Note 7 – Common and Preferred Stock, Options and Warrants
Common
9. Stockholders’ Equity
Authorized shares – As a result of the merger with Bio (see Note 2) the Company was authorized under its Amended and Restated Certificate of Incorporation to issue Common Stock only. On March 17,September 30, 2009, the Company filed Amended and Restated Articleshad received $289,684 in deposits from individuals for the purpose of Incorporation and created two new seriesinvesting into common stock. The amount of preferred stock, the first of which$289,684 is designated Series A Preferred Stock and the second of which is designated as Series B Preferred Stock .. The total number of shares ofreflected in Common Stock whichSubscription Deposit on the accompanying balance sheet as of September 30, 2009. During October 2009, this corporation shall have authority to issue is 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors. Each share of Common Stock and Preferred Stock has a par value of $.001.
Series A Preferred Stock The total number of shares of this preferred stock which this corporation shall have the authority to issue is 5,000,000 shares of Preferred Stock at a purchase price equal to the closing price of the Company’s Common Stock the business day immediately preceding the purchase by the Subscriber. Each share of this preferred stock has a par value of $.001, together with warrants, exercisable for a number of shares of common stock of the Company, $.001 par value per share equal to 100% of the number of shares of Common Stock that would be issuable upon initial conversion of the Preferred Stock, atamount plus an exercise price of $1.25 per share. This stock is convertible into shares of Common Stock of the Company at any time at the election of the holder.
Series B Preferred Stock. 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.
Series A-1 Preferred Stock – As a result of the merger with Bio (see Note 2) the Company no longer has any Preferred Stock authorized or issued except as noted above. Following is a discussion about Preferred Stock issuances prior to the Bio merger.
On March 31, 2008, the Company issued 200,000 units comprised of five shares of its Series A-1 Preferred Stock (total of 1,000,000 preferred shares) and one warrant to purchase one share of common stock at $0.75 per shareadditional $50,216 for a total consideration of $500,000.
On October 3, 2008, the Company issued 210,000 units comprised of five$339,900 was converted to 680,000 shares of its Series A-1 Preferred Stock (total of 1,050,000 preferred shares) and one warrant to purchase one share ofrestricted common stock at $0.75 per share for total proceeds of $525,000, which were placed in escrow. Upon the closing of escrow on October 3, 2008, $400,000 was used to purchase 50.5% of the outstanding shares of Bio (see Note 2), and the remaining $125,000 was distributed to the Company.stock.
On October 24, 2008, in connection with the reverse merger (see Note 2), all shares of Series A-1 Preferred Stock were converted to common shares of Bio. The accompanying financial statements have retroactively shown the recapitalization for all periods presented. As a result, there is no Preferred stock shown in the balance sheets or statements of stockholders’ deficit.
Dividends – The holders of the Series A Preferred Stock and Series A-1 Preferred Stock wereare entitled to receive , out of any funds legally available, therefore, dividends at the rate of $0.12 and $0.05 per share6% per annum, respectively, payable in preference to any payment of any dividend on Common Stock. After payment of such dividends, any additional dividends declaredSeptember 30 and March 30. Dividends shall be payable entirely to the holders of Common Stock. The right of the holders of Series A Preferred Stock to receive dividends shallaccrue and be cumulative and shall accrue to holders of Series A Preferred Stock if such dividends arewhether or not they have been declared. Dividends may be paid in any prior year.
Stock Split - In March 2008, the board of directors approved a 2,100-to-1 forward stock split of the Corporation’s common stock, which was distributed on March 31, 2008 to stockholders of record on January 29, 2007.
On October 24, 2008, the Company entered into a share exchange agreement with Bio in which Bio acquired all of the outstanding shares of the Company’s shareholders (see Note 2). Under the terms of the share exchange agreement, Bio performed a 7.5-to-1 forward stock split of its outstanding shares of common stock.
The common stock activity for all periods presented in the accompanying financial statements have been restated to give retroactive recognition to these stock splits and the conversion to Bio shares. In addition, all references in the financial statements and notes to financial statements to weighted average number of shares, per share amounts, and market prices of the Company’s common stock have been restated to give retroactive recognition to the stock split.
Warrants – On March 31, 2008 in conjunction withcash or through the issuance of 1,000,000 shares of preferred stock, the Company issued 200,000 warrants to purchase shares of common stock at an exercise price of $0.75 per share. The warrants vest immediately and have a contractual life of 5 years. The total value of the warrants issued amounted to $47,879, which has been reflected as a dividend to preferred stockholders in the accompanying financial statements. The value was determined using the Black-Scholes valuation model with input assumptions of (1) volatility of 148%, (2) expected life of 2.5 years, (3) risk free rate of 1.79%, and (4) expected dividends of zero.
On October 3, 2008, in conjunction with the issuance of a total of 1,050,000 shares of Series A-1 Preferred Stock, the Company issued 210,000 warrants to purchase shares of common stock at an exercise price of $0.75 per share. The warrants vest immediately and have a contractual life of 5 years. The total value of the warrants issued amounted to $50,291, which has been reflected as a dividend to preferred shareholders in the accompanying financial statements. The value was determined using the Black-Scholes valuation model with input assumptions of (1) volatility of 148%, (2) expected life of 2.5 years, (3) risk free rate of 1.86%, and (4) expected dividends of zero.
On October 24, 2008, in connection with the Bio transaction (see Note 2), 410,000 warrants in Hydro converted to 279,800 warrants in Bio.
In December 2008, the Company issued an aggregate of 83,333 warrants to purchase shares of the Company’s common stock at an exercise price of $1.50 per share (see Note 8).
On March 17, 2009, , in conjunction with the issuance of a total of 111,111additional shares of Series A Preferred Stock at the Company issued 111,111 warrants to purchase sharesCompany’s option. For the first quarter ending September 30, 2009, accrued dividends of common$1,500 were recognized as interest expense.
Stock Options
There were 750,646 stock at an exercise price of $1.25 per share. The warrants vest immediately and have a contractual life of 3.75 years. The total valueoptions outstanding June 30, 2009 before consideration of the warrants3 for 1 forward stock split which occurred October 12, 2009. There were no options issued amountedduring the first quarter of fiscal 2010. For details on Stock Options, please refer to $20,808. The value was determined using the Black-Scholes valuation model with input assumptions of (1) volatility of 64%, (2) expected life of 3.75 years, (3) risk free rate of 1.70%, and (4) expected dividends of zeroour 10-K submitted September 28, 2009.
10. Share Based CompensationWarrants
On July 21, 2008, the Company adopted the 2008 Stock Option Plan (the “Plan”) that provides for the granting of stock options to certain key employees. The Plan reserves 4,000,000 shares of common stock. Options under the Plan are to be granted at no less than fair market value of the shares at the date of grant.
On August 1, 2008, the Company issued 660,000 stock options to purchase sharesA summary of the Company’s common stock at a weighted average exercise price of $1.68 per share. The options vested immediatelywarrant activity and have a contractual life of 10 years. The total valuerelated information for the quarter ended September 30, 2009 and the year ended June 30, 2009 before consideration of the options issued on August3 for 1 2008 amounted to $194,030,forward stock split which is included in general and administrative expenses in the accompanying statement of operations.occurred October 12, 2009.
On October 1, 2008, the Company issued 15,000 stock options to purchase shares of the Company’s common stock at an exercise price of $1 per share. The options vest immediately and have a contractual life of 10 years. The total value of the options issued on October 1, 2008 amounted to $4,590, which is included in general and administrative expenses in the accompanying statement of operations. | Warrants | | | Weighted Average Exercise Price | |
| Sept 30, 2009 | | | June 30, 2009 | | | Sept, 30, 2009 | | | June 30, 2009 | |
Outstanding, beginning of qtr/year | | 1,510,901 | | | | 136,480 | | | $ | 1.32 | | | $ | 1.10 | |
Granted | | 30,000 | | | | 1,374,421 | | | $ | 1.25 | | | | 1.34 | |
Exercised | | — | | | | — | | | | — | | | | — | |
Forfeited | | — | | | | — | | | | — | | | | — | |
Expired | | — | | | | — | | | | — | | | | — | |
Outstanding — end of qtr/yr. | | 1,540,901 | | | | 1,510,901 | | | $ | 1.32 | | | | 1.32 | |
Exercisable at end of qtr/yr. | | 1,540,901 | | | | 1,510,901 | | | $ | 1.32 | | | $ | 1.32 | |
Weighted average fair value of warrants granted during the qtr/yr.: | $ | 0.17 | | | $ | 0.24 | | | | | | | | | |
On October 24, 2008 675,000 options in Hydro were converted to 460,646 options in Bio (see Note 2)
On October 28 the Company issued 85,000 stock options to purchase shares of the Company’s common stock at an exercise price of $2 per share. The options vest immediately. Of the 85000 options issued, 50,000 have a contractual life of nine months from issuance and the remaining 35,000 have a contractual life of ten years. The total value of the options issued on October 28, 2008 amount to $21, which is included in general and administrative expenses in the accompanying statements of operations.
The fair value of each option awardthe warrants granted during the first quarter of fiscal 2010 is estimated at $5,173. The fair value of these warrants was estimated onat the date of grant using the Black-Scholes option valuationoption-pricing model The expected volatility was based on volatilitieswith the following range of other publicly traded development stage companies inassumptions for the Company’s industry. The expected term of the options granted was estimated to represent the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Assumptions used to calculate the fair value of the options issued are as follows.
fiscal year ended June 30, 2009:
Expected life inLife | | 3.0 years | 0.38 - 5.0 |
Stock price volatilityPrice Volatility | | | 64% -148% | |
Risk free interest rateFree Interest Rate | 0.68% - 1.60% | | 1.6% | |
Expected dividendsDividends | | None |
Forfeiture rate | 0% |
The following summarizes the activity of the Company’s stock options for the nine months ended March 31, 2009:
| | | | | | | | Weighted- | | | | |
| | | | | | | | Average | | | | |
| | | | | Weighted- | | | Remaining | | | | |
| | | | | Average | | | Contractual | | | Aggregate | |
| | | | | Exercise | | | Life | | | Intrinsic | |
| | Options | | | Price | | | (Years) | | | Value | |
| | | | | | | | | | | | | | | |
Outstanding at July 1, 2008 | | - | | | $ | - | | | | - | | | $ | - | |
Granted | | | 545,646 | | | | 1.72 | | | | 9.38 | | | | - | |
Exercised | | | - | | | | - | | | | | | | | | |
Forfeited | | | - | | | | - | | | | | | | | | |
Outstanding at March 31, 2009 | | | 545,646 | | | | 1.72 | | | | 9.38 | | | | - | |
| | | | | | | | | | | | | | | | |
Vested and expected to vest at March 31, 2009 | | | 545,646 | | | | 1.72 | | | | 9.38 | | | | - | |
| | | | | | | | | | | | | | | | |
Exercisable at March 31, 2009 | | | 545,646 | | | | 1.72 | | | | 9.38 | | | | - | |
There were no options exercised as of March 31, 2009. There is no unvested compensation as of March 31, 2009. The weighted average grant date fair value of options granted during the nine months ended March 31, 2009 amounted to $0.26 per share.Note 8 - Income Taxes
11.The Company accounts for income taxes in accordance with ASC 740, Income Taxes
. Under Accounting Principles Board Opinion No. 28,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.
Hydro, in its capacity as the operating company taking over Bio’s income tax positions in addition to its own positions after October 24, 2008 (see Note 2), The Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the combined entityCompany will generate net operating losses in the year ending June 30, 2009,2010, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax has been recorded as of and for the period ended MarchSeptember 30, 2009.
ASC 740-10, Accounting for Uncertainty in Income Taxes, indicates criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in the financial statements. ASC 740-10 includes a higher standard that tax benefits must meet before they can be recognized in a company’s financial statements. As the Company has no uncertain tax positions as defined in ASC 740, there are no corresponding unrecognized tax benefits. Any future changes in the unrecognized tax benefit will have no impact on the Company’s effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months. It is the Company’s policy to classify income tax penalties and interest, if any, as part of general and administrative expense in its Statements of Operations. The Company has not incurred any interest or penalties since inception.
The Company files income tax returns with state and federal jurisdictions. The Company’s state and federal income tax returns for the tax years ended December 31, 2007 and June 30, 2008 are subject to examination by the taxing authorities as of June 30, 2009. The Company has sustained significant net operating losses since inception and has generated corresponding net operating loss carryforwards. We are in the process of evaluating those losses. At June 30, 2009 and 2008, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, we determined that it was not more likely than not that our deferred income tax assets would not be realized. Consequently we have recorded a 100% valuation allowance which is presented as a reduction of our deferred income tax asset which principally arose from our net operating loss carryforwards.
Note 9 - Lease Agreements
On January 9, 2007, the Company entered into a 3-year lease agreement for approximately 6,000 square feet of office space located at 10019 Canoga Ave., Chatsworth, CA 91311. The lease provides for monthly rental payments including parking and utilities of $4,750 for the first 12 months, and cost of living adjustments according to the Consumer Price Index for All Urban Customers at a rate not less than 3% per annum, and not greater than 6% per annum. The lease expires February 15, 2010. As of September 30, 2009, the Company has a security deposit of $9,500 associated with this lease.
Note 10 – Recent Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) change periodically. Changes in such standards may have an impact on the Company’s future financial position. The following are a summary of recent accounting developments.
In February 2007, the FASB issued ASC 825, (formerly SFAS No. 159), The Fair Value Option of Financial Assets and Financial Liabilities. ASC 825 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. ASC 825 is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007. The adoption of ASC 825 did not have a significant impact on the Company’s financial statements.
In December 2007, the FASB issued ASC 810 (SFAS No. 160), Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. ASC 810 establishes accounting and reporting standards for the non—controlling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests of which the Company currently has none. All other requirements of ASC 810 shall be applied prospectively. ASC 810 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 810 did not have a significant impact on the Company’s financial statements.
In December 2007 the FASB issued ASC 805 (formerly SFAS No. 141 revised 2007), Business Combinations, which revises current purchase accounting guidance in ASC 805, Business Combinations. ASC 805 requires most assets acquired and liabilities assumed in a business combination to be measured at their fair values as of the date of acquisition. ASC 805 also modifies the initial measurement and subsequent re-measurement of contingent consideration and acquired contingencies, and requires that acquisition related costs be recognized as expense as incurred rather than capitalized as part of the cost of the acquisition. ASC 805 is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to business combinations occurring after adoption. The impact of ASC 805 on the Company’s financial statements will depend on the nature and extent of the Company’s future acquisition activities.
In March 2008, the FASB issued ASC 815-10-50 (formerly SFAS No. 161 and an amendment of FASB Statement No. 133), Disclosures about Derivative Instruments and Hedging Activities. ASC 815 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. ASC 815 is effective for fiscal years beginning on or after November 15, 2008 with earlier adoption allowed. The adoption of ASC 815 on the Company’s financial statements will depend on the nature and extent of the Company’s future use of hedging and derivatives.
In April 2008 the Financial Accounting Standards Board issued ASC 350-30 (formerly FASB Staff Position No. FAS 142-3) “Determination of the Useful Life of Intangible Assets.” This ASC discusses the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this ASC is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under ASC 805, “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). This ASC is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted this FSP beginning July 1, 2009 and it did not have a significant impact on the Company’s financial position, results of operations, or cash flow.
In May 2008 the FASB issued ASC 470-20 (formerly FSP No. APB 14-1), “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement).” ASC 470-20 addresses instruments commonly referred to as Instrument C which requires the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer's option. ASC 470-20 requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity, and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective application to all periods presented. The adoption of this accounting pronouncement did not have a material effect on our financial statements.
In May 2009 FASB issued ASC 855 (formerly SFAS 165), Subsequent Events effective for interim and annual financial periods ending after June 15, 2009. The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. It also includes the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. It addresses the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This pronouncement had no material impact on the Company’s financial statements.
In June 2009 FASB issued ASC 810 (formerly SFAS 167 which is an amendment to FASB Interpretation No. 46), Consolidation of Variable Interest Entities, to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This Statement requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This Statement eliminates the quantitative-based risks and rewards calculation previously required for determining the primary beneficiary of a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. This pronouncement had no material impact on the Company’s financial statements.
On April 9, 2009 the FASB Issued ASC 825 (formerly Staff Position FAS 107-1 and APB 28-1), Interim Disclosures about Fair Value of Financial Instruments. This requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This ASC also requires those disclosures in summarized financial information at interim reporting periods. This ASC shall be effective for interim reporting periods ending after June 15, 2009. This pronouncement had no material impact on the Company’s financial statements.
In June 2009 FASB issued ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This ASC identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. ASC 105 arranges these sources of GAAP in a hierarchy for users to apply accordingly. The GAAP hierarchy will include only two levels of GAAP: authoritative and non-authoritative. This Codification supersedes all existing non-SEC accounting and reporting standards. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the Board’s view, the adoption of this ASC will not change GAAP, and as a result, will not have a material impact on the company’s financial statements.
Note 11 – Subsequent Events
In accordance with ASC 855, “Subsequent Events”, the Company has performed a review of events subsequent to the balance sheet date through November 13, 2009, the date that the consolidated financial statements were issued.
On September 24, 2009, our Board of Directors authorized an increase in authorized common shares from 100,000,000 to 1,000,000,000 as well as a 3 for 1 forward split of our common shares. The stock split requires retroactive restatement of all historical shares outstanding. The accompanying Statement of Changes to Stockholder’s Deficit was restated to give retroactive recognition of the forward stock split. All references to the number of shares in the Consolidated Financial Statements are presented on a pre-split basis. On October 7, 2009, we filed an amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada to authorize and increase the number of authorized shares of common stock to 1,000,000,000 (par value $0.001) and to effect a 3 for 1 forward split of all outstanding shares. The effective date for the forward split was October 12, 2009.
ItemITEM 2. Management’s Discussion and Analysis or Plan of Operation.Financial Condition and Results of Operations.
The following discussion and analysis of should be read in conjunction with the Company’sour financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Overview
Hydrodynamic Technology, Inc. dba Cavitation Technologies, Inc (Company) was incorporated January 29, 2007, in California. We have one office in Chatsworth, California.
We are a development stage enterprise that designs and engineers NANO technology based systems that use our patents pending, multi-stage, continuous flow-through, hydrodynamic cavitation reactors. We are a “GreenTech” company whose goal is primarily engagedto monetize our patent pending technologies that we feel have unique, useful, and environmentally friendly commercial applications in markets such as vegetable oil refining, renewable fuels, water recycling and desalination, alcoholic beverage enhancement, water-oil emulsions, and crude oil yield enhancement. Research and development has led to products which include the development ofGreen D De-gumming System, a bio-diesel fuel productionvegetable oil refining system, (Bioforce 9000 and the Reactor Skid). The initial focus of the Company’s research and development is the generation of products for our target market of US and International bio-diesel producers. We expect that the first commercial installation of the Bioforce 9000 reactor skid system will be operational in May of 2009 in Moberly, Missouri. The Company’s success will depend in part on its ability to obtain patents, maintain trade secrets, and operate without infringing onNANO Reactor Skid System which performs the proprietary rights of others, both in the United States and other countries. There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company.
Results of Operations for the Three Months Ended March 31, 2009 and 2008
The following is a comparison of the results of operations for the Company for the three months ended March 31, 2009 and 2008.
| | Three Months Ended | | | | | | | |
| | March 31, | | | | | | | |
| | 2009 | | | 2008 | | | $ Change | | | % Change | |
| | | | | | | | | | | | | | | | |
General and administrative expenses | | $ | 460,170 | | | $ | 81,694 | | | $ | 388,607 | | | | 463.3 | % |
Research and development expenses | | | 79,079 | | | | 1,848,567 | | | | (1,769,488 | ) | | | -95.7 | % |
Total operating expenses | | | 539,249 | | | | 1,930,261 | | | | (1,391,012 | ) | | | -72.1 | % |
Loss from operations | | | (539,249 | ) | | | (1,930,261 | ) | | | 1 ,391,012 | ) | | | -72.1 | % |
Interest expense | | | (48,593 | ) | | | (10,101 | ) | | | (38,493 | ) | | | 381.1 | % |
Loss before income taxes | | | (587,842 | ) | | | (1,940,362 | ) | | | 1 ,352,520 | | | | -69.7 | % |
Income tax expense | | | - | | | | - | | | | - | | | | 0.0 | % |
Net loss | | $ | (587,842 | ) | | $ | 1,940,362 | ) | | $ | 1 ,352,520 | | | | -69.7 | % |
Sales
We had no sales for the three months ended March 31, 2009 or 2008. We expect to be able to achieve salestransesterification process during the fiscal year ending June 30, 2009.
General and Administrative Expenses
Our general and administrative expenses increased by $388,607, or 543%, forproduction of biodiesel. We believe the three months ended March 31, 2009 as compared to 2008. In 2009, we issued shares of common stock to consultants in payment for their services to the Company which resulted in expenses of $183,400. We had no such expenses in 2008. In addition, we incurred increased salary and related expenses of approximately $157,075 in 2009 resulting from the Company having more employees. We also incurred increased legal and accounting fees of approximately $61,442 in 2009 due primarily to expenses incurred in conjunction with the Company’s reverse merger transaction and costs associated with management engaging an outside accounting consultant during the quarter ended March 31, 2009.
Research and Development Expenses
Our research and development expenses decreased by $1,769,488, or 96% for the three months ended March 31, 2009 as compared to 2008. The decrease resulted from fewer costs associated with the Company’s fabrication and prototype development
Interest Expense
Interest expense for the three months ended March 31, 2009 increased by $38,493 to $48,593 as compared to 2008.
Results of Operations for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008
| | Nine Months Ended | | | | | | | |
| | March 31, | | | | | | | |
| | 2009 | | | 2008 | | | $ Change | | | % Change | |
| | | | | | | | | | | | |
General and administrative expenses | | $ | 1,469,702 | | | $ | 118,533 | | | $ | 1,351,169 | | | | 1139.9 | % |
Research and development expenses | | | 257,625 | | | | 1,858,795 | | | | (1,601,170 | ) | | | -86.1 | % |
Total operating expenses | | | 1,727,327 | | | | 1,977,328 | | | | (250,001 | ) | | | -12.6 | % |
Loss from operations | | | (1,727,327 | ) | | | (1,977,328 | ) | | | 250,001 | | | | -12.6 | % |
Interest expense | | | (69,912 | ) | | | (36,579 | ) | | | (33,333 | ) | | | 91.1 | % |
Loss before income taxes | | | (1,797,239 | ) | | | (2,013,907 | ) | | | 2 16,668 | | | | -10.8 | % |
Income tax expense | | | - | | | | - | | | | - | | | | 0.0 | % |
Net loss | | $ | (1,797,239 | ) | | $ | (2,013,907 | ) | | $ | 2 16,668 | | | | -10.8 | % |
Sales
We had no sales for the nine months ended March 31, 2009 or 2008. In December 2008, we received a deposit for the saleapplication of our first operational bio-diesel production system. As the specifics of the sale had not yet been finalized, we deferred this revenue until such time as we have a fully documented contract of sale. We believe this will be during our fiscal fourth quarter ending June 30, 2009.
Generaltechnology can dramatically reduce operating costs and Administrative Expenses
improve yields in comparison to competitive solutions. Our generalheadquarters and administrative expenses increased by $1,351,169, or 1,140%, for the nine months ended March 31, 2009 as compared to 2008. In 2009, we issued shares of common stock to consultantsonly office is in payment for their services to the Company which resulted in expenses of $638,000. We had no such expenses in 2008. We also issued stock options to employees as compensation in 2009 resulting in increased expense of $198,620. We had no such expenses in 2008. In addition, we incurred increased salary and related expenses of approximately $285,744 in 2009 resulting from the Company having more employees. We also incurred increased legal and accounting fees of approximately $177,450 in 2009 due primarily to expenses incurred in conjunction with the Company’s reverse merger transaction and costs associated with management engaging an outside accounting consultant during the quarter ended March 31, 2009.
Research and Development Expenses
Our research and development expenses decreased by $1,601,170, or 86% for the nine months ended March 31, 2009 as compared to 2008. The decrease related primarily to fewer costs associated with fabrication and prototype development.
Interest Expense
Interest expense increased by $33,333, or 91.1% for the nine months ended March 31, 2009 as compared to 2008. Interest expense for the nine months ended March 31, 2009 increased as compared to 2008 primarily as a result of the Company’s amortization of convertible debt issued in December 2008 and in February 2009 in the amount of $40,146. We had no such expenses in 2008.
Liquidity and Capital Resources
Our principal source of funds has been from borrowings under a line of credit agreement, as well as money raised from the sale of preferred stock. At March 31, 2009, we had borrowings of $636,917 compared with $627,856 at June 30, 2008. In addition, on March 31, 2008, we raised $500,000 through the sale of 1,000,000 shares of our preferred stock and on October 3, 2008, we raised $125,000 through the sale of 1,050,000 shares of our preferred stock. We also raised an additional $125,000 through the issuance of convertible notes payable in December 2008 and an additional $110,000 through the issuance of convertible notes payable in February 2009. We raised an additional $100,000 in March 2009 through the sale of 111,111 shares of our Series A preferred stock
As of March 31, 2009, we had cash of $2,084 as compared to $310,929 at June 30, 2008. The decrease in cash is primarily due to the cash used in operations for the nine months ended March 31, 2009.
As of March 31, 2009, our total current liabilities, excluding our outstanding line of credit balance and convertible notes payable, were $167,943, compared to $56,706 at June 30, 2008. Current liabilities at March 31, 2009 included accounts payable, accrued liabilities and deferred revenue, and represented primarily outstanding amounts for deferred revenue, salaries and professional fees.Chatsworth, California.
We have no significant operating history and from January 29, 2007 (inception),(date of inception) through March 31,September 30, 2009, we have generated a net loss of $4,479,020.losses aggregating $8,402,194. Management’s plan is 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 companyCompany may curtail its operations.
Recently Issued Accounting PronouncementsOur success depends in part on our ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others both in the United States and other countries. We have seven patent applications pending in the US along with three PCT applications. We intend to apply for new patents on a regular basis. Our patents pending apply to potential commercial applications in markets such as vegetable oil processing, renewable fuels production, water recycling and desalination, water–oil emulsions, crude oil yield enhancement, water-oil emulsions, blending systems, alcoholic beverage enhancement, and algae processing. There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company.
We are a public company with stock traded on the Over the Counter Bulletin Board with ticker symbol CVAT. Our stock is also traded on the Stuttgart Stock Exchange with symbol WTC. Our only location is our headquarters in Chatsworth, California. We have four employees and have engaged approximately 40 consultants and independent contractors over the past two years.
Results of Operations
In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No, 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements for nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 will be effective 60 days following the SEC’s approval. The Company does not expect that this statement will result inis a change in current practice.comparison
In April 2008, the Financial Accounting Standards Board, or FASB issued FASB Staff Position (“FSP”) No. FAS 142-3 “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company will adopt this FSP beginning July 1, 2009 and it is not believed that this will have an impact on the Company’s financial position, results of operations or cash flows.
In May 2008,for the FASB issued FSP No. APB 14-1, “AccountingCompany for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 addresses instruments commonly referred to as Instrument C from Emerging Issues Task Force No. 90-19, which requires the issuer to settle the principal amount in cashthree months ended September 30, 2009 and the conversion spread in cash or net shares at the issuer's option. FSP APB 14-1 requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity, and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, and requires retrospective application to all periods presented. Early application is not permitted. Management is currently evaluating the impact of the adoption of this statement; however, but believes any impact with respect to future debt transactions could be material.2008.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008, with earlier adoption allowed. We do not anticipate that the adoption of this accounting pronouncement will have a material effect on our financial statements. | | Three Months Ended | | | | | | | |
| | September 30, | | | | | | | |
| | 2009 | | | 2008 | | | $ Change | | | % Change | |
| | | | | | | | | | | | | | | | |
General and administrative expenses | | $ | 3,077,874 | | | $ | 348,946 | | | $ | 2,728,928 | | | | 782 | % |
Research and development expenses | | | 62,965 | | | | 129,875 | | | | (66,910 | ) | | | -52 | % |
Total operating expenses | | | 3,140,839 | | | | 478,821 | | | | 2,662,018 | | | | 556 | % |
Loss from operations | | | (3,140,839 | ) | | | (478,821 | ) | | | (2,662,018 | ) | | | 556 | % |
Interest expense | | | (83,582 | ) | | | (9,637 | ) | | | (73,945 | ) | | | 767 | % |
Loss before income taxes | | | (3,224,421 | ) | | | ( 488,458 | ) | | | (2,735,963 | ) | | | 560 | % |
Income tax expense | | | - | | | | - | | | | - | | | | 0.0 | % |
Net loss | | $ | (3,224,421 | ) | | $ | (488,458 | ) | | $ | (2,735,963) | | | | 560 | % |
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effectiveWe had no revenue for the Companythree months ended September 30, 2009 or 2008. For the three month period ended September 30, 2009, we recorded Deferred Income of $7,480 as a deposit for fiscal years beginning January 29, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the non—controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests, of which the Company currently has none. All other requirements of SFAS No. 160 shall be applied prospectively. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company anticipates that SFAS No. 160 will not have any significant impact on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, which revises current purchase accounting guidance in SFAS 141, Business Combinations. SFAS No. 141R requires most assets acquired and liabilities assumed in a business combinationpotential future sale/lease/license. We expect to be measured at their fair values as of the date of acquisition. SFAS No. 141R also modifies the initial measurement and subsequent remeasurement of contingent consideration and acquired contingencies, and requires that acquisition related costs be recognized as expense as incurred rather than capitalized as part of the cost of the acquisition. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and isable to be applied prospectively to business combinations occurring after adoption. The impact of SFAS No. 141R on the Company’s financial statements will depend on the nature and extent of the Company’s future acquisition activities.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option of Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 did not have any significant impact on the Company’s financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. FAS-158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. The provisions of SFAS No. 158 are effective for the Company as of the end ofachieve revenue during the fiscal year ending June 30, 2008. The adoption of SFAS No. 158 did not have any significant impact on the Company’s financial statements.2010.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants,General and the United States Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.Administrative Expenses
We do not believe that the adoption of the above recent pronouncements will have a material effect on the Company’s consolidated results of operations, financial position, or cash flows.
Critical Accounting Policies
The foregoing discussionOur general and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial statements.
Basis of Presentation
On October 24, 2008, the Company effected a transaction with Bio Energy, Inc., a non-operating shell company (“Bio”) (the “Transaction”)
From a legal perspective, Bio acquired Hydro. However from an accounting perspective, the Transaction is viewed as a recapitalization of Hydro accompanied by an issuance of stock by Hydroadministrative expenses increased $2,728,928 for the net assets of Bio.three months ended September 30, 2009. This is because Bio did not have operations immediately prior to the merger, and following the merger, Hydro is the operating company. Hydro's officers and directors will serve as the officers and directors of the new combined entity.
Given these circumstances, the Transaction is accounted for as a capital transaction rather than as a business combination. That is, the Transaction is equivalentattributable largely to the issuance of stock by Hydro for the net assets of Bio, accompanied by a recapitalization. The accounting5,700,000 common shares (pre-split) distributed as incentive and valued at $4,560,000 (of which $2,587,871 is identicalexpensed in this quarter) to that resulting from a reverse acquisition. Because the Transaction is accounted for as a capital transaction,consultants, service providers and it occurred priorother key personnel who contributed to the filingsuccess of this Form 10-Q, these financial statements represent the financial conditionCompany. We had no such expenses in 2008. The other two major expenses in the first quarter of fiscal 2010 were consulting fees of $296,022 and resultsprofessional fees of operations$125,981 for legal, audit, and accounting. This compares with no consulting fees and $56,186 in professional fees in the first quarter of Hydro.fiscal 2009.
Use of Estimates6
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. We use estimates in valuing our stock options, warrants and common stock issued for services, among other items.
Research and Development Costs
Research and development costs consistDevelopment
R&D declined from $129,875 to $62,965 as we focused more resources on advertising and marketing our existing products and fewer resources on developing potential commercial products. Nevertheless, we did continue to conduct R&D on our NANO Technology for potential commercial applications in markets such as vegetable oil refining, water recycling and desalination, alcoholic beverage enhancement, crude oil yield enhancement, and water-diesel emulsion.
Interest Expense
Interest expense increased 767% to $83,582 with $63,601 attributable to amortization of expendituresdiscount on convertible debt. This amount arose as we converted the debt into restricted common shares at a 25% discount to the market price. Interest charges on our bank loan amounted to $17,556 as the bank line of credit converted to a 1-year loan with equal monthly payments of $7,396 starting August 1, 2009. Interest charges of $9,637 for the researchfirst quarter in fiscal 2009 were attributable to our bank line of credit.
Liquidity and development of new product lines and technology. These costs are primarily payroll and payroll related expenses and costs of various sample parts. Research and development costs are expensed as incurred.Capital Resources
Cash
As of September 30, 2009, we had cash of $7,029 compared to $5,038 at June 30, 2009.
Working Capital
As of September 30, 2009 total current liabilities, excluding the aforementioned bank loan, were $796,224, compared to $608,615 at June 30, 2009. This increase is attributable largely to Common Stock Subscription Deposit of $289,684 which represents deposits from individuals to be converted to common stock. The Common Stock Subscription Deposit of $289,684 partially off-sets the $180,000 convertible debt converted into shares as discussed above. Accrued salary for the president of the company increased to $249,955 from $202,590. Accounts payable increased to $172,378 from $109,311.
Convertible Notes Payable
On August 17, 2009, $180,000 in convertible notes payable plus $10,803 in accrued interest were converted into 374,125 shares of restricted common stock (pre-3 for 1 split). Immediately prior to the conversion, the Company changed the conversion rate to be equal to 75% of the average closing price of the Company’s stock for the 10 days immediately preceding the conversion request. This 25% discount from the market price amounted to $63,601 and was recognized as Interest Expense in the Consolidated Statement of Operations.
Bank Line of Credit
At September 30, 2009, we had borrowings of $627,876 from the National Bank of California versus $636,917 on June 30, 2009 on a line of credit from the same bank. On August 1, 2009, the previous revolving line of credit was replaced by a one-year variable rate loan which matures August 1, 2010. This loan bears interest at Prime + 2.75% with equal monthly installments of $7,396 beginning September 1, 2009. A final payment of $599,322 is due August 1, 2010. This loan is secured by personal guarantees of the Company’s principals and assets.
Common Stock
In addition to the 374,125 shares (pre-split) mentioned above, under Convertible Notes Payable, we also issued 5,700,000 common shares (pre-split) distributed as incentive and valued at $4,560,000 (of which $2,587,8721, is expensed in the current quarter) to consultants, service providers and others. We also issued 279,337 common shares (pre-split) valued at $217,411 for services rendered.
Cash Flow
Net Cash Used in Operating Activities amounted to $237,632 in the first quarter of fiscal 2010 compared with $235,071 for the same 3-month period in fiscal 2009.
It is our intent to raise additional debt and/or equity financing to fund operations. In addition, we expect to fund our operations from revenue generated in fiscal 2010. 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 we fail to obtain such financing, the company may curtail its operations.
ItemITEM 3. Quantitative and Qualitative Disclosures Aboutabout Market RiskRisk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item pursuant to paragraph (e) of Regulation S-K. item.
ItemITEM 4. Controls and Procedures
Management’s Report on Internal Control over Financial ReportingDisclosures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as of March 31,June 30, 2009, the end of the period covered by this quarterlyannual report. Based on their evaluation, our principal executive officer and principal financial officer concluded that, due to the existence of material weaknesses, our disclosure controls and procedures are not effective as of March 31,June 30, 2009.
Report of Management identifiedon Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material weaknesses which were reportedeffect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“the Exchange Act”). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Current Report on Form 8-K, filed withExchange Act reports is (1) recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission on November 14, 2008, under Risk FactorsCommission’s rules and Management's Discussionforms and Analysis(2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our Principal Executive Officer and Principal Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of Financial Conditionachieving their objectives and Resultsour principal executive and financial officer have determined that our disclosure controls and procedures are not effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of Operations. Therethe system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no changes to the identified material weaknesses.assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
In an effort to mitigate and remediate someassessing the effectiveness of these material weaknesses, management engaged an outside accounting consultant during the quarter ended March 31, 2009. In addition, we have started to identify ways to improve our standards and procedures, including upgrading and establishing controls over the accounting system to ensure we have appropriate internal control over financial reporting.
reporting, we use the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Based on the evaluation,our assessment using those criteria, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, there have been no changeswe concluded that for the period ending June 30, 2009, our internal controls over financial reporting are ineffective. We are searching for additional capital in order to be in a position to address these material weaknesses. We are also assessing how we can improve our internal control over financial reporting duringwith the current employees in an effort to remedy these deficiencies. This annual report does not include an attestation report of our last fiscal quarter, identified in connection with that evaluation, that has materially affected, or is reasonably likely to materially affect, ourindependent registered public accounting firm regarding internal control over financial reporting.
There were no significant changes in the Company’s internal controls over financial reporting or in other factors during the three months ended September 30, 2009 that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. We are continuing our efforts in these regards in order to fully remedy previously reported material weaknesses and to ensure that all of our controls and procedures are adequate and effective.
PART II
– OTHER INFORMATION
Item 1.1 Legal Proceedings
We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
On October 24, 2008, Bio Energy, Inc, completed an acquisition of all the outstanding shares of Hydrodynamic Technology, Inc, In connection with this transaction, Bio Energy, Inc.We issued 18,750,000 shares of its commonno stock to investors in the shareholdersfirst quarter of Hydrodynamic Technology, Inc. in exchange for all the outstanding shares of Hydrodyanamic Technology, Inc.fiscal 2010.
On March 17, 2009, the Company issued 111,111 shares of Series A Preferred Stock along with a warrant to purchase 111,111 shares of Common Stock at a purchase price of $1.25 per share. The common stock and the warrant were issued to a foreign accredited investor for a purchase price of $100,000.00
Item 3 – Defaults Upon Senior Securities
None
Item 4 – Submission of Matters to a vote of Securities Holders.
On October 6, 2008, we amended our certificateSeptember 24, 2009, the Board of incorporationDirectors authorized an increase in outstanding common shares from 100,000,000 to (i) change our name from Bio Energy, Inc. to Cavitation Technologies, Inc.; (ii) effect1,000,000,000 (par value $0.001as well as authorizing a 7.53 for 1 forward split of our outstanding securities and (iii) increase our authorized shares of Common Stock to 100,000,000. We submitted the matter to our shareholder via written consent and acommon shares. A majority of the outstanding sharesshareholders voted in favor of the amendment.forward split. The articles of incorporation were amended and submitted to the Secretary of State of the State of Nevada on October 7, 2009. The forward split became effective October 12, 2009 in the State of Nevada and was declared effective by FINRA on October 28, 2009. We have incorporated the impact of the forward split into these financial statements.
On March 16, 2009, we amended our certificate of incorporation to (i) increase the number of authorized shares to 110,000,000; (ii) designate 5,000,000 shares as Series A Preferred Stock and (iii) designate 5,000,00 shares as Series B Preferred Stock with the rights, preferences and privileges to be determined by the Board. We submitted the matter to our shareholder via written consent and a majority of the outstanding shares voted in favor of the amendment.
Item 5 – Other Information
None
Item 6 – Exhibits
The following documents are filed as part of this report:
Consolidated balance sheets September 30, 2009 and June 30, 2009
Consolidated statements of operations — Quarter ended September 30, 2009 and September 30, 2008, and the period from January 29, 2007 (date of inception) through September 30, 2009
Consolidated statements of changes in stockholders’ deficit — Period from January 29, 2007 (date of inception) through September 30, 2009
Consolidated statements of cash flows — Quarter ended September 30, 2009 and September 30, 2008, and the period from January 29, 2007 (date of inception) through September 30, 2009
Notes to consolidated financial statements — September 30, 2009
The following exhibits are included as a part of this report by reference:
3.1 Amendment to Certificate of Incorporation
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In accordance with article 8 of regulation S-X, CTI is a Smaller Reporting Company and financial schedules are not required for Smaller Reporting Companies.
SIGNATURES