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Cavitation Technologies, Inc. - Quarter Report: 2013 September (Form 10-Q)

September 30, 2013 DOC


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




FORM 10-Q



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

For the quarterly period ended September 30, 2013

Commission File Number: 0-29901

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

 

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

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

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


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

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

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

Large accelerated filer    ¨

Accelerated filer    ¨

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

Smaller reporting company    x

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

      As of November 19, 2013, the issuer had 158,439,702 shares of common stock outstanding.



TABLE OF CONTENTS

 

 

Page

Part I.

FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2013 (unaudited) and June 30, 2013

 

 

 

 

Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)

 

 

 

 

Condensed Consolidated Statement of Stockholders' Deficit - July 1, 2013 through September 30, 2013 (unaudited)

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended September 30, 2013 (unaudited) and September 30, 2012 (unaudited)

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

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

15

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

18

 

 

 

Item 4.

Controls and Procedures

18

 

 

 

Part II.

OTHER INFORMATION

18

 

 

 

Item 1.  

Legal Proceedings

18

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

19

 

 

 

Item 3.  

Defaults Upon Senior Securities

19

 

 

 

Item 4.  

Mine Safety Disclosures

19

 

 

 

Item 5.  

Other Information

19

 

 

 

Item 6.

Exhibits

19

 

 

 

Signatures

 

20

i


PART I - FINANCIAL INFORMATION

ITEM 1 - Consolidated Financial Statements

CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

    
      September 30,         June 30,    
      2013     2013
      (unaudited)      
ASSETS            
             
Current assets:            
     Cash and cash equivalents   $ 161,662    $ 241,976 
     Inventory, net     196,278      107,735 
     Prepaid expenses and other current assets         3,125 
          Total current assets     357,940      352,836 
             
Property and equipment, net      161,542      166,068 
Patents, net     70,670      70,315 
Other assets     9,500      9,500 
          Total assets   $ 599,652    $ 598,719 
             
LIABILITIES AND STOCKHOLDERS' DEFICIT            
             
Current liabilities:            
     Accounts payable & accrued expenses   $ 309,276    $ 227,869 
     Accrued payroll and payroll taxes     1,016,223      1,016,223 
     Convertible notes payable, net of discounts     59,844      44,826 
     Related party payable     1,147      1,147 
     Short-term loan     34,521      34,521 
     Short term loan, related party     185,000      185,000 
     Advances from distributor     1,465,663      1,215,663 
          Total current liabilities     3,071,674      2,725,249 
             
Commitments and contingencies            
             
Stockholders' deficit:            
     Preferred stock, $0.001 par value, 10,000,000 shares authorized,
          no shares issued and outstanding as of September 30, 2013
          and June 30, 2013, respectively.
       
     Common stock, $0.001 par value, 1,000,000,000 shares authorized,
          158,439,702 shares issued and outstanding as of September 30, 2013
          and June 30, 2013, respectively.
    158,440      158,440 
     Additional paid-in capital     17,484,058      17,484,058 
     Accumulated deficit      (20,114,520)     (19,769,028)
          Total stockholders' deficit     (2,472,022)     (2,126,530)
          Total liabilities and stockholders' deficit   $ 599,652    $ 598,719 

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

1


CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

      For the Three Months Ended
      September 30,
      2013     2012
      (unaudited)     (unaudited)
Revenue   $   $
Cost of revenue     -     -
     Gross profit        
General and administrative expenses     312,765      361,906 
Research and development expenses     6,123      40,163 
Total operating expenses     318,888      402,069 
     Loss from operations     (318,888)     (402,069)
Interest expense and other     (26,604)     (46,957)
     Net loss   $ (345,492)   $ (449,026)
             
Net loss per share,            
Basic and diluted   $ (0.00)   $ (0.00)
             
Weighted average shares outstanding,            
Basic and diluted     158,439,702      165,089,134 

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

2


CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)

    Serries A                              
    Preferred     Common Stock     Additional Paid-     Accumalated      
    Shares     Amount     Shares     Amount     in Capital     Deficit     Total
Balance at June 30, 2013      $     158,439,702    $ 158,440    $ 17,484,058    $ (19,769,028)   $ (2,126,530)
                                         
Net loss                                  (345,492)     (345,492)
Balance at September 30, 2013      $     158,439,702    $ 158,440    $ 17,484,058    $ (20,114,520)   $ (2,472,022)

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

3


CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

      Three Months Ended September 30,
      2013     2012
      (unaudited)     (unaudited)
Operating activities:            
Net loss   $ (345,492)   $ (449,026)
Adjustments to reconcile net loss to net cash             
     used in operating activities:            
     Depreciation and amortization     24,493      14,166 
     Beneficial conversion feature on convertible notes payable         9,153 
     Amortization of convertible note discount     15,018     
     Fair value of options issued for services         39,842 
     Gain on change in fair value and extinguishment of derivatives liabilities, net         (14,291)
             
Effect of changes in:            
     Inventory     (88,543)     9,842 
     Prepaid expenses and other current assets     3,125     
     Accounts payable and accrued expenses     81,407      (44,938)
     Accrued payroll and payroll taxes         185,696 
     Advances from distributor     250,000      250,000 
          Net cash (used in) provided by operating activities     (59,992)     444 
             
Investing activities:            
     Purchase of property and equipment     (13,500)     (21,989)
     Payments for patents     (6,822)     (11,050)
          Net cash used in investing activities     (20,322)     (33,039)
             
Financing activities:            
     Payments of bank loan          (68,000)
     Proceeds from convertible notes payable         53,000 
     Payments on convertible notes payable         (55,000)
          Net cash used in financing activities         (70,000)
             
Decrease in cash     (80,314)     (102,595)
Cash, beginning of period     241,976      137,249 
Cash, end of period   $ 161,662    $ 34,654 
             
Supplemental disclosures of cash flow information:            
     Cash paid for interest   $ 3,000    $ 5,770 
     Cash paid for income taxes   $   $

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

4


CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended September 30, 2013 and 2012

Note 1 - Organization and Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") as promulgated in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September 30, 2013 are not indicative of the results that may be expected for the fiscal year ending June 30, 2014. You should read these unaudited condensed consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2013.

Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly owned subsidiary of Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as "the Company," "CTi," "we," "us," and "our") a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented, and commercialized proprietary technology that may be used in liquid processing applications. CTi's patented Nano Reactor® is the critical component of CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in refining vegetable oils. CTi has two patented systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, waste water treatment, biodiesel, algae oil extraction, and alcoholic beverage enhancement.

Management's Plan Regarding Going Concern

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  During the three months ended September 30, 2013, the Company incurred a net loss of $345,492. As of September 30, 2013, the Company had a working capital deficiency of $2,713,734 and a stockholders' deficit of $2,472,022.   These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2013 expressed substantial doubt about our ability to continue as a going concern. The accompanying condensed 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. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly advances of $125,000 against future sales. During the quarter ended September 30, 2013, advances received from Desmet amounted to $250,000. 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, that the Company will be able to achieve profitable operations 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.

5


Note 2 - Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions and balances have been eliminated through consolidation.

Fair Value Measurement

FASB Accounting Standards Codification ("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2013, the carrying value of certain accounts such as inventory, accounts payable, accrued expenses, accrued payroll and short-term loans approximate fair value due to the short-term nature of such instruments.

The following table presents information about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of September 30, 2013 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.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our stock options, warrants, convertible notes, and common stock issued for services, among other items. Actual results could differ from these estimates.

Revenue Recognition

Revenue from the sale of our Nano Reactor® Systems is recognized when persuasive evidence of an agreement exists; delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured. The Company employs the Milestone Method of Revenue Recognition. Accounting Standard Codification 605-28-15 describes the Milestone Method as pertaining to R&D deliverables under which the Company satisfies its performance obligations over a period of time and which a portion or all of the consideration is contingent upon uncertain future events or circumstances. For agreements that provide for milestone payments such as our agreement with Desmet Ballestra, we adopted ASC 605-28-25, "Revenue Recognition Milestone Method." The Company used this method of accounting to record revenue associated with the Desmet transactions.

6


Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill. The Company has two patents issued in fiscal 2012 and 2011. As of September 30, 2013, we have a total of 20 patents pending. The patents have duration of twenty years from filing date.

We believe that four years is a reasonable estimate based upon our estimate of time until the next generation of reactors is developed or until other forms of competition appear.

As of September 30 and June 30, 2013 the Company had remaining unamortized patent costs of $70,670 and $70,315 respectively.

Impairment of Intangible and Long-Lived Assets

In accordance with ASC 350-30 (General Intangibles Other than Goodwill), the Company evaluates amortizable intangibles and long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Based on the Company annual impairment tests, management believes there is no impairment of its intangibles and long-lived assets as of September 30, 2013. There can be no assurance, however, that market conditions will not change or demand for the Company's products under development will continue. Either of these could result in future impairment of intangibles and long-lived assets.

Share-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company's common stock option grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

7


Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes.  The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.

The Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.

Warranty Policy

The Company provides a limited warranty with every set of reactors sold, typically 2 years. The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at September 30, 2013.

Dependence on Desmet Ballestra

Our revenue is almost entirely dependent on Desmet Ballestra who is our exclusive distribution agent with regard to the CTi Nano Neutralization® System for edible oils (see Note 3).

Basic Income per share

The Company computes the loss per common share using ASC 260, Earnings per Share.  The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period.  The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.

As of September 30, 2013, the Company had 13,611,815 stock options and 18,433,867 stock warrants outstanding to purchase shares of common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive. The Company also had $100,000 of outstanding convertible note payable, before discounts, which are convertible into approximately 3,333,333 shares of common stock as of September 30, 2013 (see Note 5).  These items were also not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.

Recent Accounting Pronouncements

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. This guidance is effective for annual and interim reporting periods beginning January 1, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

8


On March 4, 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity" ("ASU 2013-05"). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Loss, or a Tax Credit Carryforward Exists. Topic 740, Income Taxes, does not include explicit guidance on the financial statement presented of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances and the amendments in this update are intended to eliminate that diversity in practice. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Early adoption is permitted. We do not believe the adoption of this update will have a material effect on our financial position and results of operations.

Other accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Note 3 - Agreement with Desmet Ballestra

On May 14, 2012 we signed a global R and D, Marketing and Technology License Agreement with the n.v. Desmet Ballestra Group s.a. (Desmet), a Belgian company that is actively marketing the NANO Neutralization System, the key component of which is the Company's reactor to soybean and other vegetable oil refiners. The Agreement provides Desmet (licensee) a limited, exclusive license and right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devices on a global basis but is limited to oils and fats and oleo chemical applications. CTi (licensor) remains owner of the current patents and patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet has agreed to provide, under certain conditions, limited monthly advance payments of $125,000 against future sales to CTi. Desmet shall be entitled to immediately terminate the present agreement in case the claims of current US Patent Application Number 12/484,981 are not granted as such or are cancelled. In addition, Desmet may terminate the agreement on August 1 of any particular year if they have not installed at least 6 Nano Reactor® devices in the previous 12 month period. CTi may terminate the Agreement for material default. This Agreement supersedes a previous agreement dated November 1, 2010, amended on June 1, 2011 and on September 2, 2011.

Desmet, together with its affiliates, is a global engineering and equipment supply firm engaged in the development, design and supply of process equipment for oils and fats processing facilities including vegetable oil refining, biofuel, oleo chemical, seed crushing, surfactant and detergent markets. Desmet supplies these markets with competitive services based on the latest globally sourced technologies.

The Company and Desmet have worked together to determine the appropriate sales approach and installation process. The Company's Nano Neutralization is designed to be used as an add-on process to an existing neutralization system within soybean and other vegetable oil refineries. Desmet purchases Nano Reactor Systems from the Company and installs them at the refinery as part of an integrated neutralization system. We are therefore substantially dependent on Desmet to identify prospects, complete sales contracts, install the system and manage relationships with end- users.

During the fiscal quarters ended September 30, 2013 and 2012, we recorded no revenues from Desmet or otherwise. The Company received advances of $250,000 in each three months ended September 30, 2013 and 2012. As of September 30, 2013, Desmet has advanced to us an excess of funds of $1,465,663 which will be recognized as revenue as sales orders are shipped.

9


Note 4 - Property and Equipment

Property and equipment consisted of the following as of September 30, 2013 and June 30, 2013:

      September 30,         June 30,    
      2013     2013
             
Leasehold improvement   $ 2,475    $ 2,475 
Furniture       26,837      26,837 
Office equipment     1,506      1,498 
Equipment     81,872      68,380 
Systems     225,086      225,086 
      337,776      324,276 
Less: accumulated depreciation and amortization     (176,234)     (158,208)
     Property and equipment, net   $ 161,542    $ 166,068 

Depreciation expense for the three months ended September 30, 2013 and 2012 amounted to $18,026 and $12,911, respectively.

Note 5 - Convertible Note

On December 17, 2012 we issued a convertible promissory note payable to a private party, in the amount of $100,000 with an interest rate of 12% per annum and due May 31, 2014. The note is unsecured, convertible into shares of our common stock at a conversion price of $0.03 any time during the life of the note. The note was still outstanding as of September 30, 2013. Upon issuance of the note, the trading price of the Company's common stock was also $0.03/share which is the same as the note's conversion price. As such, there was no beneficial conversion feature. Also, 3,333,333 fully vested warrants with a fair value of $90,106 were issued in connection with this note. The warrants are exercisable at $0.07/share and will expire in 3 years. The fair value of the warrants was recorded as a note discount and is being amortized to interest expense over the term of the note. As of June 30, 2013, the outstanding balance of note amounted to $44,826 consisting of outstanding principal of $100,000 less discount of $55,174.

During the three months ended September 30, 2013, the Company recognized and paid interest expense of $3,000 and amortized the note discount for $15,018. As of September 30, 2013, the outstanding balance of Convertible Notes Payable (net of discount) as recorded on the balance sheet amounted to $59,844 consisting of outstanding principal of $100,000 less discount of $40,156 and with unpaid interest of $1,000.

Note 6 - Short-Term Loan, Related Party

As of June 30, 2013, we had received a loan of $185,000 from West Point Partners, LLC, whose managing partner is the Company's Principal Accounting Officer. The loan is due on demand, unsecured and pays an annual interest rate of 12% per annum. Accrued interest as of June 30, 2013 amounted to $26,650.

During the three months ended September 30, 2013, the Company recognized interest expense of $5,550. As of September 30, 2013, the entire loan of $185,000 is still outstanding with unpaid interest of $32,200.

10


Note 7 - Short-Term Loan

As of June 30, 2013, we had received a loan of $34,521 from a third party, Strategic IR. The loan is due on demand, unsecured and pays an annual interest rate of 12% per annum. Accrued interest as of June 30, 2013 amounted to $4,950.

During the three months ended September 30, 2013, the Company recognized interest expense of $1,036. As of September 30, 2013, the entire loan of $34,521 is still outstanding with unpaid interest of $5,986.

Note 8 - Accrued Payroll and Payroll Taxes

As of September 30, 2013 and June 30, 2013, the Company had accrued unpaid salaries due to officers amounting to $966,966 and $966,966 respectively. In addition, the Company also accrued the estimated payroll taxes due to this unpaid payroll of $79,357 and $79,357 respectively.

Note 9 - Stockholders' Deficit

Stock Options

The Company has not adopted a formal stock option plan, however, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity from September 30, 2013 is as follows:

                Weighted-
                Average
          Weighted-     Remaining
          Average     Contractual
          Exercise     Life
    Options     Price     (Years)
                 
Outstanding June 30, 2013   13,611,815    $ 0.10      7.92 
                 
     Granted   -       -       -  
     Forfeited       -       -  
     Exercised       -       -  
     Expired       -       -  
Outstanding September 30, 2013   13,611,815    $ 0.10      7.92 
Exercisable at September 30, 2013   13,611,815    $ 0.10      7.92 
Vested at September 30, 2013   13,611,815    $ 0.10      7.92 

11


At June 30, 2013, all outstanding stock options are fully vested. The intrinsic value of the outstanding options was $118,009 as of September 30, 2013. The following table summarizes additional information concerning options outstanding and exercisable at September 30, 2013.

      Options Outstanding   Options Exercisable
          Weighted     Weighted         Weighted
          Average     Average         Average
  Exercise   Number   Remaining     Exercise   Number     Remaining
  Price   of Shares   Life (Years)     Price   of Shares     Life (Years)
                           
$ 0.03   11,800,858    7.92    $ 0.03    11,800,858      7.92 
$ 0.33   637,297    3.06    $ 0.33    637,297      3.06 
$ 0.67   1,173,660    3.43    $ 0.67    1,173,660      3.43 
      13,611,815              13,611,815       

Warrants

A summary of the Company's warrant activity and related information for the three months ended on
September 30, 2013 is as follows.

              Weighted-
              Average 
          Weighted-   Remaining 
          Average   Contractual
          Exercise   Life
    Warrants     Price   (Years)
               
Outstanding at June 30, 2013   18,433,867    $ 0.09    6.49 
               
     Granted   -       -     -  
     Exercised   -       -     -  
     Expired   -       -     -  
Vested at September 30, 2013   18,433,867    $ 0.09    6.49 
Vested and expected to vest at September 30, 2013   18,433,867    $ 0.09    6.49 
Exercisable at September 30, 2013   18,433,867    $ 0.09    6.49 

At June 30, 2013, all outstanding warrants are fully vested. The intrinsic value of the outstanding options was $0 as of September 30, 2013. The following table summarizes additional information concerning warrants outstanding and exercisable at September 30, 2013.

      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
                           
$ 0.05 - 0.07   15,703,933    7.51   $ 0.06    15,703,933    $ 0.06 
$ 0.20 - 0.37   929,934    0.37    $ 0.28    929,934    $ 0.28 
$ 0.42 - 0.58   1,800,000    0.67    $ 0.55    1,800,000    $ 0.55 
      18,433,867              18,433,867       

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Note 10 - Income Taxes

Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax expense as a result of the NOL carry forward. Therefore, the company's effective tax rate is 0.0%. The Company files income tax returns in the United States ("Federal") and California ("State") jurisdictions. The Company is subject to Federal and State income tax examinations by tax authorities for all years since its inception.

At September 30, 2013, the Company had Federal and State net operating loss carry forwards available to offset future taxable income of approximately $8.1 million and $8.1 million, respectively. These carry forwards will begin to expire in the years ending June 30, 2027 and June 30, 2017, respectively, subject to Internal Revenue Services (IRS) limitations, including change in ownership.

The Company periodically evaluates the likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the deferred tax assets by a valuation allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. The Company considers many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available to us for tax reporting purposes, and other relevant factors.

At September 30, 2013, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, the Company determined that it was more likely than not that its deferred tax assets would not be realized. Accordingly, the Company has recorded a valuation allowance for 100% of its cumulative deferred tax assets.

As a result of the implementation of certain provisions of ASC 740-10, the Company performed an analysis of its previous tax filings and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of September 30, 2013.

Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its consolidated statements of operations. There is no interest or penalties accrued as of September 30, 2013.

The following summarizes the open tax years for each major jurisdiction:

Jurisdiction

 

Open Tax Years

 

 

 

Federal 

 

2008 - 2012

 

 

 

California

 

2007 - 2012

The Company's net operating loss carry forwards are subject to IRS examination until they are utilized and such tax years are closed.

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Note 11 - Commitments and Contingencies

On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two parties, our President as well as our former CEO and current CTO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and former CEO/current CTO have been assigned to the Subsidiary.  In exchange, that Subsidiary agreed to pay a royalty of 5% of gross revenues to each of the CTO and President and former CEO for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from its subsidiary. The Company's CTO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through September 30, 2013.

On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical Department (the "Inventor")who shall receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of September 30, 2013, no patents have been granted in which this person is the legally named inventor.

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ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.

Overview of our Business

Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly owned subsidiary of Cavitation Technologies, Inc., a Nevada corporation originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement.  Our systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development firm that has developed, patented, and commercialized proprietary technology.

CTi has developed, patented, and commercialized proprietary technology that can be used for processing of industrial fluids. CTi's patented Nano Reactor® is the critical components of the CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano Reactor® systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.

During the three months ended September 30, 2013, we recorded no revenue. Our loss from operations in Q1 2014 is $345,492. Cumulative net cash used in operating activities of $59,992 and net cash used in investing activities of $20,322 was funded largely with Company's cash reserves at the beginning of the period.

Management's Plan

We are engaged in merchandising our Neutralization System which is designed to help refine vegetable oils such as soybean, canola, sunflower and rapeseed.  Our near term goal is to continue to merchandise our systems through our partner, Desmet Ballestra. Even though the Company's revenue increased significantly in last fiscal year, the Company incurred a net loss of $345,492 in the current fiscal quarter. As of September 30, 2013, the Company had a working capital deficiency of $2,713,734 and a stockholders' deficit of $2,472,022.   The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.

Management's plan is to generate income from operations by licensing our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly advances of $125,000 against future sales. During the three months ended September 30, 2013, advances received from Desmet amounted to $250,000 and we received a total of $1,875,000 as of October 15, 2013. These funds service interest plus a portion of operational expenses on a monthly basis. Desmet shall be entitled to immediately terminate the present agreement in case the claims of current US Patent Application Number 12/484,981 are not granted as such or are cancelled. In addition, Desmet may terminate the agreement on August 1 of any particular year if they have not installed at least 6 Nano Reactor® devices in the previous 12 month period. CTi may terminate the Agreement for material default. This Agreement supersedes a previous agreement dated November 1, 2010, amended on June 1, 2011 and on September 2, 2011. In addition to these advances, we anticipate that we will need additional funding, and we will 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.

15


The accompanying condensed 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, 2013, expressed substantial doubt about our ability to continue 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, 2013, and did not change for the three months ended September 30, 2013.

Results of Operations

The following is a comparison of our results of operations for the three months ended September 30, 2013 and 2012.

      For the Quarter Ended          
      September 30,          
      2013     2012     $ Change   % Change
                       
Revenue   $   $   $   0.0%
Cost of revenue               0.0%
     Gross profit               0.0%
General and administrative expenses     312,765      361,906      (49,141)   -13.6%
Research and development expenses     6,123      40,163      (34,040)   -84.8%
Total operating expenses     318,888      402,069      (83,181)   -20.7%
     Loss from operations     (318,888)     (402,069)     83,181    -20.7%
Interest expense and other     (26,604)     (46,957)     20,353    -43.3%
     Net loss before income tax expense     (345,492)     (449,026)     103,534    -23.1%
Income tax expense     -          
     Net loss   $ (345,492)   $ (449,026)   $ 103,534    -23.1%

Revenue

We recorded no revenue in the first quarter of fiscal 2014 or fiscal 2013.

Operating Expenses

Operating expenses for the three months ended September 30, 2013 amounted to $318,888 compared with $402,069 for the same period in 2012, a decrease of $83,181, or 21%. In both periods, the major expense component was compensation, most of which was accrued in Q1 2013 but paid in cash in the current period. In the first quarter of fiscal 2014, compensation amounted to $91,815 or 29% of total costs compared with $236,999, or 60% in the first quarter of fiscal 2013. This decrease in compensation in the first quarter of fiscal 2014 was attributable largely to the reduction in a number of management positions and their base salaries.

During the first quarter of 2014, the other major component of operating expense was professional service fees related to auditors, accounting, and legal services which amounted to $76,284 or 24% of total operating expenses versus $43,046, or 11% in the first quarter of fiscal 2013. These expenses were substantially higher in the first quarter of fiscal 2013 as we increased reliance on third-party service providers rather than management, and the new auditor firm was engaged.

16


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

Interest Expense

Interest expense of $26,604 during current quarter was composed of non-cash expenses of $22,978, $15,018 of which related to convertible note amortization, and $6,585 to accrued interest on short term loans outstanding. Cash interest of $3,000 was paid to a Convertible Note holder. In the first quarter of fiscal 2013, Interest Expense of $46,957 consisted of a non-cash expense of $26,587 relating to convertible notes and $14,600 in non-cash, accrued interest relating primarily to short term loans. Cash interest payments on our loan from the National Bank of California were $5,770 in Q1 2013.

As of September 30, 2013, the outstanding balance of Convertible Notes Payable (net of discount) as recorded on the balance sheet amounted to $59,844 consisting of outstanding principal of $100,000 less discount of $40,156.

Liquidity and Capital Resources

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  During the three months ended September 30, 2013, the Company incurred a net loss of $345,492. As of September 30, 2013, the Company had a working capital deficiency of $2,713,734 and a stockholders' deficit of $2,472,022.   These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2013 expressed substantial doubt about our ability to continue as a going concern. The accompanying condensed 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.

Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly advances of $125,000 against future sales. During the quarter ended September 30, 2013, advances received from Desmet amounted to $250,000. 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, that the Company will be able to achieve profitable operations 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.

On September 30, 2013, we had cash on hand in the amount of $161,662. In addition to the funds on hand, we will require additional funds to continue to operate our business. This includes expenses we will incur in connection with costs to manufacture and ship our products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual commitments for salaries to our executive officers. In light of our financial commitments over the next several months and its liquidity constraints, we have implemented cost reduction measures in all areas of operations. We intend to review these measures on an ongoing basis and make additional decisions as may be required.

17


Cash Flow

Net cash used in operating activities during the three months ended September 30, 2013 amounted to $59,992 compared with $444 for the same period in fiscal 2013. Funding for the operating and investing activities was provided by $250,000 in advances from our distributor, and partially from cash reserves. For the first quarter of fiscal 2014, we paid $91,815 in compensation, $95,074 in fixed operating costs, $76,284 in professional services fees, $22,443 in various insurance premiums, and $3,000 in interest payments, and other obligations of about $39,000. In Q1 2013, cash was used to pay $42,394 in fixed operating costs, $58,325 in compensation, $57,920 in professional service fees, $8,926 in manufacturing costs, $16,701 in marketing and sales and $35,355 in interest payments. We paid other obligations amounting to $32,192.

Net cash used in investing activities during the three months ended September 30, 2013 was relating to $6,822 in capitalized patents and $13,500 for property, plant, and equipment. During the same period ended September 30, 2012, we invested $11,050 in capitalized patents and $21,989 in property, plant and equipment.

For the first quarter of fiscal 2013, funding was provided from proceeds of $53,000 from issuance of our convertible note. We used the convertible note funding to repay $55,000 in existing convertible debt and $68,000 in principal on the bank loan.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable for smaller reporting companies.

ITEM 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with rule 13a-15(a), CTi management must maintain disclosure controls and procedures as defined in Rule 13a- 15(e) of the Securities and Exchange Act of 1934, or the Exchange Act, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In accordance with Rule 13a-15(b) and (c), management must also evaluate the effectiveness of these disclosure control and procedures at the end of each fiscal year. As of September 30, 2013, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that these disclosure controls and procedures were not effective as of September 30, 2013.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting during the first quarter of fiscal 2014 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.

18


Item 2  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 - Defaults Upon Senior Securities

None

Item 4 - (Removed and Reserved)

Item 5 - Other Information

None

Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES

      Incorporated by Reference
Exhibit   Filed        
Number Exhibit Description Herewith Form Pd. Ending Exhibit Filing Date
             
3(i)(a) Articles of Incorporation - original name of Bioenergy, Inc.   SB-2 N/A 3.1 October 19, 2006
3(i)(b) Articles of Incorporation - Amended and Restated   10-Q December 31, 2008 3-1 February 17, 2009
3(i)( c ) Articles of Incorporation - Amended and Restated   10-Q June 30, 2009 3-1 May 14, 2009
3(i)(d) Articles of Incorporation - Amended; increase in authorized shares   8-K N/A N/A October 29, 2009
3(i)(e) Articles of Incorporation - Certificate of Amendment; forward split   10-Q September 30, 2009 3-1 November 16, 2009
             
10.1 Patent Assignment Agreement between the Company and Roman Gordon dated July 1, 2008.   8-K June 30, 2009 10.1 May 18, 2010
10.2 Patent Assignment Agreement between the Company and Igor Gorodnitsky dated July 1, 2008.   8-K June 30, 2009 10.2 May 18, 2010
10.3 Assignment of Patent Assignment Agreement between the Company and Roman Gordon   8-K June 30, 2009 10.3 May 18, 2010
10.4 Assignment of Patent Assignment Agreement between the Company and Igor Gorodnitsky   8-K June 30, 2009 10.4 May 18, 2010
10.5 Employment Agreement between the Company and Roman Gordon date March 17, 2008   10K/A June 30, 2009 10.3 October 20, 2011
10.6 Employment Agreement between the Company and Igor Gorodnitsky dated March 17, 2008   10K/A June 30, 2009 10.4 October 20, 2011
10.7 Employment and Confidentiality and Invention Assignment Agreement between the Company and Varvara Grichko dated April 30, 2008   10-Q December 31, 2010 10.3 February 11, 2011
10.8 Board of Director Agreement - James Fuller   10-Q December 31, 2011 10.12 October 20, 2011
10.9 Technology and License Agreement with Desmet Ballestra dated 14 May 2012   10-K June 30, 2012 10.1 October 15, 2012
10.10 Short Term Loan Agreement - CEO    10-K June 30, 2012 10.11 October 15, 2012
10.11 Loan Agreement - Desmet Ballestra - Oct. 26, 2010          
             
14.1 Code of Business Conduct and Ethics*   10-K June 30, 2011 14.1 September 28, 2011
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 X        
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 X        
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted  X        
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted  X        
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          
             
101.INS XBRL Instance Document 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.          
             
             

 

19


SIGNATURES

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

SIGNATURE   TITLE   DATE
         
/s/ Igor Gorodnitsky   President; Member of Board of Directors   November 19, 2013
Igor Gorodnitsky   (Principal Executive Officer)    
         
/s/ N. Voloshin   Principal Accounting Officer   November 19, 2013
N. Voloshin         
         
/s/ Jim Fuller   Audit Committee Chairman, Independent Financial Expert   November 19, 2013
Jim Fuller        

 

 

 

 

20