which are an integral part of these financial statements 6
CAVITATION TECHNOLOGIES, INC. See accompanying notes, which are an integral part of these financial statements 7
CAVITATION TECHNOLOGIES, INC. Note 1 - Nature of Operations Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly
owned subsidiary of Cavitation Technologies, Inc., a Nevada corporation originally incorporated under the name Bio Energy, Inc.
Cavitation Technologies, Inc. is a process and product development firm that has developed, patented, and commercialized proprietary
technology for processing oils and fats through the Nano Reactor® Device and Nano Reactor® System. The
reactor is the critical component of system which is designed to reduce operating costs and increase yields in the refining of vegetable
oils. The Company designs and engineers environmentally friendly NANO technology based systems that have potential commercial
applications in industries such as vegetable oil refining, renewable fuels, water-oil emulsions, alcoholic beverage enhancement, algae
oil extraction, and crude oil yield enhancement. Basis for 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 nine
months ended March 31, 2012 are not indicative of the results that may be expected for the fiscal year ending June 30, 2012. You
should read these unaudited consolidated financial statements in conjunction with the audited financial statements and the notes
included in the Company's annual report on Form 10-K for the year ended June 30, 2011. Note 2 - 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 March 31, 2012 recorded cumulative revenue of $755,898 and a cumulative net loss of
$18,208,041. To date, cumulative negative cash flow from operations of $3,630,105 was funded largely with $3.3 million in equity.
Total Stockholder's Deficit at March 31, 2012 was $1,495,948. 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. We will also attempt to raise additional debt and/or equity financing to fund operations
and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in
sufficient amounts necessary to meet the Company's needs, or that the Company will be able to meet its future contractual obligations.
Should management fail to obtain such financing, the Company may curtail its operations. The accompanying consolidated financial
statements do not include 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. As a result of the aforementioned factors, our independent auditors, in their report on our audited financial
statements for the fiscal year ended June 30, 2011, expressed substantial doubt about our ability to continue as a going concern. 8
Note 3 - Summary of Significant Accounting Policies Patents Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The
Company accounts for patents in accordance with Accounting Standards Codification ("ASC") 350-30, General
Intangibles Other Than Goodwill. As of March 31, 2012, the Company recorded $117,126 in net patents comprised of $122,062 in
capitalized patents and $4,935 in cumulative amortization. This compares with a net of $118,153 at June 30, 2011 comprised of
$121,112 in capitalized patents and accumulated amortization of $2,963. On October 25, 2011, the Company had a patent issued for its
Multi-Stage Cavitation Device the cost for which will be amortized over an estimated useful life of 4 years. The Company has
been issued two patents and has eight US and nine PCT/international applications pending. At March 31, 2012, future amortization of patent costs is estimated as follows: Related Party Advances The Company advanced Igor Gorodnitsky, President, and Roman Gordon, Chief Technology Officer, $15,000
each for operating expenditures that will be incurred on behalf of the Company during fiscal 2012. This amount was reduced to $21,120
on March 31, 2012. Deferred Revenue The Company received payment of $100,000 from the Desmet Ballestra Group ("Desmet") during
the nine months ended March 31, 2012 related to CTi Nano Reactors. The payment will be recognized as revenue when the
system has been accepted by the end-user which is expected to occur in calendar 2012. In addition, the Company received $47,444 associated
with the down-payment on a system sold to a client in Argentina. Fair Value Measurement ASC 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value
of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As
of March 31, 2012, the carrying value of certain accounts such as accounts receivable, inventory, accounts payable, accrued expenses,
and
accrued payroll which approximate fair value due to the short-term nature of such instruments and
loans payable which appproximate fair value based on prevailing interest rates. 9
The following table presents information about the Company's assets and liabilities measured and reported in
the financial statements at fair value on a recurring basis as of March 31, 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. The following tables provide a reconciliation of the beginning and ending balances of our financial liabilities classified as Level 3: Advertising and Promotion Costs Advertising costs (including marketing expenses) incurred in the normal course of operations are expensed as
incurred. Expenses amounted to $33,339, $94,117, and $255,663, for the nine months ended March 31, 2012 and 2011, and the
period from January 29, 2007 (date of inception) through March 31, 2012, respectively. Advertising expenses amounted to $6,375
and $81,836 for the three months ended March 31, 2012 and 2011, respectively. 10
Note 4 - Net Loss per Share - Basic and Diluted The Company computes the loss per common share using ASC 260, Earnings Per
Share. The net loss per common share, both basic and diluted, is computed based on the weighted average
number of shares outstanding for the period. The diluted loss per common share is normally 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 March 31, 2012, the Company had 13,560,957 stock options and 11,812,285 warrants to purchase common
stock outstanding that were not included in the diluted net loss per common share because their effect would be anti-dilutive.
The company had no Series A Preferred Stock outstanding as 111,111 preferred shares plus $18,019 in
accrued dividends previously outstanding were converted to 442,570 common shares in March 2012. The Company also had $87,900
of outstanding convertible notes payable, before discounts, which were convertible into 4,640,381 shares of common stock as of March
31, 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 on March 31, 2012 (unaudited) and June 30, 2011. Depreciation expense amounted to $34,710, $13,623, and $82,461 for the nine months ended March 31, 2012
and 2011 and the period from January 29, 2007 (date of inception) through March 31, 2012, respectively. Note 6 - Bank Loan On November 1, 2010, we renewed our loan with National Bank of California until November 1, 2011 with 11
monthly payments of $6,000 and a final payment of $474,171. The interest rate floor was increased from 7.0% to 7.5%. On November
1, 2011, the maturity of the variable rate loan 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 March 31, 2012, the outstanding balance on the loan was $370,271. Note 7 - 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. This agreement was restructured on January 21, 2011 extending the due date on the initial payment to
March 31, 2011. The due date on the loan was subsequently extended with no definitive maturity date. The loan bears no interest but accrued interest on late
payments amounted to $4,125 at March 31, 2012. Principal payments are being made to Desmet when possible. The outstanding
balance on March 31, 2012 was $55,000. 11
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%. Accrued interest amounted to $3,000 at March 31, 2012.
In addition, throughout the third quarter of fiscal 2012, we received $57,000 from our Director of Operations which is included in short-term loans, related parties which are
funds that are earmarked for eventual conversion into a convertible promissory note, should the Company be able to raise $400,000. Note 8 - Convertible Notes Payable On February 1, 2011, the Company issued convertible promissory notes to the Tripod Group, LLC, (the
"Tripod Notes") for an aggregate total amount of $61,212. From February through October 2011, Tripod converted the entire
$61,212 into 1,635,897 shares of common stock. On February 8, 2011, the Company issued a convertible promissory note payable to Asher Enterprises, Inc.,
(the "Asher Note"), in the amount of $42,500. During the quarter ended September 30, 2011, the entire $42,500 was
converted into 1,359,457 shares of common stock at a value of $91,258, and the $47,059 beneficial conversion feature was allocated to
additional paid in capital. On June 6, 2011, the Company issued a convertible promissory note payable to Asher Enterprises, Inc., (the
"Second Asher Note") in the amount of $47,500. During the second quarter of fiscal 2012, the $47,500 outstanding balance
was pre-paid incurring a pre-payment penalty (interest expense) of $23,750. The company pre-paid the convertible promissory note as
part of our overall strategy to minimize the issuance of shares. On June 24, 2011, we issued a convertible promissory note payable to GEL Properties, LLC, (the "GEL
Note") in the amount of $52,500. The Note is due June 24, 2012 and bears interest at a rate of 6% p.a. The Note is convertible
into shares of our common stock at a conversion price equal to 65% of the average day's lowest closing bid out of the 5 trading days
prior to conversion. The transaction was funded July 12, 2011. The issuance of the GEL Note amounted in a beneficial conversion
feature of $28,269 on the issue date which has been recorded as a discount to the carrying value of the note. As of March 31, 2012,
the remaining discount balance amounted to $6,565. By virtue of the variable conversion ratio, the conversion feature is a derivative
under ASC 815-40, Derivatives and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative
liability on the accompanying balance sheet. As of March 31, 2012, $44,600 had been converted to common stock and $7,900
remained the outstanding balance. On December 6, 2011 we issued a convertible promissory note payable to the Prolific Group, LLC, (the
"Prolific Note") in the amount of $25,000. The Note is due December 6, 2012 and bears interest at 6% p.a. The Note is
convertible into shares of our common stock at a conversion price equal to 65% of the average day's lowest closing bid out of the 5
trading days prior to conversion. The issuance of the Prolific Note amounted in a beneficial conversion feature of $4,673 on the issue
date which has been recorded as a discount to the carrying value of the note. As of March 31, 2012, the remaining discount balance
amounted to $3,192. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives
and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying
balance sheet. As of March 31, 2012, the outstanding balance was $25,000. On December 6, 2011 we issued a convertible promissory note payable to the Tripod Group, LLC, (the
"Tripod Note") in the amount of $30,000. The Note is due December 6, 2012 and bears interest at 6% p.a. The Note is
convertible into shares of our common stock at a conversion price equal to 65% of the average day's lowest closing bid out of the 5
trading days prior to conversion. The issuance of the Tripod Note amounted in a beneficial conversion feature of $5,608 on the issue
date which has been recorded as a discount to the carrying value of the note. As of March 31, 2012, the remaining discount balance
amounted to $3,830. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives
and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying
balance sheet. As of March 31, 2012, the outstanding balance was $30,000. 12
On December 21, 2011 we issued a convertible promissory note payable to Asher Enterprises, Inc., (the
"Asher Note") in the amount of $25,000. The Note is due September 21, 2012 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 day's lowest trading price during the 10
trading days prior to conversion. The issuance of the Asher Note amounted in a beneficial conversion feature of $7,146 on the issue
date which was recorded as a discount to the carrying value of the note. As of March 31, 2012, the remaining discount balance
amounted to $4,522. By virtue of the variable conversion ratio, the conversion feature is a derivative under ASC 815-40, Derivatives
and Hedging, and accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying
balance sheet. As of March 31, 2012, the outstanding balance was $25,000. On March 31, 2012, the outstanding balance of Convertible Notes Payable (net of discounts) as recorded on the
balance sheet amounted to $69,791 consisting of outstanding principal of $87,900 less discount of $18,109. By virtue of the variable
conversion ratios of these transactions, the conversion feature of the above notes is a derivative under ASC 815-40, Derivatives and
Hedging. Accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance
sheet. As of March 31, 2012, the aggregate value of the conversion features associated with the above notes amounted to $23,034.
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 converted 111,111 Series A Preferred Shares plus $18,019 in accrued dividends into 442,570 shares of common stock in
March 2012. 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 nine months ended March 31, 2012 is presented below. 13
The following table summarizes information about outstanding stock options as of March 31, 2012. Options are valued using the Black-Scholes option valuation model using the following inputs: Warrants A summary of the warrant activity for the nine months ended March 31, 2012 is presented below. 14
The following table summarizes information about outstanding warrants as of March 31, 2012. Note 10 - Income Taxes The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 270,
Interim Financial Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the
estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or
infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the
interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit
can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or
lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections. The
Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the Company will generate net
operating losses in the year ending June 30, 2012, and it is not more likely than not that those losses will be recovered using future
taxable income. Therefore, no provision for income tax or tax liability has been recorded as of and for the period ended March
31, 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 any interest or penalties since inception. Note 11 - Commitments and Contingencies Lease Agreements Total rent expense was $39,836, $38,633 and $287,007 for the nine months ended March 31, 2012 and 2011,
and for the period from January 29, 2007 (date of inception) through March 31, 2012, respectively. The Company exercised its
one-year option to extend the lease term to February 1, 2013. Monthly payments increased to
approximately $4,509 beginning February 2012. The Company has a security deposit of $9,500 associated with this
lease. 15
Royalty Agreements On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with our President
and former CEO, and current CTO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by
the President and CTO have been assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of gross
revenues to each of the CTO and President for licensing of the technology and leasing of the related equipment embodying the
technology. These agreements were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company's CTO and
President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated
through March 31, 2012. Therefore, no royalties have accrued or been paid. On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment
agreement with Varvara Grichko who became a member of the Board of Directors in September 2010. Mrs. Grichko shall receive an
amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty
payments from the patent which Mrs. Grichko was the legally named inventor and 3% of actual gross royalties received by the
Company from the patent in each subsequent year. As of March 31, 2012, no patents have been granted in which Mrs. Grichko is the
legally named inventor. Licensing Agreement On November 1, 2010 we signed a Technology License, Marketing &Collaboration Agreement with
N.V. Desmet Ballestra Group S.A. ("Desmet"). The agreement gives Desmet the exclusive worldwide license to
market the CTI Nano Reactor® System in the field of vegetable oil processing. Under this Agreement, Desmet is responsible
for marketing the CTI System to end users as well as the construction, installation and maintenance of the system. In
consideration for services rendered, CTi agrees to pay Desmet a fee generated from revenue derived from licensing our systems and
technology. This agreement supersedes a previous agreement dated January 15, 2010. Desmet is committed to installing a
minimum number of systems by June 30, 2012 in order to maintain exclusivity. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This
discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans,
objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in
these forward-looking statements. Overview Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly
owned subsidiary of Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as "the Company,"
"CTi," "we," "us," and "our") a Nevada corporation originally incorporated under the name
Bio Energy, Inc. We are a Development Stage Company focused on designing and engineering environmentally friendly NANO
technology based reactors and systems that have potential commercial applications in industries such as vegetable oil refining,
renewable fuels, water-oil emulsions, alcoholic beverage enhancement, algae oil extraction, and crude oil yield enhancement. We have
developed, patented, and commercialized proprietary technology for processing soybean oil using our Nano Reactor®
Device. The reactor is the critical component of the Nano Reactor® System which is designed to reduce operating costs
and increase yields in the refining of vegetable oils. Together with our partner, Desmet Ballestra, we are focused on merchandising our
Nano Reactor® Device to global refiners who process oils and fats to produce products for human consumption and other
purposes. Management's Plan Our near term goal is to successfully merchandise Nano Reactor® Devices and Nano
Reactor® Systems. We have no significant operating history and, from January 29, 2007, (inception), through March 31, 2012
we sold two systems and recognized cumulative revenue of $755,898 with cumulative losses of $18,024,928. We also have negative
cash flow from operations and negative net equity. 16
Management's plan is to generate income from operations by selling our Nano Reactor® Devices
globally through our strategic partner, the Desmet Ballestra Group. We will also attempt to raise additional debt and/or equity financing
to fund current and future operations and to provide additional working capital. However, there is no assurance that such financing will
be consummated or obtained in sufficient amounts necessary to meet the Company's needs, or that the Company will be able to meet
its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations. The
accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. Critical Accounting Policies CTi's critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended June 30, 2011,
and did not materially change for the nine months ended March 31, 2012. Results of Operations for the Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011 Revenue During the three months ended March 31, 2012, revenue of $51,818 was derived from the sale of a Nano
Reactor® Device, rental income from a trial unit, and service fees associated with the Nano Reactor® System.
During the three months ended March 31, 2011, we recorded revenue of $341,326 related to a Nano Reactor® System
sold to a customer located in the United States. Cost of Revenue During the three months ended March 31, 2012, our Cost of Revenue amounted to $12,260 resulting from the
revenue transactions described above. During the three months ended March 31, 2011, the Cost of Revenue amounted to $54,444
resulting from the transaction described above. 17
Operating Expenses Operating expenses for the three months ended March 31, 2012 amounted to $567,555 compared with $1,181,080 for the three
months ended March 31, 2011, a decrease of 51.9%. The decrease was attributable to a decline in General and Administrative
expenses of $396,126, or 44.1%, along with a decrease in R&D of $217,399, or 77.1%. G&A expenses declined as
consulting fees decreased significantly as we relied more on our partner, Desmet Ballestra, to provide the services that heretofore had
been provided by consultants. The major components of $502,820 G&A expenses in the third quarter of fiscal 2012 included $365,191 in
compensation and $47,159 in professional fees largely for legal and accounting services compared with $107,203 in compensation and
$113,268 in professional fees in the same period in fiscal 2011. This compensation was almost entirely non-cash consisting of accrued
salaries as well as stock-based compensation. The primary component of the $898,946 G&A expenses in the
third quarter of fiscal 2011 was $556,931 in consulting fees most of which was non-cash stock based compensation. R&D expenses decreased $217,399 to $64,735 for the quarter as our partner, Desmet Ballestra, assumed
more R&D functions and we continued to focus more on merchandising activities. R&D expenses consisted largely of
compensation. Interest Expense Interest expense for the 3 months ended March 31, 2012 amounted $25,337, a decrease of $5,308 versus the same period in
2011. Most of these expenses were non-cash charges associated with convertible notes payable. Cash interest payments on our bank
line of credit amounted to $7,196 and $9,720 for the third quarters of 2012 and 2011 respectively as the outstanding
principal amount of the loan declined from $382,271 at December 31, 2011 to $370,271 at March 31, 2012. Results of Operations for the Nine Months Ended March 31, 2012 Compared to the Nine Months Ended March 31, 2011 Revenue During the nine months ended March 31, 2012, revenue consisted primarily of Nano Reactor® System
sales of $142,143 to international and domestic clients as well as service fees of $23,828. This compares with $589,926 in revenue
derived largely from the sale of two Nano Reactor® Systems to domestic clients in the same period in fiscal 2011. 18
Cost of Revenue During the nine months ended March 31, 2012, our cost of revenue amounted to $35,274 compared with
$91,144 in the same period in fiscal 2011. Operating Expenses Operating expenses for the nine months ended March 31, 2012 amounted to $1,330,827 versus $3,351,597 for
the same period in fiscal 2011, a decrease of $2,020,770, or 60.3%. The decrease was attributable to a $1,519,506 reduction in
G&A and a $501,264 drop in R&D expenses. G&A decreased by $1,519,506 for the nine months ended March 31, 2012 versus 2011 largely because of
a reduction in consulting fees of more than $800,000 and the elimination of non-recurring bonus payments of $789,075 in restricted
shares to key employees for services provided. The major components of G&A during the nine months ended March 31, 2012
were compensation of $639,781 and professional services such as auditors, attorneys, and SEC related services of $248,488 versus
$341,322 in compensation and $376,758 in professional service fees in fiscal 2011. R&D expenses decreased $501,264 to $126,940 as we reduced payments to consultants while our
partner, Desmet Ballestra, assumed more R&D functions. We also focused our attention more on merchandising activities.
R&D expenses consisted largely of compensation. Interest Expense Interest expense for the 9 months ended March 31, 2012 amounted to $155,138, an increase of $102,256, or 193.4% versus the
same period in 2011. Most of these expenses are non-cash charges associated with convertible notes payable. Cash interest
payments on our bank line of credit amounted to $22,502 and $30,709 for the nine months ended March 31, of 2012 and 2011
respectively as the outstanding principal amount of the loan declined from $490,479 on March 31, 2011 to $370,271 at March 31, 2012.
In addition, for the 9 months ending March 31, 2012, we incurred a cash interest expense of $23,750 associated with the pre-payment
of a $47,500 convertible promissory note. Liquidity and Capital Resources CTi's primary sources of liquidity have been issuances of restricted common stock to service providers, sale of
common stock for cash, issuances of convertible promissory notes, short-term loans and advances from a strategic partner. In
Notes to Financial Statements, see Note 6 "Bank Loan", Note 7 "Short-Term Loans, Note 8
"Convertible Notes Payable," and Note 9, "Stockholder's Equity" for more information. CTi's ability to continue to issue restricted common stock in exchange for services may be adversely affected by
the performance of our stock price. Additionally, CTi's ability to issue long-term debt and obtain short-term loans may be negatively
impacted by domestic economic conditions that create a tight credit environment, particularly for development stage companies. It is
our intention to rely less on the issuance of stock as payment to service providers, and more on cash generated from operations by
selling our technology globally through our strategic partner, Desmet Ballestra. Common Stock During the nine months ended March 31, 2012, we issued 600,000 shares of common stock for $35,000
compared with 3,004,211 shares of common stock for $572,741 in cash for the nine months ended March 31, 2011. Share-based Compensation During the nine months ended March 31, 2012 we issued 3,889,003 shares of restricted common stock valued
at $135,459 as payment to service providers including compensation to our CEO. During the nine months ended March 31, 2011, we
issued 6,680,393 shares of common stock valued at $943,856 as payments to service providers and also recognized $786,275 for the
amortization of restricted stock issued for services. During the third quarter of 2012,
we granted stock options to purchase 11,750,000 shares of restricted common stock and incurred an expense of $168,928.
19
Cash Flow Net cash used in operating activities during the nine months ended March 31, 2012 declined to $208,649 from
$574,829 for the same period in fiscal 2011. Cash of $208,649 was used largely to pay professional service providers and interest
expense on the bank loan. During the nine months ended March 31, 2011, the net cash used in operating activities of $574,829 was
used largely to pay salary and related expenses, R&D, interest expense and professional fees such as attorneys and accountants.
For the nine months end March 31, 2012, cash used in operating activities of $208,649 plus cash used in investing activities of $41,469 were funded largely by financing of $240,411 including $100,000 in
advances from customers, $132,500 in funding from convertible notes payable, $157,000 in a short term loans from our CEO and Director of Operations, and $35,000 in the sale of common stock. In addition,
these funds were used to repay $115,839 of principal on the bank loan and $47,500 in repayment of a convertible note payable. During the same period in fiscal 2011, cash used in operating activities of
$574,829 and cash used in investing activities of $133,528 were funded largely by financing of $708,102 including $75,000 in short term loans, $103,712 in funding from convertible notes payable, and $572,741
in the sale of common stock. Commitments Lease Agreements On December 30, 2009, we extended our existing lease agreement for approximately 5,000 square feet of office
and warehouse space at 10019 Canoga Ave for a period of two years effective February 1, 2010. Monthly rent under
the extended lease agreement is $4,375 per month. On February 1, 2012, we invoked the one-year option to make monthly payments of
about $4,509 for each of the next 12 months. Royalty Agreements On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with our President
and former CEO, and current CTO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by
the President and CTO have been assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of gross
revenues to each of the CTO and President for licensing of the technology and leasing of the related equipment embodying the
technology. These agreements were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company's CTO and
President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated
through March 31, 2012. Therefore, no royalties have accrued or been paid. On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment
agreement with Varvara Grichko who became a member of the Board of Directors in September 2010. Mrs. Grichko shall receive an
amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty
payments from the patent which Mrs. Grichko was the legally named inventor and 3% of actual gross royalties received by the
Company from the patent in each subsequent year. As of March 31, 2012, no patents have been granted in which Mrs. Grichko is the
legally named inventor, and as a result, no royalties have accrued or been paid. 20
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. Not applicable for smaller reporting companies. ITEM 4. Controls and Disclosures Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures as
defined in Rules 13a-15(b)(e) and 15d-15(b)(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this
report, and they have concluded that these controls and procedures are effective. Changes in Internal Control over Financial Reporting In accordance with the requirements of Rule 13a-15(d) of the Securities Exchange Act of 1934, there were no changes in
internal control over financial reporting during the third quarter of fiscal 2012 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 nine months ended March 31, 2012. Issuance of Common Stock On August 22, 2011, the Company issued 300,000 shares of common stock for a total consideration of
$15,000 to Charles Collier, a non-affiliated accredited investor. The shares were issued in reliance on Section 4(2) of the Securities Act
of 1933, as amended. The shares were not offered via general solicitation to the public but solely to Charles Collier. The Company
issued restricted shares in connection with this issuance. No sales commissions or other remuneration was paid in connection with
these issuances. 21
On August 22, 2011, the Company issued 300,000 shares of common stock to for a total consideration of
$20,000 to Catherine Shaw, a non-affiliated accredited investor. The shares were issued in reliance on Section 4(2) of the Securities
Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to Charles Collier. The Company
issued restricted shares in connection with this issuance. No sales commissions or other remuneration was paid in connection with
these issuances. Issuance of Restricted Common Stock for Services On July 13, 2011, we issued 110,342 shares of common stock with a recorded value of $7,662 to Michael
Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On July 13, 2011, we issued 13,075 shares of common stock with a recorded value of $908 to Silvio Nardoni for
legal services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not
offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in
connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances. On July 13, 2011, we issued 156,477 shares of common stock with a recorded value of $10,865 to New Venture
Attorneys for legal/SEC services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On July 13, 2011, we issued 35,000 shares of common stock with a recorded value of $2,430 to Varvara
Grichko for services as a member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider.
The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On July 13, 2011, we issued 55,555 shares of common stock with a recorded value of $3,857 to Sonia Luna for
SOX consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares
were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted
shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On July 13, 2011, we issued 9,000 shares of common stock with a recorded value of $625 to Shannon Stokes
for office management services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On August 19, 2011, we issued 64,594 shares of common stock with a recorded value of $3,488 to Michael
Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On August 19, 2011, we issued 46,785 shares of common stock with a recorded value of $2,527 to New
Venture Attorneys PC for SEC/legal services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as
amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The
Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On August 19, 2011, we issued 50,000 shares of common stock with a recorded value of $2,700 to Kirk Wiggins
for marketing and sales services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On August 19, 2011, we issued 37,500 shares of common stock with a recorded value of $2,025 to James
Fuller for services as a member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider.
The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. 22
On August 22, 2011, we issued 230,000 shares of common stock with a recorded value of $12,421 to Pinnacle
Financial Group for investor relations and marketing services. The shares were issued in reliance on Section 4(2) of the Securities Act
of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service
provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was
paid in connection with these issuances. On September 29, 2011, we issued 356,924 shares of common stock with a recorded value of $13,768 to Mike
Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On September 29, 2011, we issued 10,000 shares of common stock with a recorded value of $386 to Varvara
Grichko for services as member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider.
The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On October 25, 2011, we issued 35,000 shares of common stock with a recorded value of $1,315 to Varvara
Grichko for services as a member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider.
The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On October 25, 2011, we issued 9,000 shares of common stock with a recorded value of $338 to Shannon
Stokes for office management services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.
The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company
issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with
these issuances. On November 1, 2011, we issued 353,959 shares of common stock with a recorded value of $13,300 to Michael
Psomas/Audit Prep Services for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933,
as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The
Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On November 22, 2011, we issued 50,000 shares of common stock with a recorded value of $1,493 to Kirk
Wiggins for marketing and sales services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as
amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The
Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On November 22, 2011, we issued 37,500 shares of common stock with a recorded value of $1,119 to James
Fuller for services as a member of the board of directors. The shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider.
The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On January 5, 2012, we issued 9,000 shares of common stock with a recorded value of $347 to Shannon
Stokes Fuller for services as Office Manager. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as
amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The
Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. 23
On January 5, 2012, we issued 131,792 shares of common stock with a recorded value of $5,084 to Frances
Asefaw for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On February 7, 2012, we issued 50,000 shares of common stock with a recorded value of $1,157 to Kirk
Wiggins for marketing and sales services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as
amended. The shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The
Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in
connection with these issuances. On February 7, 2012, we issued 37,500 shares of common stock with a recorded value of $868 to James Fuller
for marketing and sales services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. On February 16, 2012, we issued 2,000,000 shares of common stock with a recorded value of $46,290 to Todd
Zelek, our CEO, services as CEO. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued
restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these
issuances. Conversion of Preferred Shares to Common Stock On March 18, 2012, we issued 442,570 shares of common stock associated with the conversion of 111,111
shares of preferred stock plus accrued dividends with a recorded value of $18,019 to Barnhart Holdings, Ltd. The shares were issued
in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public
but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales
commissions or other remuneration was paid in connection with these issuances. With the exception of Todd Zelek, Varvara Grichko, and Jim Fuller who are affiliates of the company, none of
the aforementioned service providers are affiliates of the Company. Issuance of Common Stock for Conversion of Indebtedness On August 16, 2011, we issued 287,356 shares of common stock to Asher Enterprises, Inc. as
conversion of $10,000 in outstanding convertible notes payable. On August 17, 2011, we issued 391,850 shares of common stock to
Asher as conversion of $12,500 in outstanding convertible notes payable. On August 19, 2011, we issued 391,850 shares of common
stock to Asher as conversion of $12,500 in outstanding convertible notes. On August 22, 2011, we issued 288,401 shares of common
stock to Asher as conversion of $7,500 in outstanding convertible notes payable and $1,700 in accrued interest. These shares were
issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to
the public but solely to Asher Enterprises, Inc. The Company issued restricted shares in connection with these issuances. No sales
commissions or other remuneration was paid in connection with these issuances. On September 13, 2011, we issued 30,769 shares of common stock to Tripod Group, LLC as conversion of
$1,000 of outstanding convertible notes payable. On September 15, 2011, we issued an additional 46,154 shares of common stock to
Tripod Group, LLC as conversion of $1,500 of outstanding convertible notes. On September 16, 2011, we issued 76,923 shares of
common stock to Tripod Group, LLC as conversion of $2,500 of outstanding convertible notes payable. These shares were issued in
reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public
but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales
commissions or other remuneration was paid in connection with these issuances. 24
On October 4, 2011 we issued 130,393 shares of common stock to Tripod Group, LLC as conversion of $3,475
of outstanding convertible notes payable. On October 5, 2011, we issued an additional 178,891 shares of common stock to Tripod
Group, LLC as conversion of $5,000 of outstanding convertible notes. On October 6, 2011, we issued 429,338 shares of common stock
to Tripod Group, LLC as conversion of $12,000 of outstanding convertible notes payable. On October 10, 2011, we issued 35,778
shares of common stock to Tripod Group, LLC as conversion of $1,000 of outstanding convertible notes payable. On October 11, 2011,
we issued 194,231 shares of common stock to Tripod Group, LLC as conversion of $5,367 of outstanding convertible notes payable.
These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via
general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection
with these issuances. No sales commissions or other remuneration was paid in connection with these issuances. On October 6, 2011, we issued 429,338 shares of common stock to Tripod Group, LLC as conversion of
$12,000 of outstanding convertible notes payable. On October 10, 2011, we issued 35,778 shares of common stock to Tripod Group,
LLC as conversion of $1,000 of outstanding convertible notes payable. On October 11, 2011, we issued 194,231 shares of common
stock to Tripod Group, LLC as conversion of $5,367 of outstanding convertible notes payable. These shares were issued in reliance on
Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to
the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions
or other remuneration was paid in connection with these issuances. On January 25, 2012 we issued 230,769 shares of common stock to Gel Properties, LLC, as conversion of
$4,500 of outstanding convertible notes payable. On January 26, 2012, we issued 179,487 shares of common stock to Gel Properties,
LLC as conversion of $3,500 of outstanding convertible notes. On January 27, 2012, we issued 102,564 shares of common stock to Gel
Properties, LLC as conversion of $2,000 of outstanding convertible notes. On January 30, 2012, we issued 76,923 shares of common
stock to Gel Properties, LLC as conversion of $1,500 of outstanding convertible notes. On January 31, 2012, we issued 338,462 shares
of common stock to Gel Properties, LLC as conversion of $6,000 of outstanding convertible notes. On February 1, 2012, we issued
153,846 shares of common stock to Gel Properties, LLC as conversion of $3,000 of outstanding convertible notes. On February 17,
2012, we issued 50,441 shares of common stock to Gel Properties, LLC as conversion of $1,000 of outstanding convertible notes. On
February 21, 2012, we issued 249,750 shares of common stock to Gel Properties, LLC as conversion of $5,000 of outstanding
convertible notes. On March 5, 2012, we issued 82,124 shares of common stock to Gel Properties, LLC as conversion of $1,500 of
outstanding convertible notes. On March 9, 2012, we issued 122,587 shares of common stock to Gel Properties, LLC as conversion of
$2,000 of outstanding convertible notes. On March 12, 2012, we issued 183,880 shares of common stock to Gel Properties, LLC as conversion of
$3,000 of outstanding convertible notes. On March 13, 2012, we issued 91,940 shares of common stock to Gel Properties, LLC as
conversion of $1,500 of outstanding convertible notes. On March 16, 2012, we issued 61,538 shares of common stock to Gel
Properties, LLC as conversion of $1,000 of outstanding convertible notes. On March 26, 2012, we issued 200,669 shares of common
stock to Gel Properties, LLC as conversion of $3,000 of outstanding convertible notes. On March 27, 2012, we issued 66,890 shares of
common stock to Gel Properties, LLC as conversion of $1,000 of outstanding convertible notes. On March 29, 2012, we issued 100,334
shares of common stock to Gel Properties, LLC as conversion of $1,500 of outstanding convertible notes. On March 30, 2012, we
issued 196,399 shares of common stock to Gel Properties, LLC as conversion of $3,000 of outstanding convertible notes. These shares
were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general
solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with
these issuances. No sales commissions or other remuneration was paid in connection with these issuances. Item 3 - Defaults Upon Senior Securities None 25
Item 4 - Mine Safety Disclosures. Not applicable. Item 5 - Other Information None Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES The following documents are filed as part of this report or incorporated by reference. 26
SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED. SIGNATURE TITLE DATE /s/ Todd Zelek Chief Executive Officer and Director May 11, 2012 Todd Zelek (Principal Executive Officer) /s/ Igor Gorodnitsky President May 11, 2012 Igor Gorodnitsky /s/ R.L. Hartshorn Chief Financial Officer May 11, 2012 R.L. Hartshorn (Principal Financial Officer and 27
YES ¨
NO x
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31,
June 30,
2012
2011
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
5,072
$
14,779
Other receivables
8,853
-
Inventory
125,457
92,475
Prepaid expenses and other current assets
-
3,337
Related party advances
21,120
-
Total current assets
160,502
110,591
Property and equipment, net
142,352
159,344
Patents, net
117,126
118,153
Other assets
9,500
9,500
Total assets
$
429,480
$
397,588
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable
$
198,780
$
143,949
Accrued expenses
109,670
54,745
Accrued payroll
633,517
149,316
Advances from customers
136,533
36,533
Deferred revenue
147,444
16,951
Convertible notes payable, net of discounts
69,791
52,852
Derivative liability
23,034
121,679
Related party payable
24,388
15,750
Short-term loan
55,000
60,000
Bank loan
370,271
486,110
Short-term loans, related parties
157,000
-
Total current liabilities
1,925,428
1,137,885
Commitments and contingencies, Note 11
Stockholders' deficit:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
0 and 111,111 shares issued and outstanding as of March 31,
2012 and June 30, 2011, respectively.
-
111
Common stock, $0.001 par value, 1,000,000,000 shares
authorized, 163,701,906 shares and 153,799,715 shares are issued
and outstanding as of March 31, 2012 and June 30, 2011, respectively
163,704
153,800
Additional paid-in capital
16,548,389
15,954,280
Deficit accumulated during the development stage
(18,208,041)
(16,848,488)
Total stockholders' deficit
(1,495,948)
(740,297)
Total liabilities and stockholders' deficit
$
429,480
$
397,588
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
January 29, 2007,
Inception,
For the Three Months Ended
For the Nine Months Ended
Through
March 31,
March 31,
March 31,
2012
2011
2012
2011
2012
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
Revenue
$
51,818
$
341,326
$
165,972
$
589,926
$
755,898
Cost of revenue
12,260
54,444
35,274
91,144
126,418
Gross profit
39,558
286,882
130,698
498,782
629,480
General and administrative expenses
502,820
898,946
1,203,887
2,723,393
12,496,167
Research and development expenses
64,735
282,134
126,940
628,204
5,415,334
Total operating expenses
567,555
1,181,080
1,330,827
3,351,597
17,911,501
Loss from operations
(527,997)
(894,198)
(1,200,129)
(2,852,815)
(17,282,021)
Interest expense and other
(25,337)
(30,645)
(155,138)
(52,882)
(742,907)
Loss before income taxes
(553,334)
(924,843)
(1,355,267)
(2,905,697)
(18,024,928)
Income taxes
-
-
-
-
-
Net loss
$
(553,334)
$
(924,843)
$
(1,355,267)
$
(2,905,697)
$
(18,024,928)
Deemed dividends to preferred stockholders
(1,286)
(1,500)
(4,286)
(4,500)
(183,113)
Net loss available to common stockholders
$
(554,620)
$
(926,343)
$
(1,359,553)
$
(2,910,197)
$
(18,208,041)
Net loss available to common shareholders per share:
Basic and diluted
$
(0.00)
$
(0.01)
$
(0.01)
$
(0.02)
Weighted average shares outstanding:
Basic and diluted
160,767,919
140,793,632
158,090,480
136,643,591
(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)
(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)
(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)
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
Dividends on preferred stock
(4,286)
(4,286)
Net Loss
(1,355,267)
(1,355,267)
Balance at March 31, 2012
-
$
-
163,701,906
$
163,704
$
16,548,389
$
(18,208,041)
$
(1,495,948)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
January 29, 2007,
Inception,
For the nine Months Ended
Through
March 31,
March 31,
2012
2011
2012
Operating activities:
Net loss
$
(1,355,267)
$
(2,905,697)
$
(18,024,928)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization
37,730
15,786
88,440
Warrants issued in connection with convertible notes payable
-
-
49,245
Amortization of convertible loan discount
95,345
19,207
416,807
Common stock issued for services
135,459
1,730,131
11,666,060
Stock option compensation
168,928
-
476,440
Warrants issued for services
-
46,735
337,359
Change in value of derivatives
(18,489)
13,588
708
Equipment write-down
-
-
5,399
Patent write-down
21,758
-
35,258
Effect of changes in:
Accounts receivable
-
(309,964)
-
Inventory
(32,982)
-
(86,038)
Prepaid expenses and other current assets
(5,516)
(166)
(8,853)
Advances to related parties
(21,120)
-
(21,120)
Deposits/Ars
-
-
(9,500)
Bank overdraft, net
-
(2,109)
-
Accounts payable and accrued expenses
126,423
474,328
323,817
Accrued payroll
484,201
86,015
912,438
Advances
-
19,271
36,533
Deferred revenue
130,493
(16,549)
147,444
Related party payables
24,388
254,595
24,386
Net cash used in operating activities
(208,649)
(574,829)
(3,630,105)
Investing activities:
Purchase of property and equipment
(17,719)
-
(116,911)
Payments for systems
-
(133,528)
(152,721)
Payments for patents
(23,750)
-
(158,362)
Net cash used in investing activities
(41,469)
(133,528)
(427,994)
Financing activities:
Proceeds from (payments on) bank loan borrowings
(115,839)
(34,271)
370,271
Proceeds from sales of preferred stock
-
-
725,000
Proceeds from convertible notes payable
132,500
103,712
518,712
Payments on convertible notes payable
(47,500)
-
(102,500)
Proceeds from sales of common stock
35,000
572,741
2,139,688
Payments on related party short-term loans
(15,750)
-
(15,750)
Proceeds from short-term loans, related parties
157,000
-
172,750
Proceeds from short-term loans
-
75,000
184,000
Advances from customers
100,000
-
100,000
Payments on short term loans
(5,000)
(9,000)
(29,000)
Net cash provided by financing activities
240,411
708,182
4,063,171
Net increase (decrease) in cash
(9,707)
(175)
5,072
Cash, beginning of period
14,779
270
-
Cash, end of period
$
5,072
$
95
$
5,072
Supplemental disclosures of cash flow information:
Cash paid for interest
$
23,494
$
32,588
$
217,086
Cash paid for income taxes
$
1,600
$
1,600
$
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
Conversion of short-term loan to common stock
$
-
$
100,000
$
100,000
Accrued dividends issued to preferred stockholders
$
4,286
$
4,500
$
18,019
Conversion of convertible notes payable and accrued interest to common stock
$
120,593
$
25,916
$
342,239
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012
Year Ended
June 30,
Amount
2012
$
7,594
2013
14,251
2014
20,611
2015
21,545
2016
15,883
Thereafter
37,242
Total
$
117,126
Fair Value
Fair Value Measurements at March 31, 2012
as of
Using Fair Value Heirarchy
Financial Instruments
March 31, 2012
Level 1
Level 2
Level 3
Liabilities:
Derivative liability
$
23,034
$
-
$
-
$
23,034
Total
$
23,034
$
-
$
-
$
23,034
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Derivative Liability
Balance at June 30, 2011
$
121,679
Total (gains) losses included in interest expense and other
(18,489)
Creation - convertible note issuances
45,696
Settlements - note conversions
(125,852)
Balance at March 31, 2012
$
23,034
March 31,
June 30,
2012
2011
Leasehold improvement
$
2,475
2,475
Furniture
26,837
26,837
Office equipment
1,499
1,500
Equipment
68,380
68,380
Systems
130,193
112,474
229,384
211,666
Less: accumulated depreciation and amortization
(87,032)
(52,322)
$
142,352
159,344
Weighted-
Average
Weighted-
Remaining
Average
Contractual
Exercise
Life
Options
Price
(Years)
Outstanding at June 30, 2011
1,810,957
$
0.55
5.23
Granted
11,750,000
0.03
9.88
Forfeited
-
Exercised
-
Expired
-
Outstanding at March 31, 2012
13,560,957
$
0.07
9.23
Exercisable at March 31, 2012
8,060,957
$
0.15
8.84
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
9.88
$
0.03
6,250,000
$
0.03
0.33
637,297
4.62
0.33
637,297
0.33
0.67
1,173,660
5.21
0.67
1,173,660
0.67
13,560,957
8,060,957
Expected life in years
0 to 10
Stock price volatility
147%
Risk free interest rate
0.86%
Expected dividends
0
Forfeiture rate
0%
Weighted-
Average
Weighted-
Remaining
Average
Contractual
Exercise
Life
Warrants
Price
(Years)
Outstanding at June 30, 2011
13,145,618
$
0.41
1.69
Granted
-
-
Exercised
-
-
Unexercised
1,333,333
0.42
Outstanding at March 31, 2012
11,812,285
$
0.42
1.06
Vested and expected to vest
at March 31, 2012
11,812,285
$
0.42
1.06
Exercisable at March 31, 2012
11,812,285
$
0.42
1.06
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
1.62
$
0.29
1,939,374
$
0.29
0.42 - 0.58
9,872,911
1.30
0.45
9,872,911
0.45
11,812,285
11,812,285
For the Three Months Ended
March 31,
2012
2011
$ Change
% Change
(Unaudited)
(Unaudited)
Revenue
$
51,818
$
341,326
$
(289,508)
-84.8%
Cost of sales
12,260
54,444
(42,184)
-77.5%
Gross profit
39,558
286,882
(247,324)
-86.2%
General and administrative expenses
502,820
898,946
(396,126)
-44.1%
Research and development expenses
64,735
282,134
(217,399)
-77.1%
Total operating expenses
567,555
1,181,080
(613,525)
-51.9%
Loss from operations
(527,997)
(894,198)
366,201
-41.0%
Interest expense
(25,337)
(30,645)
5,308
-17.3%
Loss before income taxes
(553,334)
(924,843)
371,509
-40.2%
Income tax expense
-
-
-
-
Net loss
$
(553,334)
$
(924,843)
371,509
-40.2%
For the Nine Months Ended
March 31,
2012
2011
$ Change
% Change
(Unaudited)
(Unaudited)
Revenue
$
165,972
$
589,926
$
(423,954)
-71.9%
Cost of sales
35,274
91,144
(55,870)
-61.3%
Gross profit
130,698
498,782
(368,084)
-73.8%
General and administrative expenses
1,203,887
2,723,393
(1,519,506)
-55.8%
Research and development expenses
126,940
628,204
(501,264)
-79.8%
Total operating expenses
1,330,827
3,351,597
(2,020,770)
-60.3%
Loss from operations
(1,200,129)
(2,852,815)
1,652,686
-57.9%
Interest expense
(155,138)
(52,882)
(102,256)
193.4%
Loss before income taxes
(1,355,267)
(2,905,697)
1,550,430
-53.4%
Income tax expense
-
-
-
-
Net loss
$
(1,355,267)
$
(2,905,697)
1,550,430
-53.4%
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 Agreement with R.L. Hartshorn dated Sept. 22, 2009
10-Q
December 31, 2011
10.70
February 10, 2012
10.8
Employment and Confidentiality and Invention Assignment Agreement between the Company and Varvara Grichko dated April 30, 2008
10-Q
December 31, 2010
10.3
February 11, 2011
10.9
Board of Director Agreement - James Fuller
10-Q
December 31, 2011
10.12
October 20, 2011
10.10
Marketing and Collaboration Agreement w/ Desmet Ballestra Group - Nov. 1, 2010
8K
December 31, 2011
10.1
December 7, 2011
10.11
Marketing and Collaboration Agreement w/ Desmet Ballestra Group - Amend #1 - June 1, 2011
8K
December 31, 2011
10.2
December 7, 2011
10.12
Marketing and Collaboration Agreement w/ Desmet Ballestra Group - Amend #2 - Sept 1, 2011
8K
December 31, 2011
10.3
December 7, 2011
10.13
Convertible Note Payable - Prolific Group LLC - $25,000
10-Q
December 31, 2011
10.40
February 10, 2012
10.14
Convertible Note Payable - Tripod Group LLC - $30,000
10-Q
December 31, 2011
10.41
February 10, 2012
10.15
Share Issuance Agreement - December 6, 2011
10-Q
December 31, 2011
10.42
February 10, 2012
14.1
Code of Business Conduct and Ethics*
10-K
June 30, 2010
14.1
September 28, 2010
31.1
Certificat of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
X
31.2
Certificat of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
X
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted
X
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
X
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
XBRL Instance Document
X
101.SCH**
XBRL Taxonomy Extension Schema
X
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase
X
101.DEF**
XBRL Taxonomy Extension Definition Linkbase
X
101.LAB**
XBRL Taxonomy Extension Label Linkbase
X
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase
X
*
In accordance with Regulation S-K 406 of the Securities Act of 1934, we undertake to provide to any person
without charge, upon request, a copy of our "Code of Business Conduct and Ethics". A copy may be requested
by sending an email to info@cavitationtechnologies.com.
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part
of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933
or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
Chairman of the Board
Accounting Officer)
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