UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark (Mark
One)		  
þ
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended September 30,December 31, 2009
 
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from          to
 
Commission File Number: 0-29901
 
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
 
Nevada 20-4907818
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of Principal Executive Offices)
 
(818) 718-0905
(Registrant’s telephone number, including area code)
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of Each Class: Name of Each Exchange on Which Registered:
None Over the Counter (Bulletin Board)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o      No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

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 such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.101 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o    Accelerated Filer o   Non-Accelerated Filer o     Smaller Reporting Company  x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 Yes o     No x

State the aggregate market value of the voting and non -voting common equity held by non-affiliates of the registrant by reference to the price at which the common equity was last sold, or of the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completely second fiscal quarter: $33,204,808$26,216,684 as of December 31, 20082009 based on the closing price of $1.17$0.23 per share and 28,380,178113,985,584 shares outstanding.  

The registrant had 28,380,178114,165,048 shares of Common Stock, par value $0.001 per share, outstanding at December 31, 2008 and 111,315,348 shares of common stock outstanding on November 15, 2009 after accounting for our 3 for 1 forward stock split which occurred October 12,January 22, 2009.  .

DOCUMENTS INCORPORATED BY REFERENCE:
None.

FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED DECEMBER 31, 2009
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS4
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS17
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK22
ITEM 4.CONTROLS AND PROCEDURES22
PART II – OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS23
 ITEM 1A RISK FACTORS     23
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS23
ITEM 3.DEFAULTS UPON SENIOR SECURITIES23
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS23
ITEM 5.OTHER INFORMATION23
ITEM 6.EXHIBITS       23

2
 
Note Regarding Forward Looking Statements

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain statements relating to future results of Cavitation Technologies, Inc. (including certain projections and business trends) that are “forward-looking statements”. Our actual results may differ  materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“SEC”) filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward-looking statements contained in this quarterly report by the foregoing cautionary statements.

3

PART I – FINANCIALINFORMATIONI: FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CAVITATION TECHNOLOGIES, INC.
(a Development Stage Company)
Consolidated Balance Sheets
  (Unaudited)    
  September 30,  June 30, 
  2009  2009 
       
ASSETS      
       
Current assets:      
Cash and cash equivalents $7,029  $5,038 
Prepaid expenses and other current assets  1,875   2,341 
Total current assets  8,904   7,379 
         
Property and equipment, net  80,234   62,753 
Other assets  9,500   9,500 
Total assets $98,638  $79,632 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
Current liabilities:        
Accounts payable and accrued expenses $473,060  $382,615 
Deferred revenue  33,480   26,000 
Convertible notes payable, net of discounts  -   200,000 
Common stock subscription deposit  289,684   - 
Line of credit  -   636,917 
Loan payable  627,876   - 
Total current liabilities  1,424,100   1,245,532 
         
         
Commitments and contingencies        
         
Stockholders' deficit:        
Preferred stock ,$0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding as of September 30, 2009 and June 30, 2009  111   111 
Common stock, $0.001 par value, 1,000,000,000 shares authorized,  108,044,979 shares and 88,984,593 shares issued and outstanding as of September 30, 2009 and June 30, 2009, respectively  36,014   29,661 
Additional paid-in capital  7,207,432   4,148,926 
Deficit accumulated during the development stage  (8,569,019)  (5,344,598)
Total stockholders' deficit  (1,325,462)  (1,165,900)
Total liabilities and stockholders' deficit $98,638  $79,632 
See accompanying notes, which are an integral part of these financial statements
CAVITATION TECHNOLOGIES, INC.
(a Development Stage Company)
Consolidated Statements of Operations (Unaudited)
        January 29, 2007, 
  Three Months Ended  Three Months Ended  
Inception,
Through
 
  September 30,  September 30,  September 30, 
  2009  2008  2009 
          
General and administrative expenses $3,077,874  $348,946  $5,664,617 
Research and development expenses  62,965   129,875   2,501,463 
Total operating expenses  3,140,839   478,821   8,166,080 
Loss from operations  (3,140,839)  (478,821)  (8,166,080)
Interest expense  (83,582)  (9,637)  (236,114)
Loss before income taxes  (3,224,421)  (488,458)  (8,402,194)
Income tax expense  -   -   - 
Net loss $(3,224,421) $(488,458) $(8,402,194)
             
Net loss available to common stockholders per share:            
Basic and Diluted $(0.03) $(0.01)    
             
Weighted average shares outstanding:            
Basic and Diluted  103,111,510   56,720,883     
See accompanying notes, which are an integral part of these financial statements
FINANCIAL STATEMENTS
 
CAVITATION TECHNOLOGIES, INC.
(a Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited)Balance Sheets

  Preferred Stock  Common Stock  
Additional
Paid-In
  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                      
Issuance of common stock for services on January 29, 2007, inception -  $ -   42,993,630  $14,331  $6,669  $-  $21,000 
Net loss                            (533,185)  (533,185)
                           
Balance at December 31, 2007  -  $-   42,993,630  $14,331  $6,669  $(533,185) $(512,185)
                             
Common stock sold for cash          2,047,314   682   499,318       500,000 
Common stock issued as payment for services          10,369,650   3,457   1,819,943       1,823,400 
Amortization of discount on convertible preferred stock                  47,879   (47,879)  - 
Net loss                                (2,148,597)  (2,148,597)
                             
Balance at June 30, 2008  -  $-   55,410,594  $18,470  $2,373,809  $(2,729,661) $(337,382)
                             
Preferred stock sold in connection with reverse merger for cash          2,149,560   717   124,283       125,000 
Preferred stock sold for cash  111,111   111           99,889       100,000 
Preferred stock - Beneficial Conversion Feature                  11,111   (11,111)  - 
Bio shares outstanding before reverse merger          27,840,534   9,280   (9,280)      - 
Common stock issued as payment for services          1,983,909   661   639,012       639,673 
Common stock sold for cash          1,599,996   533   299,467       300,000 
Warrants issued in connection with issuance of convertible debt                  49,245       49,245 
Amortization of discount on conversion of preferred stock                  107,835   (107,835)  - 
Warrants issued as payment for services                  146,043   -   146,043 
Stock option compensation                  307,512       307,512 
Net loss                                (2,495,991)  (2,495,991)
                             
Balance at June 30, 2009  111,111  $111   88,984,593  $29,661  $4,148,926  $(5,344,598) $(1,165,900)
                             
Common stock issued as payment for services          17,938,011   5,979   2,799,303       2,805,282 
Common stock issued for debt and accrued interest conversion          1,122,375   374   190,429       190,803 
Conversion feature on notes payable                  63,601       63,601 
Warrants issued as payment for services                  5,173       5,173 
Net loss                                (3,224,421)  (3,224,421)
                             
Balance at September 30, 2009  111,111  $111   108,044,979  $36,014  $7,207,432  $(8,569,019) $(1,325,462)
See accompanying notes, which are an integral part of these financial statements
CAVITATION TECHNOLOGIESY, INC.
(a Development Stage Company)
Statements of Cash Flows (Unaudited)
        January 29, 2007, 
        Inception, 
  Three Months Ended  Three Months Ended  
Through
September 30,
 
  September 2009  September 2008  2009 
          
Operating activities:         
Net loss $(3,224,421) $(488,458) $(8,402,194)
Adjustments to reconcile net loss to net cash            
used in operating activities:            
Depreciation and amortization  3,539   1,131   16,157 
Warrants issued in connection with convertible notes payable  -   -   49,245 
Common stock issued for services  2,805,282   -   5,289,699 
Stock option compensation  -   194,030   307,512 
Warrants issued for services  5,173   -   151,216 
Amortization of loan discount  63,601   -   63,601 
Effect of changes in:            
Prepaid expenses and other current assets  466   (4,273)  (1,876)
Deposits  -   -   (9,500)
Accounts payable and accrued expenses  101,248   62,499   483,521 
Deferred revenue  7,480   -   33,480 
Net cash used in operating activities  (237,632)  (235,071)  (2,019,139)
             
Investing activities:            
Purchase of Property and Equipment  (21,020)  -   (96,392)
Net investing activities  (21,020)  -   (96,392)
             
Financing activities:            
Proceeds from line of credit borrowings  -   9,061   636,917 
Payments on line of credit  (9,041)      (9,041)
Proceeds from sales of preferred stock  -   -   725,000 
Payments on convertible notes payable  (20,000)  -   (55,000)
Proceeds from convertible notes payable  -   -   235,000 
Proceeds from sale of common stock/subscription  289,684   -   589,684 
           - 
Net cash provided by financing activities  260,643   9,061   2,122,560 
             
Net increase (decrease) in cash  1,991   (226,010)  7,029 
Cash, beginning of period  5,038   310,929     
Cash, end of period $7,029  $84,919  $7,029 
             
Supplemental disclosures of cash flow information:            
Cash paid for interest $20,201  $9,637  $123,488 
Cash paid for income taxes  -   -   3,469 
             
Supplemental disclosure of non-cash investing and financing activities:             
Warrants issued in connection with preferred stock  $ -  $-  $155,714 
Beneficial conversion feature of preferred stock $-  $-  $11,111 
Conversion of preferred to common stock in reverse merger $-  $-  $625,000 
Proceeds from sales of preferred stock used to purchase shares of Bio  $ -  $-  $400,000 
Conversion of notes payable in to common stock  $ 190,803  $-  $190,803 
  (Unaudited)    
   December 31,  June 30, 
   2009  2009 
  
ASSETS 
       
Current assets:      
Cash and cash equivalents $10,476  $5,038 
Prepaid expenses and other current assets  352   2,341 
Total current assets  10,828   7,379 
         
Property and equipment, net  75,833   62,753 
Other assets  9,500   9,500 
Total assets $96,161  $79,632 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT 
         
Current liabilities:        
Accounts payable and accrued expenses $506,976  $382,615 
Deferred revenue  33,480   26,000 
Convertible notes payable, net of discounts  -   200,000 
Common stock subscription deposit  9,870   - 
Short term loan  18,500   - 
Line of credit  550,146   636,917 
Total current liabilities  1,118,972   1,245,532 
         
Commitments and contingencies        
         
Stockholders' deficit:        
Preferred stock $0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding at December 31, 2009 and June 30, 2009.  111   111 
Common stock, $0.001 par value,  1,000,000,000 shares authorized, 113,985,584 and 88,984,593 shares issued and outstanding at December 31, 2009 and June 30, 2009, respectively.  41,955   29,661 
Additional paid-in capital  8,855,831   4,148,926 
Deficit accumulated during the development stage  (9,920,708)  (5,344,598)
Total stockholders' deficit  (1,022,811)  (1,165,900)
Total liabilities and stockholders' deficit $96,161  $79,632 
 
See accompanying notes, which are an integral part of these financial statementsstatements.
 
4
CAVITATION TECHNOLOGIES, INC.

Statements of Operations (Unaudited)

        January 29, 2007, 
         Inception, 
   Three Months Ended  Six Months Ended  Through 
   December 31,  December 31,  December 31, 
  2009  2008  2009  2008  2009 
                
General and administrative expenses $1,249,554  $660,586  $4,327,428  $1,009,532  $6,914,171 
Research and development expenses  91,968   48,671   154,933   178,546   2,593,431 
Total operating expenses  1,341,522   709,257   4,482,361   1,188,078   9,507,602 
Loss from operations  (1,341,522)  (709,257)  (4,482,361)  (1,188,078)  (9,507,602)
Interest expense  (10,167)  (11,681)  (93,749)  (21,318)  (246,281)
Loss before income taxes  (1,351,689)  (720,938)  (4,576,110)  (1,209,396)  (9,753,883)
Income tax expense  -   -   -   -   - 
Net loss $(1,351,689) $(720,938) $(4,576,110) $(1,209,396) $(9,753,883)
Preferred stock dividend  (1,500)  (50,756)  (3,000)  (50,756)    
Net loss available to common stockholders $(1,353,189) $(771,694) $(4,579,110) $(1,260,152)    
                     
Net loss available to common stockholders per share:                    
Basic and Diluted $(0.01) $(0.01) $(0.04) $(0.02)    
                     
Weighted average shares outstanding:                    
Basic and Diluted  111,567,617   77,416,140   107,253,064   67,068,510     

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

5

Cavitation Technologies, Inc.

Statement of Changes In Stockholders' Deficit (Unaudited)
  Preferred Stock  Common Stock  Additional  Accumulated    
   Shares  Amount  Shares  Amount  Paid-In Capital  Deficit  Total 
                      
Issuance of common stock for services on                     
January 29, 2007, inception        42,993,630  $14,331  $6,669  $   $21,000 
Net loss                    (533,185)  (533,185)
                           
Balance at December 31, 2007  -  $-   42,993,630  $14,331  $6,669  $(533,185) $(512,185)
                             
Common stock sold for cash          2,047,314   682   499,318       500,000 
Common stock issued as payment for services          10,369,650   3,457   1,819,943       1,823,400 
Amortization of discount on convertible preferred stock                  47,879   (47,879)  - 
Net loss                      (2,148,597)  (2,148,597)
                             
Balance at June 30, 2008  -  $-   55,410,594  $18,470  $2,373,809  $(2,729,661) $(337,382)
                             
Preferred stock sold in connection with reverse merger          2,149,560   717   124,283       125,000 
Preferred stock sold for cash  111,111   111           99,889       100,000 
Preferred stock - Beneficial Conversion Feature                  11,111   (11,111)    
Bio shares outstanding before reverse merger          27,840,534   9,280   (9,280)      - 
Common stock issued as payment for services          1,983,909   661   639,012       639,673 
Common stock sold for cash          1,599,996   533   299,467       300,000 
Warrants issued in connection with issuance of convertible debt                  49,245       49,245 
Amortization of discount on conversion of preferred stock                  107,835   (107,835)  - 
Warrants issued as payment for services                  146,043       146,043 
Share-based compensation                  307,512       307,512 
Net loss                      (2,495,991)  (2,495,991)
                             
Balance at June 30, 2009  111,111  $111   88,984,593  $29,661  $4,148,926  $(5,344,598) $(1,165,900)
                             
Common stock issued as payment for services          17,938,011   5,979   2,799,303       2,805,282 
Common stock issued for debt and accrued interest conversion          1,122,375   374   190,429       190,803 
Conversion feature on notes payable                  63,601       63,601 
Warrants issued as payment for services                  5,173       5,173 
Net loss                      (3,224,421)  (3,224,421)
                             
Balance at September 30, 2009  111,111  $111   108,044,979  $36,014  $7,207,432  $(8,569,019) $(1,325,462)
                             
Common stock sold for cash          4,179,935   4,180   695,460       699,640 
Common stock issued as payment for services          1,760,670   1,761   560,904       562,665 
Amortization of restricted stock                  395,285       395,285 
Dividends on preferred stock                  (3,250)      (3,250)
Net loss                      (1,351,689)  (1,351,689)
                             
Balance at December 31, 2009  111,111  $111   113,985,584  $41,955  $8,855,831  $(9,920,708) $(1,022,811)
See accompanying notes, which are an integral part of these financial statements.
6

CAVITATION TECHNOLOGIES, INC.

Statements of Cash Flows (Unaudited)

        January 29, 2007, 
        Inception, 
        Through 
  Six Months Ended December 31,  March 31, 
  2009  2008  2009 
          
Operating activities:         
Net loss $(4,576,110) $(1,209,396) $(9,753,883)
Adjustments to reconcile net loss to net cash            
   used in operating activities:            
   Depreciation and amortization  7,940   2,262   20,558 
   Warrants issued in connection with convertible notes payable  -   1,255   49,245 
   Common stock issued for services  3,763,232   454,600   6,247,649 
   Stock option compensation  -   198,620   307,512 
   Warrants issued for services  5,173   -   151,216 
   Amortization of loan discount  63,601   -   63,601 
             
Effect of changes in:            
             
   Prepaid expenses and other current assets  1,989   (898)  (353)
   Deposits  -   -   (9,500)
   Accounts payable and accrued expenses  131,914   35,195   514,187 
   Deferred revenue  7,480   26,000   33,480 
      Net cash used in operating activities $(594,781) $(492,362) $(2,376,288)
             
Investing activities:            
  Purchase of Property and Equipment  (21,020)  -   (96,392)
    Net cash used in investing activities $(21,020) $-  $(96,392)
             
Financing activities:            
   Proceeds from line of credit borrowings  -   9,061   636,917 
   Payments on line of credit  (86,771)  -   (86,771)
   Proceeds from sales of preferred stock  -   125,000   725,000 
   Payments on convertible notes payable  (20,000)  -   (55,000)
   Proceeds from convertible notes payable  -   125,900   235,000 
   Proceeds from sale of commom stock and subscription deposit  709,510   -   1,009,510 
   Proceeds from short term loan  18,500   -   18,500 
      Net cash provided by financing activities $621,239  $259,961  $2,483,156 
             
Net increase (decrease) in cash  5,438   (232,401)  10,476 
Cash, beginning of period  5,038   310,929   - 
Cash, end of period $10,476  $78,528  $10,476 
             
Supplemental disclosures of cash flow information:            
   Cash paid for interest $30,368  $17,868  $133,655 
   Cash paid for income taxes  -   -   3,469 
             
Supplemental disclosure of non-cash investing and financing activities:            
   Warrants issued in connection with preferred stock  -   -   155,714 
   Beneficial conversion feature of preferred stock  -   -   11,111 
   Conversion of preferred to common shares in reverse merger  -   625,000   625,000 
   Proceeds from sales of preferred stock used to purchase shares of Bio  -   -   400,000 
   Conversion of notes payable to common stock  190,803   -   190,803 

See accompanying notes, which are an integral part of these financial statements.
7
CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30,December 31, 2009
 
Note 1 - Nature of Operations
 
Cavitation Technologies, Inc. is a Nevada Corporation (the “Company”) ,which  operates through its wholly owned subsidiary Hydrodynamic Technology, Inc. dba Cavitation Technologies, Inc (“Hydro”, or the “Company”) was incorporated on January 29, 2007, in California.a California corporation.  The Company designs and engineers environmentally friendly NANO technology based systems that use our patents pending, multi-stage, continuous flow-through, hydrodynamic NANO Series of cavitation reactors thatreactors.  These systems have commercial applicationapplications in industries such as vegetable oil refining, renewable fuels, water recycling, and desalination,water-oil emulsions, alcoholic beverage enhancement, extraction of algae, and crude oil yield enhancement.

Products include the "Green D+ Plus De-gumming System", a vegetable oil refining system, the "HydorFuel System" for producing diesel-water fuel emulsions, and the "Bioforce 9000 NANO Reactor Skid System" which performs the transesterification process during the production of biodiesel.

Our success will depend 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 seveneight patent applications pending in the US and have applied for three international patents.  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 refining, renewable fuels production, waste water treatment, water–oilwater-oil emulsions, crude oil yield enhancement,
and alcoholic beverage enhancement. 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 stockare traded on both the Over the Counter Bulletin Board withwhere our ticker symbol CVAT. Our stock is also traded onCVAT as well as  the Berlin and Stuttgart Stock Exchange withExchanges where our symbol WTC-BER.is WTC.  Our onlysingle location is our headquarters in Chatsworth, California.CA.  We have four full-time employees and have engaged approximately 40forty consultants and independent contractors over the past two years.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Going Concern

The Company is a development stage entity as of September 30,December 31, 2009 as defined by the Financial Accounting Standard Board Accounting Standard Codification (ASC) 915. Successful completion of the Company’s development programs and ultimately the attainment of profitable operations are dependent on future events including, among other things, our ability to access potential markets; secure financing; develop a customer base; attract, retain, and motivate qualified personnel; and develop strategic alliances. The Company has no significant operating history and, from January 29, 2007 (inception), through September 30,December 31, 2009 generated a net loss of $8,402,194.$9,753,883. The Company also has negative cash flow from operations and negative net equity. To date the Company has been funded by private equity and debt. Although management believes that the company will be able to successfully fund its operations, there can be no assurance that the Company will be able to do so or that the company will ever operate profitably.

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 Company may curtail its operations. The accompanying consolidated financial statements do not include any 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.
 
8
CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three and six months ended September 30,December 31, 2009 and September 30,for the three and six months ended December 31, 2008 are not necessarily indicative of results to be expected for fiscal year ending June 30, 2010. For further information, please refer to Notes to Consolidated Financial Statements - “Significant Accounting Policies” of the Company’s Form 10-K for the year ended June 30, 2009 as filed with the Securities and Exchange Commission (SEC) on September 28, 2009 for a description of the Company’s Basis of Presentation.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. All significant inter-company transactions and balances have been eliminated through consolidation.
1
  
Fair Value Measurement
 
Effective January 1, 2008, the Company adopted the provisions of ASC 820, “Fair Value Measurements”. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The implementation of this standard did not have any impact on the Company’s consolidated financial positions, results of operations, or cash flows. The carrying amounts of cash and cash equivalents, accounts payable and other accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of outstanding debt issued pursuant to credit agreements approximate fair value because interest rates over the term of these instruments approximate current market interest rates.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
 
Revenue Recognition
 
Revenue is recognized when: an arrangement exists; delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectibility is reasonably assured. The Company recognizes revenues in accordance with ASC 605 Revenue Recognition.  During the first quarter of fiscal 2010, the Company received a deposit of $7,480 from a customer relating to an order for our Bioforce 9000 NANO Reactor Skid System. Because this transaction has not yet been fully completed, this amount has been reflectedis included in deferred revenue on the accompanying balance sheet as of September 30,December 31, 2009.   There were no deposits during the second quarter of fiscal 2010.
 
Cash
 
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.
 
9
CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009
Property and Equipment
 
Property and equipment presented at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company's accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations

Stock-BasedShare-Based Compensation
 
Compensation costs related to stock options are determined in accordance with ASC 718, “Share-Based Payments”. Under this method, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.
 
Income Taxes
 
The Company accounts for income taxes under the liability method which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred income tax assets and liabilities.
 
Advertising costs
 
Advertising costs incurred in the normal course of operations are expensed as incurred.

Research and Development Costs

R&D expenses relate primarily to the development, design, and testing of preproduction prototypes and models and are expensed as incurred.

 
Note 3 -Net Loss Per Share – Basic and Diluted
 
The Company computes 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. Diluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute the potential dilution that would occur if stock-based awards and other commitments to issue common stock were exercised.
 
10
CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009
On September 30,December 31, 2009, the Company had 750,6462,251,938 stock options and 1,540,9018,802,638 warrants outstanding to purchase common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive. In addition, the Company had 111,111 shares of Series A Preferred Stock outstanding, which are convertible into 375,000 shares of common stock. These items were not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.
2
Note 4 - Property and Equipment

Property and equipment consisted of the following as of September 30,December 31, 2009 (unaudited) and June 30, 2009.

  Sept 30,  June 30, 
  2009  2009 
         
Leasehold improvements $2,475  $2,475 
Furniture and fixtures  26,837   26,837 
Office equipment  1,400   1,400 
Equipment  65,680   44,660 
    Property and Equipment (gross)   96,392    75,372  
Less: accumulated depreciation  (16,158)  (12,619)
    Property and Equipment (net) $    80,234  $    62,753 
  December 31,  June 30, 
  2009  2009 
       
Leasehold improvements $2,475  $2,475 
Furniture and fixtures  26,837   26,837 
Office equipment  1,400   1,400 
Equipment  65,680   44,660 
Property and Equipment (gross)  96,392   75,372 
Less: accumulated depreciation  (20,559)  (12,619)
Property and Equipment (net) $75,833  $62,753 
 
Depreciation expense for the three and six months ended September 30,December 31, 2009 amounted to $4,401 and $7,940, respectively.  Depreciation expense for the three and six months ended December 31, 2008 amounted to $3,539$1,131 and $1,131$2,363, respectively.

Note 5 -Bank Loan
 
On February 7, 2007, the Company contracted a $700,000 revolving line of credit from National Bank of California. On August 1, 2009, the 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% and will be repaid 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. The balance outstanding under the loan was $627,876$550,146 on September 30,December 31, 2009 and under the line of credit was $636,917 on June 30, 2009.

Note 6 - Convertible Notes Payable
 
Convertible Notes Payable
 
On August 17, 2009, $180,000 in convertible notes payable plus accrued interest were converted into 374,1251,122,375 shares of restricted common stock (1,122,375 after 3 for 1 forward split effective October 12, 2009).stock. 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.

Note 7 – Common and Preferred Stock, Options and Warrants
 
Common
 
11
CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009
On September 30,24, 2009, the Company’s 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 the Company’s 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 post-split basis. On October 7, 2009, the Company hadfiled an amendment to its 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.

On December 31, 2009, the Company received $289,684$9,870 in deposits from individualsan individual for the purpose of investing intoin common stock. The amount of $289,684$9,870 is reflected in Common Stock Subscription Deposit on the accompanying balance sheet as of September 30,December 31, 2009.  During October 2009, this amount plus an additional $50,216 for a total of $339,900In January 2010, the $9,870 deposit was converted to 680,000 sharesinto 58,056 of restricted common stock.

Preferred
 
The holders of the Series A Preferred Stock are entitled to receive out of any funds legally available, dividends at the rate of 6% per annum, payable on September 30 and March 30. Dividends shall accrue and beare cumulative whether or not they have been declared. Dividends may be paid in cash or through the issuance of additional shares of Series A Preferred Stock at the Company’s option. ForAt December 31, 2009, the first quarter ending September 30, 2009,Company has accrued dividends of $1,500 were recognized as interest expense.$4,750 in dividends.

Stock Options

There were 750,6462,251,938 stock options outstanding June 30, 2009 before consideration of the 3 for 1 forward stock split which occurred October 12, 2009.  There were no options issued during the first quarter of fiscal 2010.six months ended December 31, 2009.  For details on Stock Options, please refer to our 10-K submitted September 28, 2009.

Warrants

A summary ofThe following tables summarize the Company’s warrant activity and related information for the quartersix months ended September 30,December 31, 2009 and the year ended June 30, 2009 beforeafter consideration of the 3 for 1 forward stock split which occurred on October 12, 2009.

Warrants Weighted Average Exercise Price  Warrants  Weighted Average Exercise Price 
Sept 30, 2009 
June 30, 2009
 Sept, 30, 2009 June 30, 2009  December 31,     December 31,    
Outstanding, beginning of qtr/year 1,510,901 136,480 $1.32 $1.10 
 2009  June 30, 2009  2009  June 30, 2009 
Outstanding — Beginning 4,532,703  409,440  $0.44  $0.37 
Granted 30,000 1,374,421 $1.25 1.34  4,269,935  4,123,263  $0.42  0.45 
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     
Outstanding — ending  8,802,638   4,532,703  $0.43  0.44 
Exercisable  8,802,638   4,532,703  $0.43  $0.44 
 
312

CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009
Warrants Outstanding 
 Range of Exercise Number of  Weighted Average Remaining 
 Prices Warrants  Contractual Life (Years) 
$0.20 – 0.42  6,632,642   3.05 
$0.50 – 0.58  2,169,996   3.75 
    8,802,638     
The fair value of the warrants granted for services during the first quarter of fiscal 2010 is estimated at $5,173. There were no warrants issued for services during the second quarter of fiscal 2010.  The fair value of these warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following range of assumptions for the fiscal year ended June 30, 2009:assumptions:

Expected Life 3.0 years 
Stock Price Volatility  64%  64%  
Risk Free Interest Rate     1.6%1.6%  
Expected Dividends None 

Note 8 - 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, 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 September 30,December 31, 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, 20072009,  2008 and June 30, 20082007 are subject to examination by the taxing authorities as of June 30,December 31, 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,December 31, 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.

13
CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009

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. annum. The lease expires February 15, 2010. As of September 30,December 31, 2009, the Company has a security deposit of $9,500 associated with this lease.

On December 30, 2009, the Company extended its lease agreement for office space for a period of two years effective February 1, 2010.  Monthly rent under the extended lease agreement is $4,250 per month.

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.
 
4
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.

 
14

CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009

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.

15

CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2009

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”“Subsequent Events”, the Company has performed a review of events subsequent to the balance sheet date through November 13, 2009,February 2, 2010, 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 asJanuary 15, 2010 the Company signed a 3worldwide license and distribution Agreement with the Desmet Ballestra Group 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 recognitionthe marketing 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.Company’s “Green D Plus Nano Cavitation Reactor Systems”.

516

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
 
Overview
 
Hydrodynamic Technology, Inc. dba Cavitation Technologies, Inc (Company) was incorporated January 29, 2007, in 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 to 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 Green D De-gumming System, a vegetable oil refining system, and the Bioforce 9000 NANO Reactor Skid System which performs the transesterification process during the production of biodiesel. We believe the application of our technology can dramatically reduce operating costs and improve yields in comparison to competitive solutions. Our headquarters and only office is in Chatsworth, California.
 
We have no significant operating history and from January 29, 2007 (date of inception) through September 30,December 31, 2009, we generated net losses aggregating $8,402,194.$9,753,883. 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 Company may curtail its operations.
 
Our 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
 
The following is a comparison of the results of operations for the Company for the three and six months ended September 30,December 31, 2009 and 2008.

 
  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%
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  Three Months Ended    
  December 31,    
  2009  2008  $ Change  % Change 
             
General and administrative            
expenses $1,249,554  $660,586  $588,968   89%
Research and development                
expenses  91,968   48,671   43,297   89%
Total operating expenses  1,341,522   709,257   632,265   89%
Loss from operations  (1,341,522)  (709,257)  (632,265)  89%
Interest expense  (10,167)  (11,681)  1,514   -13%
Loss before income taxes  (1,351,689)  (720,938)  (630,751)  87%
Income tax expense  -   -   -   - 
Net loss $(1,351,689) $(720,938) $(630,751)  87%

  Six Months Ended       
  December 31,       
  2009  2008  $ Change  % Change 
             
General and administrative            
expenses $4,327,428  $1,009,532  $3,317,896   329%
Research and development                
expenses  154,933   178,546   (23,613)  -13%
Total operating expenses  4,482,361   1,188,078   3,294,283   277%
Loss from operations  (4,482,361)  (1,188,078)  (3,294,283)  277%
Interest expense  (93,749)  (21,318)  (72,431)  340%
Loss before income taxes  (4,576,110)  (1,209,396)  (3,366,714)  278%
Income tax expense  -   -   -   0%
Net loss $(4,576,110) $(1,209,396) $(3,366,714)  278%

Revenues

We had no revenue for the three and six months ended September 30,December 31, 2009 orand 2008. For the three month period ended September 30, 2009, we recorded Deferred Income of $7,480 as a deposit for a potential future sale/lease/license. This amount is included in deferred revenue on the accompanying balance sheet as of December 31, 2009.  We expect to be able to achieve revenue during the fiscal year ending June 30, 2010.

General and Administrative Expenses
 
Our general and administrative expenses increased $2,728,928$588,968 and $3,317,896 for the three and six months ended December 31, 2009, respectively.  This is primarily attributed to the issuance of 1,660,182 common shares valued at $923,870, and 19,598,181 common shares valued at $3,729,152, as compensation for services rendered by consultants and key personnel during the three and six months ended December 31, 2009, respectively. We issued 1,050,000 common shares valued at $454,600, and 15,000 stock option s valued at $4,590, during the three months ended December 31, 2008 as compensation for services rendered by consultants and key personnel.  We issued 1,050,000 common shares valued at $454,600, and 675,000 stock options valued at $198,620 as compensation for services rendered by consultants and key personnel during the six months ended December 31, 2008.  Other expenses contributing to the increase in general and administrative expenses for the three months ended September 30, 2009.  This is attributable largelyDecember 31, 2009 include legal fees and salaries in the amount of $90,011 and $112,765, respectively.  Legal fees and salaries for the three months ended December 31, 2008 totaled $28,554 and $60,681, respectively.  Other expenses contributing to the issuance of 5,700,000 common shares (pre-split) distributed as incentiveincrease in general and valued at $4,560,000 (of which $2,587,871 is expensed in this quarter)  to consultants, service providersadministrative expenses for the six months ended December 31, 2009 include consulting and other key personnel who contributed to the success of the Company. We had no such expenses in 2008.  The other two major expenseslegal fees, and salaries in the first quarteramounts of fiscal 2010$267,972, $162,273 and $225,324, respectively.  For the six months ended December 31, 2008, legal fees and salaries totaled $38,330 and $122,858, respectively.  There were consulting fees of $296,022 and professional fees of $125,981 for legal, audit, and accounting. This compares with no consulting fees and $56,186 in professional fees in(other than share-based incentives mentioned above) during the first quarter of fiscal 2009.six months ended December 31, 2008.

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Research and Development
 
R&D declined from $129,875Research and development expenses increased by $43,297 for the three months ended December 31, 2009 when compared to $62,965the three months ended December 31, 2008. This increase is primarily attributed to issuance of 100,500 common shares as compensation for services rendered by consultants valued at $34,080.   Research and development expenses decreased by $23,613 for the six months ended December 31, 2009 when compared to the six months ended December 31, 2008.  Research and development expenses decreased because we focused more resources on advertising and marketing of our existing products and we focused fewer resources on developingthe development potential of commercial products. Nevertheless, we did continue to conduct R&Dresearch and development 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 decreased by $1,514 for the three months ended December 31, 2009 when compared to the three months ended December 31, 2008.  Interest expense increased 767%by $72,431 for the six months ended December 31, 2009 when compared to $83,582 with $63,601 attributablethe six months ended December 31, 2008.  The decrease in interest expense for the three months ended December 31, 2009 is attributed to lower bank loan levels.  The increase in interest expense for the six months ended December 31, 2009 is attributed to interest and amortization of discount on convertible debt. This amount arose as we converted the debt into restricted common sharesnotes payable that were issued on December 30, 2008 at a 25% discount to the market price. Interest charges on our bank loan amounted to $17,556 as the bank linerate of credit12% that were converted to a 1-year loan with equal monthly payments of $7,396 startingcommon stock on August 1, 2009.  Interest charges of $9,637 for the first quarter in fiscal17, 2009 were attributable to ouroffset by lower bank line of credit.loans levels.
 
Liquidity and Capital Resources

Cash

As of SeptemberAt December 31, 2009 and June 30, 2009, we had cash of $7,029 compared$10,476 and $5,038, respectively.    Our net cash used by operating activities increased by $102,419 from $492,362 to $5,038 at$594,781 during the six months ended December 31, 2008 and 2009, respectively.  Our net cash used by investing activities increased by $21,020 from $0 to $21,020 during the six months ended December 31, 2008 and 2009, respectively.  Our net cash provided by financing activities increased by $361,278 from $259,961 to $621,239 during the six months ended December 31, 2008 and 2009, respectively.

 At December 31, 2009 and June 30, 2009.    
Working Capital

As of September 30, 2009 total current liabilities,we had a negative working capital, 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$557,998 and $601,236, respectively.  Our working capital improved primarily because 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 inconversion of the 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 incentiveoffset by an increase in accounts payable 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.accrued expenses.

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.

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to stock options, warrants, and common stock issued for services, among others. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Share-Based Compensation 
Compensation costs related to stock options are determined in accordance with ASC 718, “Share-Based Payments”. Under this method, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable vesting period of the stock award using the straight-line method.

 Income Taxes
The Company accounts for income taxes under the liability method which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred income tax assets and liabilities.

Recently Issued 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.

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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.

21

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 has not changed GAAP, and as a result, it did not have a material impact on the company’s financial statements.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk.
 
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.

ITEM 4.  Controls and Disclosures
 
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 June 30, 2009, the end of the period covered by this annual 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 June 30, 2009.
7
Report of Management on 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 effect 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,carried out an evaluation, under the supervision and with the participation of our chief executive officerChief Executive Officer and chief financial officer,our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this reportForm 10-Q pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“the Exchange Act”)Rule 13a-15(b). Based onupon that evaluation, our chief executive officerChief Executive Officer and chief financial officer haveour Chief Financial Officer concluded that, as of the end of the period covered by this report,December 31, 2009, our disclosure controls and procedures were effective.

The term “disclosure controls and procedures,” as defined under the Exchange Act, means controls and other procedures of an issuer that are effective in ensuringdesigned to ensure that information required to be disclosed by the issuer in ourthe reports that it files or submits under the Exchange Act reports is (1) recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and formsforms. Disclosure controls and (2)procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to ourthe issuer’s management, including our chiefits principal executive officer and chiefprincipal financial officer,officers, or persons performing similar functions, 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 achieving their objectives and our 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 the 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 There have been detected. These inherent limitations include the realities that judgmentsno changes 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 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 assessing the effectiveness of our internal control over financial reporting we usethat occurred during the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Based on our assessment using those criteria, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we concludedthree months ended December 31, 2009 that for the period ending June 30, 2009, our internal controls over financial reportinghave materially affected, or are ineffective. We are searching for additional capital in orderreasonably likely to be in a position to address these material weaknesses. We are also assessing how we can improvematerially affect, our internal control over financial reporting with the current employees in an effort to remedy these deficiencies. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.


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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  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

We issuedsold 4,179,935 common shares for $699,640 during the three months ended December 31, 2009.  There were no sales of common stock to investors induring the first quarter of fiscal 2010.three months ended September 30, 2009.

We issued 19,698,681 common shares as compensation for services rendered during the six months ended December 31, 2009.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Submission of Matters to a vote of Securities Holders.

On September 24, 2009, the Board of Directors authorized an increase in outstanding common shares from 100,000,000 to 1,000,000,000 (par value $0.001as well as authorizing a 3 for 1 forward split of our common shares. A majority of the shareholders voted in favor of the 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.

Item 5 – Other Information

None
8

Item 6 – Exhibits

The following documents are filed as part of this report:Part I Exhibits

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:

 Amendment to Certificate of Incorporation

Certification of31.1              Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Certification

Certification of31.2              Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Certification

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C.32.1              Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Certification
10.1              Material agreement

23

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.Part II Exhibits

None.
 
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OFPursuant to the requirements of the Securities Exchange Act of 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SIGNATURE TITLE DATE
     
/s/ Roman Gordon Chief Executive Officer and Director November 13, 2009February 2, 2010
Roman Gordon 
(Principal Executive Officer)
Chairman of the Board
  
     
/s/  Igor Gorodnitsky President November 13, 2009February 2, 2010
Igor Gorodnitsky    
     
/s/  R.L. Hartshorn Chief Financial Officer November 13, 2009February 2, 2010
R.L. Hartshorn (Principal Financial Officer and Accounting Officer)  

924