Capacitive Deionization Technology Systems 10QSB 2004 Q3 Quarterly report (small business)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2004

Capacitive Deionization Technology Systems, Inc.

(Exact name of registrant as specified in its charter)

Nevada	86-0867960
(State of Jurisdiction)	(I.R.S. Employer
	identification No.)

13636 Neutron Road, Dallas, Texas 75244-4410

(Address of Principal executive offices)

972-934-1586

(Registrant's telephone number)

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.

(1) Yes X No

(2) Yes X No

The number of shares outstanding of the registrant's $.0001 par value common stock as of October 31, 2004 was 18,816,226.

Capacitive Deionization Technology Systems, Inc.

Index		Page
Part I	Financial Information

Item 1	Financial statements

	Balance Sheets as of September 30, 2004 and December 31, 2003	3

	Statements of Operations for the three and nine months ended September 30, 2004 and 2003 and Cumulative Amounts Through September 30, 2004	4

	Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 and Cumulative Amounts Through September 30, 2004	5

	Notes to Financial Statements	6-8

Item 2	Management's discussion and analysis of Financial Condition and Results of Operations	8

Item 3	Controls and Procedures	10

Part II

Other Information

Item 2	Changes in securities	10

Item 6	Exhibits and Reports on Form 8-K	10

Signature page			11

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

(A Development Stage Entity)

BALANCE SHEETS

Assets

	September30, 2004	December 31, 2003
Current assets:	(Unaudited)	(Audited)
Cash	$ 10,033	$ 333
Accounts receivable	-	10,000
Total current assets	10,033	10,333

Furniture and equipment	25,294	25,294
Less accumulated depreciation	(22,680)	(21,488)
Total furniture and equipment	2,614	3,806
	$ 12,647	$ 14,139

Liabilities and Stockholders' Equity (Deficit)

Current liabilities:
Accounts payable	$ 317,760	$ 476,934
Wages payable	776,119	724,034
Accrued liabilities	244,113	227,846
Customer deposits	203,700	78,700
Severance payable to shareholder	235,000	154,000
Current portion of long-term debt	334,816	247,671
Current portion of long-term debt - related parties	443,000	433,000
Payable to former subsidiary	31,808	31,808
Total current liabilities	2,586,316	2,373,993

Long-term and convertible debt - related parties	-	10,000
Other long-term debt	362,425	25,000

Commitments and contingencies	-	-

Stockholders' equity (deficit):
Preferred stock, $.0001 par value, 20,000,000 shares authorized; none issued and outstanding	-	-
Common stock, $.0001 par value, 80,000,000 shares authorized; 18,646,026 and 16,581,799 shares issued and outstanding	1,864	1,658
Additional paid-in capital	8,523,826	7,994,471
Note receivable issued for stock	-	(45,500)
Common stock subscription	(11,111)	(11,111)
Accumulated deficit from previous operating activities	(3,523,977)	(3,523,977)
Deficit accumulated during the development stage	(7,926,696)	(6,810,395)
Total stockholders' equity (deficit)	(2,936,094)	(2,394,854)
	$ 12,647	$ 14,139

See accompanying notes to financial statements.

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

(A Development Stage Entity)

STATEMENTS OF OPERATIONS

Three and Nine Months Ended September 30, 2004 and 2003

And Cumulative Operations as a Development Stage Entity (January 1 2000 through September 30, 2004)

(unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,		Cumulative through
	2004	2003	2004	2003	September 30,2004

Revenues	$ -	$ 15,000	$ -	$ 15,000	$ 15,000

Operating expenses:
Cost of sales	-	10,935	-	10,935	10,935
Common stock and options issued for services -
General and administrative	29,258	35,373	141,971	129,961	2,000,035
Common stock and options issued for services -
Research and development	25,250	17,959	77,500	46,506	378,098
Other research and development	140,055	194,387	425,982	399,474	3,178,298
General and administrative (excluding amounts applicable to stock and options issued for services each period	154,693	64,568	354,124	185,339	1,986,713
	349,256	323,222	999,577	772,215	7,554,079

Loss from operations	(349,256)	(308,222)	(999,577)	(757,215)	(7,539,079)

Other income (expense):
Other income	(36)	-	8,910	-	8,910
Interest expense	(53,271)	(29,368)	(125,634)	(55,809)	(396,527)
Total other income (expense)	(53,307)	(29,368)	(116,724)	(55,809)	(387,617)

Net loss	$ (402,563)	$ (337,590)	$ (1,116,301)	$ (813,024)	$ (7,926,696)

Basic and diluted net loss per common share:	$ (0.02)	$ (0.02)	$ (0.06)	$ (0.06)

Weighted average common shares outstanding	18,584,693	15,173,404	17,907,775	14,166,093

See accompanying notes to financial statements.

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

(A Development Stage Entity)

STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2004 and 2003

And Cumulative Operations as a Development Stage Entity (January 1, 2000 through September 30, 2004)

(unaudited)

	2004	2003	Cumulative through September 30, 2004

Cash flows from operating activities:
Net loss	$ (1,116,301)	$ (813,024)	$ (7,926,696)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	1,192	3,750	18,952
Writedown of note receivable	-	15,750	129,500
Shares issued for services	192,300	167,702	1,847,302
Stock options and warrants issued for services	27,171	14,620	530,831
Changes in operating assets and liabilities:
Inventory and accounts receivable	10,000	10,500	-
Accounts payable and accrued liabilities	326,534	313,393	2,487,468
Net cash used in operating activities	(559,104)	(287,309)	(2,912,643)

Cash flows from investing activities:
Purchase of furniture and equipment	-	-	(14,169)

Cash flows from financing activities:
Sale of common shares and warrants	201,550	133,880	2,185,164
Net advances from shareholder	-	-	(96,388)
Net payments on long-term debt	(45,171)	-	(63,065)
Payments to former subsidiary	-	-	(238,192)
Additions to convertible debt and notes payable	412,425	153,000	598,725
Proceeds (payments) - notes payable to stockholders	-	-	161,500
Net cash provided by financing activities	568,804	286,880	2,547,744

Net increase (decrease) in cash and cash equivalents	9,700	(429)	(379,068)

Cash at beginning of year	333	729	389,401

Cash at end of year	$ 10,033	$ 300	$ 10,333

Supplemental disclosure:
Total interest paid	$ 11,829	$ -	$ 57,172

Non-cash transactions:

During 2004, the Company issued 359,160 common shares to settle $80,290 accounts payable and $9,500 accrued wages.

During 2004, the Company issued 75,000 common shares to settle $18,750 of a note payable.

During 2004, the Company negotiated a settlement of an account payable in which the note receivable issued for stock of
$45,000 was returned to the creditor for $95,900 in accounts payable, resulting in other income of $50,400.

During 2003, the Company issued 710,000 common shares for $177,500 in accrued salaries.

See accompanying notes to financial statements.

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2004

Note 1 - Future Operations

The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's significant operating losses and its working capital deficit and stockholders' deficit raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The following is a summary of management's plan to raise capital and generate additional operating funds.

The Company was funded initially through investment by the principal shareholder. Since 1998 funding has been through private investments including strategic alliances.

Business opportunities for the next twelve months will be dependent on the company's ability to finance and expedite the completion of its planned manufacturing facility in Texas. Current opportunities require CDT production by the second quarter of 2005 of more than 5,000 CDT AquaCells per month. Limited CDT production is projected beginning in the fourth quarter 2004. The Company has commitments from senior engineering, operations, financial and manufacturing professionals to join the Company immediately after the completion of financing.

The strategic alliances, which have been established as well as additional alliances being negotiated, provide short-term financial and application opportunities. The pilot CDT system previously tested at Carlsbad, California has helped create additional municipal and wastewater applications. All opportunities require immediate CDT AquaCell production.

*	Comprehensive financing from various government entities within the State of Texas
*	Expansion of current strategic and investment alliances
*	International joint ventures
*	An alliance with industry and government partners to accelerate pilot systems for the Powder River CBME Gas Wastewater Remediation Project
*	Convertible debt financing from private investment group

The Company is dependent upon the proceeds of private placements and strategic alliances of the Company's securities to implement its business plan and to finance its working capital requirements. Should the Company's plans or its assumptions change or prove to be inaccurate or offering proceeds are insufficient to fund the Company's operations, the Company would be required to seek additional financing sooner than anticipated. Management is confident it will be able to continue raising funds in the balance of 2004 through private placements and investment/distribution agreements.

There can be no assurances given that the Company will be successful in generating sufficient revenues from its planned activities or in raising sufficient capital to allow it to continue as a going concern which contemplates increased operating expenses, acquisition of assets and the disposition of liabilities in the normal course of business. These factors can affect the ability of the Company to implement its general business plan including the completion of the required manufacturing facilities and continued proprietary CDT product improvements.

Note 2 - Summary of Significant Accounting Policies and Practices

(a) Description of Business

Capacitive Deionization Technology Systems, Inc. (Formerly FarWest Group, Inc.) (the "Company" or "CDT Systems, Inc.") was organized under the laws of the state of Nevada in July 1996 to serve as a water technology company.

In January 1997, the Company entered into a manufacturing and marketing license agreement with Lawrence Livermore National Laboratories ("Lawrence Livermore") whereby the Company obtained the rights to Lawrence Livermore's patented Capacitive Deionization Technology ("CDT"). The Company has the rights to develop and manufacture a carbon aerogel CDT product for commercial use in the desalination, filtration and purification of water. The manufacturing and marketing license is effective for the life of the patents (up to 17 years). To maintain the license the Company must make contracted annual royalty payments to Lawrence Livermore beginning at $25,000 per year, then becoming a percentage of revenue.

(b) Net Loss per Weighted Average Share

Net loss per weighted average share is calculated using the weighted average number of shares of common stock outstanding.

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulations S-B. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements for the year ended December 31, 2003 which is included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with those financial statements to be included in the Form 10-KSB. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been mad e. Operating results for the three and nine months ended September 30, 2004 are not indicative of the results that may be expected for the year ending December 31, 2004.

(d) Stock-Based Compensation

The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations, in accounting for its stock-based compensation plans. Under Opinion 25, compensation cost is measured as the excess, if any, of the market price of the Company's stock at the date of the grant above the amount an employee must pay to acquire the stock. No compensation expense is recognized when the exercise price is equal to the market value of the stock on the day of the grant. The Financial Standards Board ("FASB") published SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) on January 1, 1996 which encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Companies that choose not to adopt the n ew rules will continue to apply the existing rules, but will be required to disclose pro forma net income under the new method.

The Company issued no options or warrants to employees during the quarter ended June 30, 2004 and 2003.

Item 2 Management's discussion and analysis of financial condition and results of operations.

Results of operations.

To date the Company has recognized nominal revenue. Operating expenses were increased to $349,256 compared to $323,222 in the third quarter of 2003, principally due to the amount of cash raised from sales of common stock and convertible debentures. Research and development expenditures for the third quarter of 2004 decreased to $140,055 compared to $194,387 in the third quarter of 2003. R & D expenses totaled 40% of operating expenses in the third quarter of 2004 compared to 60% in 2003.

Liquidity and capital resources.

Management recognizes the requirement for additional investment to execute the Company's business plan and complete the necessary manufacturing and research facilities. Financing transactions are currently being negotiated. These include an equity participation manufacturing joint venture, an equity investment in conjunction with a publicly financed trust fund and a long-term debt financing. There is no certainty that these fundings will be completed.

Information regarding and factors affecting forward-looking statements. Forward-looking statements include statements concerning plans, goals, strategies, future events or performances and underlying assumptions and other statements, which are other than statements of historical fact. Certain statements contained herein are forward-looking statements and, accordingly, involve risk and uncertainties, which could cause the actual results or outcomes to differ materially from those expressed in the forward-looking statements. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitations, management's examination of historical trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result, or be achieved, or accomplished.

Item 3. Controls And Procedures

Within 90 days prior to the filing of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer and the Company's Chief Financial Officer. Based on that evaluation, the Company's Chairman and Chief Executive Officer, and Chief Financial Officer concluded that the Company's disclosure control and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chairman, Chief Executive Officer and President, and the Company's Chief Financial Officer as appropriate, to allow timely decision regarding required disclosure.

Part II Other Information

Item 2. Changes in Securities

A private placement of 633,127 shares of the Company's rule 144 common stock was completed during the quarter ended September 30, 2004. The private placement provided the Company $53,250 in cash through the issuance of 239,667 shares; 74,300 shares were issued for $18,575 of professional services; 101,000 shares were issued for $25,250 of engineering services; 121,160 shares were issued for $30,290 of accounts payable; 22,000 shares were issued for $5,500 of accrued wages; 75,000 shares were issued for $18,750 of notes payable and the Company recognized $10,683 in expense for certain warrants issued.

During the second quarter 2004, three-year convertible debentures, convertible at $.20 per share, provided $5,000 to the Company. In addition, a private placement of 337,400 shares of the Company's rule 144 common stock was completed. The private placement provided the Company $35,000 in cash through the issuance of 160,000 shares; 108,400 shares were issued for $27,100 of professional services and 69,000 shares were issued for $17,250 of engineering services.

During the first quarter 2004, three-year convertible debentures, convertible at $.50 per share, provided $132,425 to the Company. In addition, a private placement of 1,093,700 shares of the Company's rule 144 common stock was completed. The private placement provided the Company $113,300 in cash through the issuance of 461,200 shares; 140,000 shares were issued for $35,000 of engineering services, 276,500 shares were issued for $69,125 of professional services; and 216,000 shares were issued to settle $50,000 of accounts payable and $4,000 of wages payable.

Item 6. Exhibits and Reports on Form 8-K.

(b) Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

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

Capacitive Deionization Technology Systems, Inc.

/s/ Dallas Talley

Dallas Talley

Chairman of the Board,

Chief Executive Officer

Dated: November 19, 2004

Capacitive Deionization Technology Systems, Inc.

/s/ Phil Marshall

Phil Marshall

Chief Financial Officer

Dated: November 19, 2004

Capacitive Deionization Technology Systems (CDTN) Inactive 10QSB2004 Q3 Quarterly report (small business)