|
|
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 December 31, 2012
Commission File Number: 0-29901
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
|
|
|
|
|
|
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
¨
|
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 February 19, 2013, the issuer had 156,899,702 shares of common stock outstanding.
TABLE OF CONTENTS
 
 
Page
Part I.
FINANCIAL INFORMATION
2 
 
 
 
Item 1.
Consolidated Financial Statements
2 
 
 
 
 
Consolidated Balance Sheets at December 31, 2012 (unaudited) and June 30, 2012
2 
 
 
 
 
Consolidated Statements of Operations - Three and Six Months Ended December 31, 2012 (unaudited) and December 31, 2011
(unaudited), and the period from January 29, 2007 (Inception) through December 31, 2012 (unaudited)
3 
 
 
 
 
Consolidated Statement of Stockholders' Deficit - January 29, 2007 (Inception) through December 31, 2012 (unaudited)
4 
 
 
 
 
Consolidated Statements of Cash Flows - Six Months Ended December 31, 2012 (unaudited) and December 31, 2011
(unaudited), and the period from January 29, 2007 (Inception) through December 31, 2012 (unaudited)
8 
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
9 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
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
22
 
 
 
Item 3.
Defaults Upon Senior Securities
22
 
 
 
Item 4.
Mine Safety Disclosures
22
 
 
 
Item 5.
Other Information
22
 
 
 
Item 6.
Exhibits
23
 
 
 
Signatures
 
24
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.
See accompanying notes, which are an integral part of these financial statements
8
CAVITATION TECHNOLOGIES, INC.
Note 1 - Nature of Operations and Basis of Presentation
Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly
owned subsidiary of Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as the "Company," "CTi," "we," "us,"
and "our"), a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi is a California-based development stage
company that has developed, patented, and commercialized proprietary technology for processing soybean oil through a device called
the Nano ® (the "Reactor"). The Reactor is the critical component of
the Nano Neutralization
®
System
which is designed to reduce operating costs and increase yields in the refining of vegetable oils.
Basis of Presentation
We have prepared the accompanying consolidated unaudited financial statements of the Company in
accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and
with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the
"Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these financial statements do not include all
of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included
all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the six
months ended December 31, 2012 are not indicative of the results that may be expected for the fiscal year ending June 30, 2013. You
should read these unaudited consolidated financial statements in conjunction with the audited financial statements and the notes
thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2012.
Note 2 -Going Concern
Management's Plan Regarding Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting
principles which contemplate continuation of the Company as a going concern. The Company has no significant operating history and,
from January 29, 2007, (inception), through December 31, 2012, generated a net loss of $18,991,438. Since inception, we recorded
revenue of $1,470,930; with revenue in the second quarter of fiscal 2013 being $693,778. The Company also has negative cash flow
from operations and negative net equity. Cumulative net cash used in operating activities of $3,931,068 was funded largely with $2.8
million in equity and $0.6 million in convertible notes, as well as short term loans in the amount of $0.5 million and advances from a
strategic partner of $750K. These factors, among others, raise doubt about the Company's ability to continue as a going concern.
Management's plan is to generate income from operations by licensing our technology globally through our
strategic partner, the Desmet Ballestra Group. Desmet has agreed to provide us limited monthly advances against future sales. As of
December 31, 2012, advances received amounted to $750,000 of which $223,500 have been applied to current period sales and
recognized as revenue. Minimum monthly advances from Desmet amount to $125,000 and should continue monthly for the duration of
the agreement. In addition, in the first quarter of fiscal 2013, the Company signed an agreement with the GEA Westfalia Separator
Group. The purpose of the agreement is to jointly develop and patent new process applications using CTi's technology.
We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional
working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary
to meet the Company's needs, or that the Company will be able to meet its future contractual obligations. Should management fail to
obtain such financing, the Company may curtail its operations.
9
As a result of the aforementioned factors, our independent auditors, in their report on our audited financial
statements for the fiscal year ended June 30, 2012 expressed substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as
a going concern.
Note 3 - Summary of Significant Accounting Policies
Patents
Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The
Company accounts for patents in accordance with Accounting Standards Codification ("ASC") 350-30,
General
Intangibles Other Than Goodwill
. As of December, 31, 2012, the Company had incurred $133,304 in net patent costs comprised of
$141,989 of gross capitalized patents and $8,685 in cumulative amortization. This compares with a net of $123,158 at June 30, 2012
comprised of $129,334 in gross capitalized costs and $6,176 in cumulative amortization. The Company has designed, developed, and
patented two proprietary Nano Reactors (
Nano Reactor®
) and has eight US and nine PCT/international applications pending
in processes such as vegetable oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
At December 31, 2012, future amortization of patent costs is estimated as follows:
Advertising and Promotion Costs
Advertising costs incurred in the normal course of operations are expensed as incurred. Advertising (and
marketing) expenses amounted to $11,457, $26,964, and $217,289 for the six months ended December 31, 2012 and 2011, and the
period from January 29, 2007 (date of inception) through December 31, 2012, respectively.
Related Party Advances
The outstanding balance of $16,500 at December 31, 2012 corresponds to an advance to our CEO (who presently is the
Company's Chief Technology Officer).
Deferred Revenue
During fiscal 2012, we received an advance of $100,000 from Desmet Ballestra associated with a license fee for a European
client. Previously, the Company had received cash payments of $147,444 relating to license fees associated with two
NANO
Neutralization Systems
for two clients in Argentina. Since the systems were installed, have met performance specifications, and
have been accepted by the client, we recognized revenue for these amounts in current quarter.
10
The balance of $109,936 in Deferred Revenue account represents $36,533 part of the advanced payments provided by our
marketing partner Desmet Ballestra in prior periods, as well as deposits of $46,650 and $26,753 the Company received in the current
quarter for new orders to be shipped to clients in the 3-rd quarter of fiscal 2013. These amounts will remain in Deferred Revenue on the
accompanying consolidated balance sheet until the systems are assembled and shipped.
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 December 31, 2012 and 2011, the carrying value of certain accounts such as
inventory, accounts payable, accrued expenses, accrued payroll and short-term loans approximate fair value due to the short-term
nature of such instruments.
The following table presents information about the Company's assets and liabilities measured and reported in the financial
statements at fair value on a recurring basis as of December 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:
The following tables provide a reconciliation of the beginning and ending balances of our financial liabilities classified as Level 3:
Reclassifications
Certain numbers in the prior year have been reclassified to the current year's presentation.
11
Note 4 - Net Loss per Share - Basic and Diluted
The Company computes the loss per common share using ASC 260,
Earnings per
Share
. The net loss per common share, both basic and diluted, is computed based on the weighted average number
of shares outstanding for the period. The diluted loss per common share is computed by dividing the net loss attributable
to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.
On December 31, 2012, the Company had 12,861,815 stock options and 17,257,629 warrants outstanding to
purchase common stock that were not included in the diluted net loss per common share because the earnings per share were less
than $0.01. The Company also had $100,000 of convertible notes payable, before discounts, which are convertible into
3,333,333 shares of common stock as of December 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 as of December 31, 2012 and June 30, 2012.
Depreciation and amortization expense amounted to$27,195, $23,141 and $121,227 for the six months ended
December 31, 2012 and 2011, and the period from January 29, 2007 (date of inception) through December 31, 2012, respectively.
Note 6 -Bank Loan
On November 1, 2011, the maturity of the variable rate loan with the National Bank of California was
extended to February 1, 2013. Monthly payments included 14 principal payments of $6,000 plus interest. In addition, CTi were to make
a quarterly principal payment of $50,000. During the quarter ended December 31, 2012, the outstanding balance on the loan, including
interest, was fully paid off by the Company. The Company provided the National Bank of California a security interest in the assets of
the Company as collateral for the loan. In addition, the personal assets of our two founders were pledged as collateral.
12
Note 7 - Short-Term Loans and Short Term Loans - related parties
Short Term Loans
On October 26, 2010, the Company entered into a loan agreement with Desmet Ballestra North America,
Inc. under which the Company borrowed $75,000. The outstanding balance on September 30, 2012 was $55,000 with accrued interest
of $6,875 and was paid off by the Company during the quarter.
As of December 31, 2012, we had received $34,521 from a third party, and we recorded these funds in Short Term Loans which
are due on demand and pay an annual interest rate of 12%. Accrued interest amounts to $2,879 at December 31, 2012.
Short Term Loans - related parties
As of December 31, 2012, we had received $185,000 from West Point Partners, LLC, whose managing
partner is the Company's Principal Accounting Officer. These funds are due on demand, and pay an annual interest rate of 12%.
Accrued interest which is included in Accrued Expenses amounts to $15,600.
On December 28, 2011, the past CEO, Todd Zelek, extended to the company a $100,000 short-term loan due on demand at an
annual interest rate of 12%. In October 2012, the terms of the loan were amended so that the balance of accrued interest at Sept 30,
2012 of $9,000 was to be repaid at $3,000 per month starting in October 2012. Interest is to accrue and be paid monthly at 15% per
year, and the entire balance is due October 1, 2013. In addition, principal payments are to be made monthly in the company receives
cash in excess of $125,000 per month at an amount of 25% of the excess cash. The outstanding amount at December 31, 2012 was
$100,000 and Accrued Interest of $1,250 is included in Accrued Expenses, and subsequent to quarter-end the Company repaid the
outstanding principal and accrued interest.
Note 8 - Convertible Notes Payable
On July 12, 2012 we entered into a convertible promissory note with Asher Enterprises, Inc. under which we issued a $53,000
convertible promissory note. The note is due April 13, 2013 and bears interest at 8% p.a. The note is convertible into shares of our
common stock at a conversion price equal to 60% of the average of the lowest three (3) Trading Prices for the Common Stock during
the ten Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The note was issued in reliance on
Section 4(2) of the Securities Act of 1933. The note was not offered via general solicitation to the public. No sales commissions or other
remuneration was paid in connection with the issuance of this note. On November 9, 2012 the note was paid in full including a
pre-payment premium of $19,600 and accrued interest of $1,394.
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% p.a. and due May 31, 2014. The note is 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 issued in reliance on Section 4(2) of the Securities Act of 1933. The note was not
offered via general solicitation to the public. No sales commissions or other remuneration was paid in connection with the issuance of
this note.
Also, 3,333,333 warrants were issued in connection with the note, and that as a result, a discount in the amount of $95,002 was
recorded against this note. The balance of the discount at December 31, 2012 is $92,492.
Note 9 - Stockholders' Equity
Preferred Stock
The Company has 5,000,000 shares of Series A Preferred Stock authorized with no shares outstanding. The
Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock. The Board of Directors can establish the
rights, preferences and privileges of the Series B Preferred Stock. There are no shares of Series B Preferred Stock outstanding.
13
Stock Options
A summary of the stock option activity for the six months ended December 31, 2012 is presented below.
The following table summarizes information about outstanding stock options as of December 31, 2012.
14
Warrants
A summary of the warrant activity for the six months ended December 31, 2012 is presented below.
The following table summarizes information about outstanding warrants as of December 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, 2013, and it is not more likely than not that those losses will be recovered using future
taxable income. Therefore, no provision for income tax or tax liability has been recorded as of and for the period
ended December 31, 2012.
15
ASC 740-10,
Accounting for Uncertainty in Income Taxes,
indicates criteria that an individual tax position
must satisfy for some or all of the benefits of that position to be recognized in the financial statements. ASC 740-10 includes a higher
standard that tax benefits must meet before they can be recognized in a company's financial statements. As the Company has no
uncertain tax positions as defined in ASC 740, there are no corresponding unrecognized tax benefits. Any future changes in the
unrecognized tax benefit will have no impact on the Company's effective tax rate due to the existence of the valuation allowance. The
Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months. It is the Company's
policy to classify income tax penalties and interest, if any, as part of general and administrative expense in its Statements of
Operations. The Company has not incurred interest or penalties since inception.
Note 11 - Commitments and Contingencies
Lease Agreements
Total rent expense was $27,065, $30,643, and $338,707 for the six months ended December 31, 2012 and
2011, and for the period from January 29, 2007 (date of inception) through December 31, 2012, respectively. The Company's lease
agreement extends through February 1, 2013 with monthly rental payments of $4,378.
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two
parties, our President as well as our former CEO/current CTO, where certain devices and methods involved in the hydrodynamic
cavitation processes invented by these two individuals have been assigned to the Company. In exchange, the Company agreed to pay
a royalty of 5% of gross revenues to each of these two individuals for licensing of the technology and leasing of the related equipment
embodying the technology. These agreements were subsequently assigned to Cavitation Technologies on May 13, 2010. The
Company's CTO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any
gross revenue generated through December 31, 2012.
On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment
agreement with the Director of Chemical and Analytical Department (the "Inventor")who shall receive an amount equal to 5% of actual
gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which
the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in
each subsequent year. As of December 31, 2012, no patents have been granted in which this person is the legally named inventor.
Licensing Agreement
On May 14, 2012, we signed a 3-year
R and D, Marketing and Technology License Agreement (the
"Agreement")
with n.v. Desmet Ballestra Group, s.a. ("Desmet"). The Agreement provides Desmet (licensee) an exclusive license
and right to develop, design and supply systems which incorporate Nano Reactor® devices on a global basis but limited to oils and
fats and oleo chemical applications. CTi (licensor) remains owner of the current patents and patent applications but Desmet will be
co-owner of any new process patent applications jointly developed. Desmet has agreed to provide limited monthly advance payments on
future sales to CTi, if necessary. Payments made by Desmet during the six months ended December 31, 2012 amounted to $625,000.
Note 12 - Subsequent Events
On January 2, 2013 the company shipped a skid unit containing
the Nano Neutralization
®
System
to a customer in South Dakota and received $124,910 payment from the Desmet Ballestra Group in addition to $46,657
down payment received and included in deferred revenue at December 31, 2012.
On January 31, 2013 the company received $178,500 for the purchase order for licensing fee previously issued
relating to a sale of
the Nano Neutralization
®
System
to a client in Argentina.
16
On January 16, 2013, the Company paid off $100,000 note plus accrued interest of $605 to Todd Zelek, ex-CEO.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and the
related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and
uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements.
Overview of our Business
Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly
owned subsidiary of Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as "the Company,"
"CTi," "we," "us," and "our") a Nevada corporation originally incorporated under the name
Bio Energy, Inc. Cavitation Technologies, Inc. has developed, patented, and commercialized proprietary technology for processing
soybean oil through a device called the
Nano Reactor
(the "Reactor" that employs proprietary continuous flow-through,
hydrodynamic
NANO
Technology
in the form of our multi-stage NANO Series of reactors. The Reactor is the
critical component of the
Nano Neutralization System
- a vegetable oil refining system which is designed to reduce operating
costs and increase yields.
During the quarter ended December 31, 2012, we recorded $693,788 in revenue. Cumulative loss since inception on January 29,
2007 is $18,991,438 including non-monetary cash expense of $11,702,990 in common stock issued for services. Cumulative net cash
used in operating activities of $3,931,068 was funded largely with $2.8 million in equity and $0.6 million in convertible notes, as well as
short term loans in the amount of $0.5 million and advances from a strategic partner of $750K.
Management's Plan
We are a development stage entity engaged in merchandising our
NANO Neutralization System
which is
designed to help refine vegetable oils such as soybean, canola, and rapeseed. Our near term goal is to successfully merchandise our
systems. We have no significant operating history and, from January 29, 2007, (inception), through December 31, 2012 generated a net
loss of $18,991,438. We also have negative cash flow from operations and negative net equity. The accompanying financial
statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the
Company as a going concern.
Management's plan is to generate income from operations by licensing our technology globally through our
strategic partner, the Desmet Ballestra Group. We will also attempt to raise additional debt and/or equity financing to fund future
operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or
obtained in sufficient amounts necessary to meet the Company's needs, or that the Company will be able to meet its future contractual
obligations. Should management fail to obtain such financing, the Company may curtail its operations.
Critical Accounting Policies
CTi's critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended June 30,
2012, and did not change for the six months ended December 31, 2012.
17
Results of Operations
The following is a comparison of our results of operations for the three months ended December 31, 2012 and 2011.
Revenue
During the three months ended December 31, 2012, our revenue consisted primarily of
NANO
Neutralization System
reactor sales of $693,788 to clients in Argentina, as well as final acceptance of our systems by clients in
Europe and the US. This compares with $114K recorded during the same period in fiscal 2011 associated primarily with the sale of a
NANO Neutralization System
to a customer located in Argentina.
Cost of Revenue
During the three months ended December 31, 2012, our cost of sales amounted to $4,939 which was the result
of the revenue transactions described above. Three of the units for which licensing revenue was recognized were sold in fiscal 2012,
and as a result much of the associated cost was expensed in a prior year.
Operating Expenses
Operating expenses for the three months ended December 31, 2012 amounted to $430,226 compared with
$453,591 for the same period in 2011, a decrease of $23,365, or 5.2%. The decrease was attributable to a $30,330 reduction in
G&A and $8,451 drop in R&D expenses.
In both periods, the major expense component was compensation, most of which was accrued. In the second
quarter of fiscal 2013, compensation amounted to $220,316, or 48% of total costs compared with $153,596, or 29% in the second
quarter of fiscal 2012. This increase in compensation in the second quarter of fiscal 2013 was attributable largely to the addition of new
management.
During the second quarter of 2013, the other major component of operating expense was professional service
fees related to auditors, accounting, and legal services which amounted to $39,770, or 9% of total operating expenses versus $61,104,
or 12% in the second quarter of fiscal 2012. These expenses were substantially lower in the second quarter of fiscal 2013 as we
reduced reliance on third-party service providers. Other significant expenses for the second quarter of 2013 were Automobile,
Consulting, Insurance (mostly health insurance which is majority accrued) and Travel. These expenses cumulatively amounted to about
$110K, or 25% of all operating expenses for the quarter.
18
R&D expenses remained relatively low at $25,690 as we continued to rely on Desmet Ballestra for support
in R&D. It is our intention to pursue R&D as our cash position permits.
Interest Expense
In the second quarter of fiscal 2013, Interest Expense amounted to $20,133, a decrease of $57,064 compared
to $77,197 in the second quarter of fiscal 2012. It consisted of a non-cash expense of $12,972 relating to convertible notes, $10,336 in
non-cash, accrued interest relating primarily to short term loans, and cash interest paid to convertible note holders in the amount of
$19,995. This compares with total cash payments of $23,750 as a prepayment premium for convertible note repayment in Q2 of fiscal
2012. The decrease was attributable largely to lower non-cash charges of $12,972 on amortization of discount on convertible notes
payable compared to $44,152 in second quarter of fiscal 2012, and forgiveness of accrued interest in the amount of $6,875 by our
marketing partner. Cash interest payments on our loan from the National Bank of California declined to $5,250 versus $6,047 during the
2
nd
quarter of fiscal 2012 as the outstanding balance declined from $382,271 on December 31, 2011 to $0 on
December 31, 2012.
Results of Operations for the Six Months Ended December 31, 2012 Compared to the Six Months Ended December 31, 2011
The following is a comparison of our results of operations for the six months ended December 31, 2012 and 2011.
Revenue
During the six months ended December 31, 2012, our revenue consisted primarily of
NANO
Neutralization System
reactor sales of $693,788 to clients in Argentina, as well as final acceptance of our systems by clients in
Europe and the US. This compares with $114K recorded during the same period in fiscal 2011 associated primarily with the sale of a
NANO Neutralization System
to a customer located in Argentina.
Cost of Revenue
During the six months ended December 31, 2012, our cost of sales amounted to $4,939 which was the result
of the revenue transactions described above. Three of the units for which licensing revenue was recognized were sold in fiscal 2012,
and as a result much of the associated cost was expensed in a prior year.
19
Operating Expenses
Operating expenses for the six months ended December 31, 2012 amounted to $832,295 compared with
$763,272 for the same period in 2011, an increase of $69,023, or 9.3%. The increase was attributable to a $60,482 increase in
G&A and $3,648 increase in R&D expenses.
The primary expenditures during the first half of fiscal 2013 were $180K for professional service fees such as
auditors, attorneys, and SEC related services, consulting fees, and automobile and travel expenses, and $495K in salaries and salary
related expenses. These expenses for the first half of fiscal 2012 were $235K and $312 respectively. This increase in compensation in
the first half of fiscal 2013 was attributable largely to the addition of new management.
Interest Expense
Interest expense decreased by $62,711, or 48%, for the six months ended December 31, 2012 as compared to 2011. Interest
expense for the six months ended December 31, 2012 consisted of a non-cash expense of $22,125 relating to convertible notes,
$20,936 in mostly non-cash, accrued interest relating primarily to short term loans, and cash interest paid to convertible note holders in
the amount of $47,710. Cash interest payments on our loan from the National Bank of California declined to $11,020 during the
2
nd
half of fiscal 2012 as the outstanding balance declined from $382,271 on December 31, 2011 to $281,276 on
December 31, 2012.
The major uses of cash in the first half of fiscal 2012, by comparison, included $15,306 in interest expense to National Bank of
California related to a loan and $23,750 in interest expense in the form of a pre-payment premium for repayment of a $47,500
convertible promissory note to Asher Enterprises.
Liquidity and Capital Resources
CTi's primary sources of liquidity derived largely from payments for reactors and licensing fees, as well as
advances on future sales from Desmet Ballestra, and convertible promissory notes and short-term loans. See Note 7 "Short-Term
Loans and Short Term Loans - related parties" and Note 8 "Convertible Notes Payable," for more information.
Common Stock
During the six months ended December 31, 2012, we did not issue any stock for cash, compared with 600,000
shares of common stock for $35,000 for the six months ended December 31, 2011. In August of 2012 the 1,500,000 shares issued to
Prolific for note conversion were returned to the company and the note was reinstated (and subsequently paid off).
Share-based Compensation
During the six months ended December 31, 2012 we issued 1,231,000 shares of restricted common stock
valued at $36,930 as payment to service providers, of which 231,000 were issued to Director of R&D. Also, 6,800,858 shares of
restricted stock previously issued to the Company's CTO, President and a service provider were cancelled and replaced with 6,800,858
options vested immediately. In addition, the company's CTO and President received additional 2,500,000 options with immediate
vesting for services provided during 5 years. We also previously issued 10,000,000 options to our ex-CEO as well as 2,000,000
restricted shares. As part of the separation agreement with CEO on October 12, 2012, the aforementioned options and shares were
cancelled and replaced with 7,500,000 warrants. During the six months ended December 31, 2011 we issued 1,660,711 shares of
restricted common stock valued at $81,713 as payment to service providers.
20
Cash Flow
Net cash used by operating activities during the six months ended December 31, 2012 amounted to $278,717
compared with $176,788 cash used up for the same period in fiscal 2012. Funding for the operating and investing activities in the first
half of fiscal 2013 was provided by $625,000 in advances against sales from Desmet, some of which were recognized as revenue, as
well as by $212K received from Desmet for the reactors sold and as licensing fee.
For the first half of fiscal 2013, cash was used to pay $162,745 in fixed operating costs, $93,989 in
compensation, $127,507 in professional service fees, $32,649 in manufacturing costs, $31,709 in marketing and sales and $79,409 in
interest payments. We paid other obligations amounting to $32,192. Net cash used in investing activities during the six months ended
December 31, 2012 was $63,836 relating to capitalized patents and $51,182 for property, plant, and equipment.
For the first half of fiscal 2013, financing activities were funded by $625K in advances against sales from Desmet along with
$153,000 in convertible debt. We used the convertible note funding to repay $55,000 in existing convertible debt. We used the
advances from Desmet and convertible note proceeds to pay off $350K of principal on the bank loan and $53,000 in repayment of a
convertible note payable as well as interest on various notes and $55K in short term loans. Net cash provided by financing activities
during the six months ended December 31, 2012 amounted to $266K. By comparison, the major non-financial uses of cash for the first
half of fiscal 2012 were $104K in repayment of principal on the bank loan and $47,500 in repayment of a convertible note payable.
Cumulative uses of cash of about $350,000 for the first 6 months of fiscal 2012 were funded by a $100,000 advance relating to a
license for a client in Europe, $132,500 in funding from convertible notes payable, $100,000 in a short term loan from our CEO, and
$35,000 in the sale of common stock.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable for smaller reporting companies.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Accounting officer have evaluated the Company's disclosure
controls and procedures as defined in Rules 13a-15(b)(e) and 15d-15(b)(e) of the Securities Exchange Act of 1934 as of the end of the
period covered by this report, and they have concluded that these controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the second quarter of fiscal 2013
that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a
plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
21
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
The following is a listing of unregistered security activity during the six months ended December 31, 2012.
Issuance of Common Stock for Conversion of Indebtedness
On June 6, 2012, a conversion request was submitted by the Prolific Group, LLC for $21,450 of outstanding convertible
notes corresponding to 1,500,000 shares of common stock. These shares were issued but subsequently returned to the Company in
the first quarter of fiscal 2013, and the note of $25,000 was paid in full in two payments of $15,000 on July 12 and $10,000 on August 7
plus a pre-payment premium of $12,593 recorded as interest expense in the Statements of Operations.
Issuance of Restricted Common Stock for Services
On December 18, 2012, we issued 650,000 shares of common stock with a recorded value of $19,500 to Star
Funding LLC for professional 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 December 18, 2012, we issued 350,000 shares of common stock with a recorded value of $10,500 to
Pinnacle Financial Group for professional 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 December 18, 2012, we issued 231,000 shares of common stock with a recorded value of $6,930 to Varvara
Grichko, with 50,000 shares issued for services on the Company's Board of Directors, and 181,000 shares issued for services as a
Chief Chemist. 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.
Cancellation of Common Stock
On October 12, 2012, we cancelled 2,000,000 shares of common stock with a recorded value of $46,290
previously issued to Todd Zelek, our former CEO for employment services.
On December 18, 2012, we cancelled 3,000,000 shares of common stock with a recorded value of $69,444
previously issued to Roman Gordon for employment services.
On December 18, 2012, we cancelled 3,000,000 shares of common stock with a recorded value of $69,444
previously issued to Igor Gorodnitsky, Company's President, for employment services.
On December 18, 2012, we cancelled 800,858 shares of common stock with a recorded value of $18,536
previously issued to Sergei Chernov for consulting services.
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Mine Safety Disclosures
Not spplicable
Item 5 - Other Information
None
22
Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
23
SIGNATURES
Pursuant to the requirements of the securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
24
YES
¨
NO
x
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31,
June 30,
2012
2012
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
60,420
$
137,249
Inventory
143,998
141,057
Related party advances
16,500
23,853
Total current assets
220,918
302,159
Property and equipment, net
159,602
135,615
Patents, net
133,304
123,158
Other assets
9,500
9,500
Total assets
$
523,324
$
570,432
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable
$
156,439
$
187,095
Accrued expenses
139,625
126,767
Accrued payroll
1,261,975
992,806
Deferred revenue
109,936
283,977
Convertible notes payable, net of discounts
-
29,083
Derivative liability
-
6,271
Related party payables
1,262
59,608
Short-term loans - related party
285,000
100,000
Short-term loans
34,521
274,521
Advances from partner
526,500
125,000
Bank loan
-
349,276
Total current liabilities
2,515,258
2,534,404
Long-term Liabilities:
Convertible note payable, net of discount
7,508
-
Commitments and contingencies, Note 11
Stockholders' deficit:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding as of December
31, 2012 and June 30, 2012.
-
-
Common stock, $0.001 par value, 1,000,000,000 shares
authorized, 156,899,702, shares and 165,969,569 shares are
issued and outstanding as of December 31, 2012 and June
30, 2012, respectively
156,901
165,971
Additional paid-in capital
16,835,095
16,650,959
Deficit accumulated during the development stage
(18,991,438)
(18,780,902)
Total stockholders' deficit
(1,999,442)
(1,963,972)
Total liabilities and stockholders' deficit
$
523,324
$
570,432
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
January 29, 2007,
Inception,
For the Three Months Ended
For the Six Months Ended
Through
December 31,
December 31,
December 31,
2012
2011
2012
2011
2012
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
Revenue
$
693,788
$
114,154
$
693,788
$
114,154
$
1,470,930
Cost of revenue
4,939
23,014
4,939
23,014
136,647
Gross profit
688,849
91,140
688,849
91,140
1,334,283
General and administrative expenses
404,536
419,450
766,442
701,067
13,779,039
Research and development expenses
25,690
34,141
65,853
62,205
5,506,249
Total operating expenses
430,226
453,591
832,295
763,272
19,285,288
Profit (loss) from operations
258,623
(362,451)
(143,446)
(672,132)
(17,951,005)
Interest expense and other
(20,133)
(77,197)
(67,090)
(129,801)
(857,322)
Profit (loss) before Income Taxes
238,490
(439,648)
(210,536)
(801,933)
(18,808,327)
Income Tax Expense
-
-
-
-
-
Net profit (loss)
238,490
(439,648)
(210,536)
(801,933)
(18,808,327)
Deemed dividends to preferred stockholders
-
(1,500)
-
(3,000)
(183,111)
Net income (loss) available to common stockholders
$
238,490
$
(441,148)
$
(210,536)
$
(804,933)
$
(18,991,438)
Net incom (loss) available to common shareholders per share:
Basic and Diluted
$
0.00
$
(0.00)
$
(0.00)
$
(0.01)
Weighted average shares outstanding:
Basic and Diluted
157,887,084
158,306,426
161,488,109
156,766,312
(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)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) (Continued)
Deficit
Accumulated
During the
Series A Preferred
Common Stock
Additional Paid-in
Development
Shares
Amount
Shares
Amount
Capital
Stage
Total
Balance at June 30, 2011
111,111
$
111
153,799,715
$
153,800
$
15,954,280
$
(16,848,488)
$
(740,297)
Common stock issued as payment for services on July 13, 2011
379,449
380
25,968
26,348
Common stock issued as payment for services on August 19, 2011
198,879
199
10,541
10,740
Common stock issued as payment for services on August 22, 2011
230,000
230
12,191
12,421
Common stock issued as payment for services on September 29, 2011
366,924
367
13,787
14,154
Common stock issued for conversion of note payable on August 16, 2011
287,356
287
20,786
21,073
Common stock issued for conversion of note payable on August 17, 2011
391,850
392
25,949
26,341
Common stock issued for conversion of note payable on August 19, 2011
391,850
392
25,949
26,341
Common stock issued for conversion of note payable on August 22, 2011
288,401
288
17,216
17,504
Common stock issued for conversion of note payable on September 13, 2011
30,769
31
1,508
1,539
Common stock issued for conversion of note payable on September 15, 2011
46,154
46
2,262
2,308
Common stock issued for conversion of note payable on September 16 2011
76,923
77
4,538
4,615
Common stock sold for cash on August 22, 2011
600,000
600
34,400
35,000
Common stock issued for conversion of note payable on October 4, 2011
130,474
130
4,818
4,948
Common stock issued for conversion of note payable on October 5, 2011
178,891
179
6,943
7,122
Common stock issued for conversion of note payable on October 6, 2011
429,338
429
16,663
17,092
Common stock issued for conversion of note payable on October 10, 2011
35,778
36
1,388
1,424
Common stock issued for conversion of note payable on October 11, 2011
194,231
194
6,929
7,123
Common stock issued as payment for services on October 25, 2011
44,000
44
1,653
1,697
Common stock issued as payment for services on November 1, 2011
353,959
354
13,300
13,654
Common stock issued as payment for services on November 22, 2011
87,500
88
2,612
2,700
To record prepayment of convertible promissory note December 6, 2011
24,591
24,591
Common stock issued for conversion of note payable on January 25, 2012
230,769
231
6,692
6,923
Common stock issued for conversion of note payable on January 26, 2012
179,487
179
5,205
5,384
Common stock issued for conversion of note payable on January 27, 2012
102,564
103
4,000
4,103
Common stock issued for conversion of note payable on January 30, 2012
76,923
77
3,000
3,077
Common stock issued for conversion of note payable on January 31, 2012
338,462
338
13,200
13,538
Common stock issued for conversion of note payable on February 1, 2012
153,846
154
6,000
6,154
Common stock issued for conversion of note payable on February 17, 2012
50,441
50
2,063
2,113
Common stock issued for conversion of note payable on February 21, 2012
249,750
250
9,740
9,990
Common stock issued for conversion of note payable on March 5, 2012
82,124
82
2,382
2,464
Common stock issued for conversion of note payable on March 9, 2012
122,587
123
3,555
3,678
Common stock issued for conversion of note payable on March 12, 2012
183,880
184
5,333
5,517
Common stock issued for conversion of note payable on March 13, 2012
91,940
92
2,666
2,758
Common stock issued for conversion of note payable on March 16, 2012
61,538
62
1,785
1,847
Common stock issued for conversion of note payable on March 26, 2012
200,669
201
5,819
6,020
Common stock issued for conversion of note payable on March 27, 2012
66,890
67
1,940
2,007
Common stock issued for conversion of note payable on March 29, 2012
100,334
100
2,910
3,010
Common stock issued for conversion of note payable on March 30, 2012
196,399
196
5,696
5,892
Issuance of stock options as payment for services on February 16, 2012
168,928
168,928
Common stock issued as payment for services on January 5, 2012
140,792
141
5,290
5,431
Common stock issued as payment for services on February 7, 2012
87,500
88
1,937
2,025
Common stock issued as payment for services on February 16, 2012
2,000,000
2,000
44,290
46,290
Conversion of Convertible Preferred Shares to Common Shares on March 18, 2012
(111,111)
(111)
442,570
443
17,687
18,019
Common stock issued for conversion of note payable on April 3, 2012
60,096
60
1,743
1,803
Common stock issued for conversion of note payable on April 17, 2012
60,332
60
1,750
1,810
Common stock issued for conversion of note payable on April 19, 2012
66,365
66
1,925
1,991
Common stock issued for conversion of note payable on April 23, 2012
267,559
268
7,758
8,026
Common stock issued for conversion of note payable on April 23, 2012
113,311
113
3,286
3,399
Common stock issued for conversion of note payable on June 1, 2012
-
-
5,136
5,136
Issuance of stock options as payment for services on March 31, 2012
-
-
16,570
16,570
Issuance of stock options as payment for services on March 31, 2012
-
-
570
570
Issuance of stock options as payment for services on June 30, 2012
-
-
34,271
34,271
Issuance of stock options as payment for services on June 30, 2012
-
-
1,172
1,172
Common stock issued as payment for services on June 3, 2012
200,000
200
4,429
4,629
Common stock issued for conversion of note payable on June 6, 2012
1,500,000
1,500
23,960
25,460
Dividends on Preferred Stock
(4,286)
(4,286)
Net loss
(1,928,128)
(1,928,128)
Balance at June 30, 2012
-
$
-
165,969,569
$
165,971
$
16,650,959
$
(18,780,902)
$
(1,963,972)
Issuance of stock options as payment for services on June 30, 2012
-
-
1,185
1,185
Issuance of stock options as payment for services on Sept 30, 2012
-
-
34,647
34,647
Common stock returned in exchange for payment of convertible debt
(1,500,000)
(1,500)
(23,960)
(25,460)
Common stock and options returned in exchange for warrants October 12, 2012
(2,000,000)
(2,000)
(39,427)
(41,427)
Common stock issued as payment for services December 18, 2012
1,000,000
1,000
29,000
30,000
Issuance of warrants with convertible debt December 17, 2012
95,002
95,002
Common stock returned in exchange for options December 18, 2012
(6,800,858)
(6,801)
6,801
-
Restricted common stock issued as payment for services December 18, 2012
231,000
231
6,699
6,930
Issuance of stock options as payment for services on December 31, 2012
74,189
74,189
Adjustment for common stock returned in 2011
(9)
-
Net loss
(210,536)
(210,536)
Balance at December 31, 2012
-
$
-
156,899,702
$
156,901
$
16,835,095
$
(18,991,438)
$
(1,999,442)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
January 29, 2007,
Inception,
For the Six Months Ended
Through
December 31,
Decmeber 31,
2012
2011
2012
Operating activities:
Net loss
$
(210,536)
$
(801,933)
$
(18,808,327)
Adjustments to reconcile net loss to net cash
-
used in operating activities:
-
Depreciation and amortization
29,703
24,719
130,953
Warrants issued in connection with convertible notes payable
-
-
49,245
Amortization of convertible loan discount
22,126
83,396
452,575
Use of advances against revenue
(223,500)
-
(223,500)
Common stock issued for services
36,930
81,713
11,702,990
Stock option compensation
68,594
-
597,617
Warrants issued for services
-
-
337,359
Change in value of derivatives
(25,430)
(3,536)
(25,240)
Equipment write-down
-
-
5,399
Patent write-down
-
21,758
35,259
Effect of changes in:
-
Inventory
(2,941)
(32,957)
(104,578)
Prepaid expenses and other current assets
-
1,175
(20,516)
Advances to related parties
7,353
(25,560)
67,145
Bank overdraft, net
-
-
(9,500)
Accounts payable and accrued expenses
(76,144)
72,408
250,490
Accrued payroll
269,169
302,029
1,521,625
Advances
(136,533)
-
-
Deferred revenue
(37,508)
100,000
109,936
Net cash used in operating activities
(278,717)
(176,788)
(3,931,068)
Investing activities:
Purchase of property and equipment
(51,182)
(9,343)
(172,926)
Payments for systems
-
-
(152,721)
Payments for patents
(12,654)
(16,878)
(178,288)
Net cash used in investing activities
(63,836)
(26,221)
(503,935)
Financing activities:
Proceeds from (payments on) bank loan borrowings
(349,276)
(103,839)
(0)
Proceeds from sales of preferred stock
-
-
725,000
Proceeds from convertible notes payable
153,000
132,500
624,212
Payments on convertible notes payable
(108,000)
(47,500)
(163,000)
Proceeds from sales of common stock
-
35,000
2,139,690
Payments on related party short-term loans
-
(15,750)
-
Proceeds from related party short-term loans
-
-
100,000
Proceeds from short-term loans
-
100,000
398,521
Advances against sales
625,000
100,000
750,000
Payments of short term loans
(55,000)
(79,000)
Net cash provided by financing activities
265,724
200,411
4,495,423
Net (decrease) increase in cash
(76,829)
(2,598)
60,420
Cash, beginning of period
137,249
14,779
-
Cash, end of period
$
60,420
$
12,181
$
60,420
Supplemental disclosures of cash flow information:
Cash paid for interest
$
40,020
$
39,056
$
302,892
Cash paid for income taxes
$
-
$
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
Accrued dividends issued to preferred stockholders
$
-
$
3,000
$
13,733
Conversion of convertible notes payable and accrued interest to common stock
$
25,460
$
76,044
$
399,233
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2012
Year Ended June 30,
Amount
2013
$
5,289
2014
14,771
2015
22,988
2016
25,536
2017
21,711
Thereafter
42,307
Total
$
132,602
Fair Value
Fair Value Measurements at December 31, 2012
as of
Using Fair Value Heirarchy
Financial Instruments
December 31, 2012
Level 1
Level 2
Level 3
Liabilities:
Derivative liability
$
-  
$
-  
$
-  
$
-  
Total
$
-  
$
-  
$
-  
$
-  
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Derivative Liability
Balance at June 30, 2012
$
6,271 
Total (gains) losses included in interest expense and other
(10,281)
Creation - convertible note issuances
15,149 
Settlements - note conversions
(11,139)
Balance at December 31, 2012
$
-  
December 31,
June 30,
2012
2012
Leasehold improvement
$
2,475
$
2,475
Furniture
26,837
26,837
Office equipment
1,500
1,499
Equipment
68,380
68,380
Systems
186,208
135,027
285,400
234,218
Less: accumulated depreciation and amortization
(125,798)
(98,603)
Property and equipment, net
$
159,602
$
135,615
Weighted-
Average
Weighted-
Remaining
Average
Contractual
Exercise
Life
Options
Price
(Years)
Outstanding June 30, 2012
13,560,957
$ 0.10
8.95
- Granted
9,300,858
0.03
10.00
- Forfeited
(10,000,000)
0.03
4.00
- Exercised
-
-
-
- Expired
-
-
-
Outstanding December 31, 2012
12,861,815
$ 0.10
8.56
Vested at December 31, 2012
11,111,815
Exercisable at December 31, 2012
11,111,815
$ 0.09
9.03
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
11,050,858
9.27
$
0.03
9,300,858
$
0.03
$
0.33
637,297
3.81
$
0.33
637,297
$
0.33
$
0.67
1,173,660
4.13
$
0.67
1,173,660
$
0.67
12,861,815
11,111,815
Weighted-
Average
Weighted-
Remaining
Average
Contractual
Exercise
Life
Warrants
Price
(Years)
Outstanding at June 30, 2012
11,222,287
$
0.42
0.62
Granted
10,833,333
-
-
Exercised
-
-
-
Expired
4,797,991
0.42
-
Outstanding at December 31, 2012
17,257,629
$
0.19
5.10
Vested and expected to vest at December 31, 2012
17,257,629
$
0.19
5.10
Exercisable at December 31, 2012
17,257,629
$
0.19
5.10
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
10,833,333
7.69
$
0.06
10,833,333
$
0.06
$
0.20 - 0.37
1,939,374
0.86
$
0.29
1,939,374
$
0.29
$
0.42 - 0.58
4,484,922
0.69
$
0.47
4,484,922
$
0.47
17,257,629
17,257,629
For the Three Months Ended
December 31,
2012
2011
$ Change
% Change
(Unaudited)
(Unaudited)
Revenue
$
693,788
$
114,154
$
579,634
507.8%
Cost of sales
4,939
23,014
(18,075)
-78.5%
Gross profit
688,849
91,140
597,709
655.8%
General and administrative expenses
404,536
419,450
(14,914)
-3.6%
Research and development expenses
25,690
34,141
(8,451)
-24.8%
Total operating expenses
430,226
453,591
(23,365)
-5.2%
Loss from operations
258,623
(362,451)
621,074
-171.4%
Interest expense and other
(20,133)
(77,197)
57,064
-73.9%
Loss before income taxes
238,490
(439,648)
678,138
-154.2%
Income tax expense
-
-
-
0.0%
Net loss
$
238,490
$
(439,648)
$
678,138
-154.2%
For the Six Months Ended
December 31,
2012
2011
$ Change
% Change
(Unaudited)
(Unaudited)
Revenue
$
693,788
$
114,154
$
579,634
507.8%
Cost of sales
4,939
23,014
(18,075)
-78.5%
Gross profit
688,849
91,140
597,709
655.8%
General and administrative expenses
766,442
701,067
65,375
9.3%
Research and development expenses
65,853
62,205
3,648
5.9%
Total operating expenses
832,295
763,272
69,023
9.0%
Loss from operations
(143,446)
(672,132)
528,686
-78.7%
Interest expense
(67,090)
(129,801)
62,711
-48.3%
Loss before income taxes
(210,536)
(801,933)
591,397
-73.7%
Income tax expense
-
-
-
0.0%
Net loss
$
(210,536)
$
(801,933)
$
591,397
-73.7%
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.
**
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.
SIGNATURE
TITLE
DATE
/s/ Igor Gorodnitsky
President; Member of Board of Directors
February 19, 2013
Igor Gorodnitsky
(Principal Executive Officer)
/s/ N. Voloshin
Principal Accounting Officer
February 19, 2013
N. Voloshin
/s/ Jim Fuller
Audit Committee Chairman, Independent Financial Expert
February 19, 2013
Jim Fuller