UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2010
OR
¨ | 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)
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 whether the registrant has submitted electronically and posted on its corporate web site, every Interactive Data File, required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.
Yes þ No o
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 ¨ | Accelerated Filer ¨ |
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: as of November 12, 2010, the issuer had 134,825,182 shares of common stock outstanding.
TABLE OF CONTENTS
Page | ||
Part I. | FINANCIAL INFORMATION | |
Item 1. | Consolidated Financial Statements | 2 |
Consolidated Balance Sheets at September 30, 2010 (unaudited) and June 30, 2010 | 2 | |
Consolidated Statements of Operations - Three Months Ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited) | 3 | |
Consolidated Statement of Stockholders' Deficit - Three Months Ended September 30, 2010 (unaudited) | 4 | |
Consolidated Statements of Cash Flows – Three Months Ended September 30, 2010 (unaudited) and September 30, 2009 (unaudited) | 6 | |
Notes to Consolidated Financial Statements (unaudited) | 7 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 |
Item 4T. | Controls and Procedures | 20 |
Part II. | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 20 |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 |
Item 3. | Defaults Upon Senior Securities | 23 |
Item 4. | (Removed and Reserved) | 23 |
Item 5. | Other Information | 23 |
Item 6. | Exhibits | 23 |
Signatures | 24 |
1
PART I – FINANCIALINFORMATION
ITEM 1. Consolidated Financial Statements.
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
September 30, | June 30, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 10,529 | $ | 270 | ||||
Prepaid expenses and other current assets | 2,735 | 3,158 | ||||||
Total current assets | 13,264 | 3,428 | ||||||
Property and equipment, net | 65,064 | 69,605 | ||||||
Deferred costs | 161,124 | 71,683 | ||||||
Patents, net | 91,715 | 92,284 | ||||||
Other assets | 9,500 | 9,500 | ||||||
Total assets | $ | 340,667 | $ | 246,500 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities: | ||||||||
Bank overdraft | $ | - | $ | 2,747 | ||||
Accounts payable | 228,294 | 160,179 | ||||||
Accrued expenses | 61,786 | 75,656 | ||||||
Accrued payroll | 73,153 | 83,051 | ||||||
Deferred revenue | 104,484 | 50,761 | ||||||
Short-term loan | 379,165 | 109,000 | ||||||
Bank loan | 511,875 | 524,750 | ||||||
Total current liabilities | 1,358,757 | 1,006,144 | ||||||
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, 2010 and June 30, 2010 | 111 | 111 | ||||||
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 133,690,545 (unaudited) and 130,581,562 shares are issued and outstanding as of September 30, and June 30, 2010, respectively | 133,691 | 130,582 | ||||||
Additional paid-in capital | 13,559,745 | 12,656,723 | ||||||
Deficit accumulated during the development stage | (14,711,637 | ) | (13,547,060 | ) | ||||
Total stockholders' deficit | (1,018,090 | ) | (759,644 | ) | ||||
Total liabilities and stockholders' deficit | $ | 340,667 | $ | 246,500 |
See accompanying notes, which are an integral part of these financial statements
2
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
January 29, 2007, | ||||||||||||
Inception, | ||||||||||||
For the Three Months Ended | Through | |||||||||||
September 30, | September 30, | |||||||||||
2010 | 2009 | 2010 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
General and administrative expenses | $ | 909,131 | $ | 3,077,874 | $ | 9,171,501 | ||||||
Research and development expenses | 241,253 | 62,965 | 4,864,653 | |||||||||
Total operating expenses | 1,150,384 | 3,140,839 | 14,036,154 | |||||||||
Loss from operations | (1,150,384 | ) | (3,140,839 | ) | (14,036,154 | ) | ||||||
Interest expense | (12,693 | ) | (83,582 | ) | (501,158 | ) | ||||||
Loss before income taxes | (1,163,077 | ) | (3,224,421 | ) | (14,537,312 | ) | ||||||
Income tax expense | - | - | - | |||||||||
Net loss | $ | (1,163,077 | ) | $ | (3,224,421 | ) | $ | (14,537,312 | ) | |||
Deemed dividends to preferred stockholders | (1,500 | ) | - | (174,325 | ) | |||||||
Net loss available to common stockholders | $ | (1,164,577 | ) | $ | (3,224,421 | ) | $ | (14,711,637 | ) | |||
Net loss available to common shareholders per share: | ||||||||||||
Basic and Diluted | $ | (0.01 | ) | $ | (0.03 | ) | ||||||
Weighted average shares outstanding: | ||||||||||||
Basic and Diluted | 132,525,540 | 103,111,510 |
See accompanying notes, which are an integral part of these financial statements
3
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited)
Deficit | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
During the | ||||||||||||||||||||||||||||
Series A Preferred | Common Stock | Additional Paid-in | Development | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Stage | Total | ||||||||||||||||||||||
Balance at inception, January 29, 2007 | - | $ | - | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Issuance of common stock for services on January 29, 2007 | 42,993,630 | 42,994 | (21,994 | ) | 21,000 | |||||||||||||||||||||||
Common stock issued as payment for services on March 31, 2008 | 6,428,904 | 6,429 | 1,123,971 | 1,130,400 | ||||||||||||||||||||||||
Common stock issued as payment for services on April 16, 2008 | 51,180 | 51 | 8,949 | 9,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on April 22, 2008 | 102,360 | 102 | 17,898 | 18,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on June 18, 2008 | 3,787,320 | 3,788 | 662,212 | 666,000 | ||||||||||||||||||||||||
Common stock sold for cash on June 30, 2008 | 2,047,200 | 2,047 | 497,953 | 500,000 | ||||||||||||||||||||||||
Amortization of discount on convertible preferred stock | 47,879 | (47,879 | ) | - | ||||||||||||||||||||||||
Net loss | (2,681,782 | ) | (2,681,782 | ) | ||||||||||||||||||||||||
Balance at June 30, 2008 | - | $ | - | 55,410,594 | $ | 55,411 | $ | 2,336,868 | $ | (2,729,661 | ) | $ | (337,382 | ) | ||||||||||||||
Common stock sold in connection with reverse merger for cash on October 3, 2008 | 2,149,560 | 2,150 | 122,850 | 125,000 | ||||||||||||||||||||||||
Preferred stock sold for cash on March 17, 2009 | 111,111 | 111 | 99,889 | 100,000 | ||||||||||||||||||||||||
Preferred stock - beneficial conversion feature | 11,111 | (11,111 | ) | - | ||||||||||||||||||||||||
Common stock sold for cash on April 22, 2009 | 499,998 | 500 | 99,500 | 100,000 | ||||||||||||||||||||||||
Common stock sold for cash on June 4, 2009 | 499,998 | 500 | 99,500 | 100,000 | ||||||||||||||||||||||||
Common stock sold for cash on June 22, 2009 | 300,000 | 300 | 49,700 | 50,000 | ||||||||||||||||||||||||
Common stock sold for cash on June 30, 2009 | 300,000 | 300 | 49,700 | 50,000 | ||||||||||||||||||||||||
Bio common stock outstanding before reverse merger on October 3, 2008 | 27,840,534 | 27,840 | (27,840 | ) | - | |||||||||||||||||||||||
Common stock issued as payment for services on September 22, 2008 | 150,000 | 150 | 17,850 | 18,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on December 3, 2008 | 450,000 | 450 | 187,150 | 187,600 | ||||||||||||||||||||||||
Common stock issued as payment for services on December 17, 2008 | 300,000 | 300 | 131,800 | 132,100 | ||||||||||||||||||||||||
Common stock issued as payment for services on February 27, 2009 | 590,565 | 591 | 156,893 | 157,484 | ||||||||||||||||||||||||
Common stock issued as payment for services on March 11, 2009 | 86,550 | 86 | 26,853 | 26,939 | ||||||||||||||||||||||||
Common stock issued as payment for services on March 22, 2009 | 150,000 | 150 | 50,350 | 50,500 | ||||||||||||||||||||||||
Common stock issued as payment for services on April 23, 2009 | 29,415 | 29 | 9,285 | 9,314 | ||||||||||||||||||||||||
Common stock issued as payment for services on May 28, 2009 | 152,379 | 152 | 38,959 | 39,111 | ||||||||||||||||||||||||
Common stock issued as payment for services on June 4, 2009 | 37,500 | 38 | 9,837 | 9,875 | ||||||||||||||||||||||||
Common stock issued as payment for services on June 30, 2009 | 37,500 | 38 | 8,712 | 8,750 | ||||||||||||||||||||||||
Warrants issued with convertible debt in December 2008, January 2009 and February 2009 | 49,245 | 49,245 | ||||||||||||||||||||||||||
Amortization of discount on convertible preferred stock | 107,835 | (107,835 | ) | - | ||||||||||||||||||||||||
Warrants issued as payment for services on May 27, 2009 | �� | 56,146 | 56,146 | |||||||||||||||||||||||||
Warrants issued as payment for services on June 3, 2009 | 84,219 | 84,219 | ||||||||||||||||||||||||||
Warrants issued as payment for services on June 30, 2009 | 5,678 | 5,678 | ||||||||||||||||||||||||||
Issuance of stock options as payment for services on August 8, 2008 | 229,493 | 229,493 | ||||||||||||||||||||||||||
Issuance of stock options as payment for services on October 1, 2008 | 4,598 | 4,598 | ||||||||||||||||||||||||||
Issuance of stock options as payment for services on October 7, 2008 | 22,770 | 22,770 | ||||||||||||||||||||||||||
Issuance of stock options as payment for services on October 21, 2008 | 47 | 47 | ||||||||||||||||||||||||||
Issuance of stock options as payment for services on October 28, 2008 | 33 | 33 | ||||||||||||||||||||||||||
Issuance of stock options as payment for services on January 19, 2009 | 50,571 | 50,571 | ||||||||||||||||||||||||||
Net loss | (2,495,991 | ) | (2,495,991 | ) | ||||||||||||||||||||||||
Balance at June 30, 2009 | 111,111 | $ | 111 | 88,984,593 | $ | 88,985 | $ | 4,089,602 | $ | (5,344,598 | ) | $ | (1,165,900 | ) |
4
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited) (Continued)
Deficit | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
During the | ||||||||||||||||||||||||||||
Series A Preferred | Common Stock | Additional Paid-in | Development | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Stage | Total | ||||||||||||||||||||||
Balance at June 30, 2009 | 111,111 | $ | 111 | 88,984,593 | $ | 88,985 | $ | 4,089,602 | $ | (5,344,598 | ) | $ | (1,165,900 | ) | ||||||||||||||
Common stock issued as payment for services on July 27, 2009 | 17,358,000 | 17,358 | 3,886,279 | 3,903,637 | ||||||||||||||||||||||||
Common stock issued as payment for services on August 5, 2009 | 165,000 | 165 | 44,935 | 45,100 | ||||||||||||||||||||||||
Common stock issued as payment for services on September 16, 2009 | 190,011 | 190 | 42,209 | 42,399 | ||||||||||||||||||||||||
Common stock issued as payment for services on October 7, 2009 | 130,500 | 131 | 42,500 | 42,631 | ||||||||||||||||||||||||
Common stock issued as payment for services on October 16, 2009 | 100,911 | 101 | 34,209 | 34,310 | ||||||||||||||||||||||||
Common stock issued as payment for services on October 23, 2009 | 30,000 | 30 | 9,270 | 9,300 | ||||||||||||||||||||||||
Common stock issued as payment for services on October 29, 2009 | 37,500 | 38 | 13,463 | 13,501 | ||||||||||||||||||||||||
Common stock issued as payment for services on November 3, 2009 | 37,500 | 37 | 13,464 | 13,501 | ||||||||||||||||||||||||
Common stock issued as payment for services on November 10, 2009 | 35,102 | 35 | 12,251 | 12,286 | ||||||||||||||||||||||||
Common stock issued as payment for services on November 16, 2009 | 1,505,000 | 1,505 | 405,944 | 407,449 | ||||||||||||||||||||||||
Common stock issued as payment for services on November 30, 2009 | 60,000 | 60 | 17,340 | 17,400 | ||||||||||||||||||||||||
Common stock issued as payment for services on December 4, 2009 | 49,157 | 49 | 12,240 | 12,289 | ||||||||||||||||||||||||
Common stock issued as payment for services on January 11, 2010 | 121,286 | 121 | 30,200 | 30,321 | ||||||||||||||||||||||||
Common stock issued as payment for services on February 1, 2010 | 5,125,102 | 5,125 | 1,071,146 | 1,076,271 | ||||||||||||||||||||||||
Common stock issued as payment for services on February 11, 2010 | 500,000 | 500 | 109,500 | 110,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on February 15, 2010 | 127,500 | 128 | 26,648 | 26,776 | ||||||||||||||||||||||||
Common stock issued as payment for services on February 23, 2010 | 135,000 | 135 | 26,865 | 27,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on March 5, 2010 | 346,098 | 346 | 82,897 | 83,243 | ||||||||||||||||||||||||
Common stock issued as payment for services on March 12, 2010 | 70,000 | 70 | 13,455 | 13,525 | ||||||||||||||||||||||||
Common stock issued as payment for services on March 22, 2010 | 50,000 | 50 | 8,450 | 8,500 | ||||||||||||||||||||||||
Common stock issued as payment for services on April 12, 2010 | 127,282 | 127 | 16,420 | 16,547 | ||||||||||||||||||||||||
Common stock issued as payment for services on April 19, 2010 | 100,000 | 100 | 16,900 | 17,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on April 29, 2010 | 1,700,000 | 1,700 | 253,300 | 255,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on May 10, 2010 | 773,750 | 774 | 115,288 | 116,062 | ||||||||||||||||||||||||
Common stock issued as payment for services on May 24, 2010 | 219,092 | 219 | 43,599 | 43,818 | ||||||||||||||||||||||||
Common stock issued as payment for services on June 1, 2010 | 163,794 | 164 | 29,319 | 29,483 | ||||||||||||||||||||||||
Common stock issued as payment for services on June 9, 2010 | 333,333 | 333 | 59,667 | 60,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on June 14, 2010 | 46,544 | 47 | 8,331 | 8,378 | ||||||||||||||||||||||||
Common stock issued for debt and accrued interest conversion on August 7, 2009 | 1,122,375 | 1,122 | 189,681 | 190,803 | ||||||||||||||||||||||||
Conversion feature on convertible notes payable | 63,601 | 63,601 | ||||||||||||||||||||||||||
Common stock sold for cash on October 13, 2009 | 208,104 | 208 | 34,156 | 34,364 | ||||||||||||||||||||||||
Common stock sold for cash on October 16, 2009 | 2,980,734 | 2,981 | 493,808 | 496,789 | ||||||||||||||||||||||||
Common stock sold for cash on November 4, 2009 | 217,117 | 217 | 36,183 | 36,400 | ||||||||||||||||||||||||
Common stock sold for cash on November 17, 2009 | 421,529 | 422 | 71,748 | 72,170 | ||||||||||||||||||||||||
Common stock sold for cash on December 4, 2009 | 352,451 | 352 | 59,565 | 59,917 | ||||||||||||||||||||||||
Common stock sold for cash on January 6, 2010 | 58,058 | 58 | 9,812 | 9,870 | ||||||||||||||||||||||||
Common stock sold for cash on February 4, 2010 | 888,235 | 888 | 150,112 | 151,000 | ||||||||||||||||||||||||
Common stock sold for cash on March 2, 2010 | 743,746 | 744 | 125,693 | 126,437 | ||||||||||||||||||||||||
Common stock sold for cash on March 12, 2010 | 352,941 | 353 | 59,647 | 60,000 | ||||||||||||||||||||||||
Common stock sold for cash on April 19, 2010 | 125,000 | 125 | 14,875 | 15,000 | ||||||||||||||||||||||||
Common stock sold for cash on June 1, 2010 | 700,000 | 700 | 69,300 | 70,000 | ||||||||||||||||||||||||
Common stock issued for conversion of note payable on June 1, 2010 | 2,789,217 | 2,789 | 276,133 | 278,922 | ||||||||||||||||||||||||
Common stock sold for cash on June 24, 2010 | 1,000,000 | 1,000 | 99,000 | 100,000 | ||||||||||||||||||||||||
Warrants issued as payment for services on July 15, 2009 | 13,205 | 13,205 | ||||||||||||||||||||||||||
Warrants issued as payment for services on February 11, 2010 | 131,376 | 131,376 | ||||||||||||||||||||||||||
Conversion feature of note payable on June 1, 2010 | 223,137 | 223,137 | ||||||||||||||||||||||||||
Dividends on preferred stock | (6,000 | ) | (6,000 | ) | ||||||||||||||||||||||||
Net loss | (8,196,462 | ) | (8,196,462 | ) | ||||||||||||||||||||||||
Balance at June 30, 2010 | 111,111 | $ | 111 | 130,581,562 | $ | 130,582 | $ | 12,656,723 | $ | (13,547,060 | ) | $ | (759,644 | ) | ||||||||||||||
Common stock issued as payment for services on July 8, 2010 | 349,571 | 350 | 52,086 | 52,436 | ||||||||||||||||||||||||
Common stock issued as payment for services on August 3, 2010 | 1,854,009 | 1,854 | 350,406 | 352,260 | ||||||||||||||||||||||||
Common stock issued as payment for services on August 30, 2010 | 75,000 | 75 | 11,175 | 11,250 | ||||||||||||||||||||||||
Common stock issued as payment for services on September 8, 2010 | 237,192 | 237 | 35,342 | 35,579 | ||||||||||||||||||||||||
Common stock sold for cash on August 3, 2010 | 593,211 | 593 | 58,728 | 59,321 | ||||||||||||||||||||||||
Amortization of restricted stock issued for services | 395,285 | 395,285 | ||||||||||||||||||||||||||
Dividends on preferred stock | (1,500 | ) | (1,500 | ) | ||||||||||||||||||||||||
Net loss | (1,163,077 | ) | (1,163,077 | ) | ||||||||||||||||||||||||
Balance at September 30, 2010 (unaudited) | 111,111 | $ | 111 | 133,690,545 | $ | 133,691 | $ | 13,559,745 | $ | (14,711,637 | ) | $ | (1,018,090 | ) |
See accompanying notes, which are an integral part of these financial statements
5
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows (Unaudited)
January 29, 2007, | ||||||||||||
Inception, | ||||||||||||
For the Three Months Ended | Through | |||||||||||
September 30, | September 30, | |||||||||||
2010 | 2009 | 2010 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
Operating activities: | ||||||||||||
Net loss | $ | (1,163,077 | ) | $ | (3,224,421 | ) | $ | (14,537,312 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 5,110 | 3,539 | 34,697 | |||||||||
Warrants issued in connection with convertible notes payable | - | - | 49,245 | |||||||||
Beneficial conversion feature on convertible notes payable | - | 63,601 | 286,738 | |||||||||
Common stock issued for services | 846,810 | 2,805,282 | 9,806,954 | |||||||||
Stock option compensation | - | - | 307,512 | |||||||||
Warrants issued for services | - | 5,173 | 290,624 | |||||||||
Effect of changes in: | ||||||||||||
Prepaid expenses and other current assets | 423 | 466 | (2,735 | ) | ||||||||
Deposits | - | - | (9,500 | ) | ||||||||
Bank overdraft | (2,747 | ) | - | - | ||||||||
Accounts payable and accrued expenses | 52,745 | 101,248 | 293,039 | |||||||||
Accrued payroll | (9,898 | ) | - | 352,075 | ||||||||
Deferred revenue | 53,723 | 7,480 | 104,484 | |||||||||
Net cash used in operating activities | (216,911 | ) | (237,632 | ) | (3,024,179 | ) | ||||||
Investing activities: | ||||||||||||
Purchase of property and equipment | - | (21,020 | ) | (99,192 | ) | |||||||
Payments for systems | (89,441 | ) | - | (161,124 | ) | |||||||
Payments for patents | - | - | (92,284 | ) | ||||||||
Net cash used in investing activities | (89,441 | ) | (21,020 | ) | (352,600 | ) | ||||||
Financing activities: | ||||||||||||
Proceeds from (payments on) bank loan borrowings | (12,875 | ) | (9,041 | ) | 511,875 | |||||||
Proceeds from sales of preferred stock | - | - | 725,000 | |||||||||
Proceeds from convertible notes payable | - | - | 235,000 | |||||||||
Payments on convertible notes payable | - | (20,000 | ) | (55,000 | ) | |||||||
Proceeds from sale of common stock | 59,321 | 289,684 | 1,591,268 | |||||||||
Proceeds from short-term loans | 279,165 | - | 388,165 | |||||||||
Payments of short-term loans | (9,000 | ) | - | (9,000 | ) | |||||||
Net cash provided by financing activities | 316,611 | 260,643 | 3,387,308 | |||||||||
Net increase in cash | 10,259 | 1,991 | 10,529 | |||||||||
Cash, beginning of period | 270 | 5,038 | - | |||||||||
Cash, end of period | $ | 10,529 | $ | 7,029 | $ | 10,529 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 12,693 | $ | 20,201 | $ | 163,675 | ||||||
Cash paid for income taxes | $ | 1,600 | $ | - | $ | 6,728 | ||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||
Warrants issued in connection with preferred stock | $ | - | $ | - | $ | 155,714 | ||||||
Beneficial conversion feature on preferred stock | $ | - | $ | - | $ | 11,111 | ||||||
Conversion of preferred to common shares in reverse merger | $ | - | $ | - | $ | 625,000 | ||||||
Proceeds from sales of preferred shares used to purchase shares of Bio | $ | - | $ | - | $ | 400,000 | ||||||
Conversion of note payable to common stock | $ | - | $ | - | $ | 278,922 | ||||||
Accrued dividends issued to preferred stockholders | $ | 1,500 | $ | - | $ | 7,500 | ||||||
Conversion of convertible notes payable and accrued interest to common stock | $ | - | $ | 190,803 | $ | 190,803 |
See accompanying notes, which are an integral part of these financial statements
6
CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2010
Note 1 - Nature of Operations
Cavitation Technologies, Inc. (the “Company”) is a Nevada Corporation incorporated under the name Bio Energy, Inc. The Company designs and engineers environmentally friendly NANO technology based systems that have potential commercial applications in industries such as vegetable oil refining, renewable fuels, water treatment, water-oil emulsions, alcoholic beverage enhancement, algae oil extraction, and crude oil yield enhancement.
We are focused on merchandising our NANO Neutralization System – a vegetable oil refining system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors. The principle global market for our systems includes the approximate 300 major refiners who process vegetable oils including soybean, canola and rapeseed. The finished product is used for human consumption as well as animal feed. To date, we have not sold or licensed products and have recorded no revenue. Our cumulative loss since inception on January 29, 2007 is $14,537,312. Cumulative net cash used in operating activities of $3,024,179 was funded largely with $2,498,764 in equity and $511,875 in a bank loan. Our investment in research and development since inception on January 29, 2007 through September 30, 2010 is $4,864,653, consisting of $2,713,195 paid in cash and $2,151,458 paid in restricted stock primarily to service providers. We have four full-time employees.
Note 2 – Basis of Presentation and Going Concern
Management’s Plan Regarding Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. The Company has no significant operating history and, from January 29, 2007, (inception), through September 30, 2010, generated a net loss of $14,537,312. The Company also has negative cash flow from operations and negative net equity. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s plan is to generate income from operations by successfully finalizing licensing arrangements with prospective customers. We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
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.
Basis of Presentation
We have prepared the accompanying consolidated unaudited financial statements of the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September 30, 2010 are not indicative of the results that may be expected for the fiscal year ending June 30, 2011. You should read these unaudited consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2010.
7
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. All significant inter-company transactions and balances have been eliminated through consolidation.
Fair Value Measurement
Accounting Standards Codification (“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 2010, the carrying value of certain accounts such as deferred costs, accounts payable, accrued expenses, accrued payroll and short-term loans approximates fair value due to the short-term nature of such instruments.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 common stock issued for services, among other items. Actual results could differ from these estimates.
Revenue Recognition
The Company recognizes revenue 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 collectability is reasonably assured.
Deferred Revenue
The Company received total deposits of $104,484 as of September 30, 2010 from prospective customers relating to potential orders of the Company’s NANO Neutralization System and Bioforce 9000 Reactor Skid Systems. Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidate balance sheets as of September 30, 2010.
Cash and Cash Equivalents
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.
Property and Equipment
Property and equipment is 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.
8
Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives.
Leasehold improvements | Shorter of life of asset or lease |
Furniture | 5-7 Years |
Office equipment | 5-7 Years |
Equipment | 5-7 Years |
Stock-Based Compensation
The Company accounts for its share-based compensation in accordance ASC 718-20, Share-Based Payment. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite vesting period. There were no stock options granted during the three months ended September 30, 2010 or 2009. There were no warrants granted during the three months ended September 30, 2010. Warrants granted during the three months ended September 30, 2009 were valued using the following assumptions.
Three | ||||
Months Ended | ||||
September 30, | ||||
2009 | ||||
Expected life in years | 3.0 | |||
Stock price volatility | 64 | % | ||
Risk free interest rate | 1.6 | % | ||
Expected dividends | None | |||
Forfeiture rate | 0 | % |
Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.
The Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
9
Advertising and Promotion Costs
Advertising costs incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $350, $211, and $139,653 for the three months ended September 30, 2010 and 2009, and the period from January 29, 2007 (date of inception) through September 30, 2010, respectively.
Research and Development Costs
Research and development expenses relate primarily to the development, design, and testing of preproduction prototypes and models and are expensed as incurred.
Patents
Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill. As of September, 30, 2010, the Company had incurred $92,284 in gross patent costs which are capitalized in the accompanying consolidated balance sheet. The Company had one patent issued during the three months ended September 30, 2010 which is being amortized over an estimated useful life of 4 years. The patent has a duration through February 27, 2029. For the three months ended September 30, 2010, amortization amounted to $569. The Company is awaiting final approval and issuance of additional pending patents. Once the patents are issued, the Company will begin amortizing the capitalized patent costs over their estimated useful lives.
Intangible and Long-Lived Assets
In accordance with ASC 350-30, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company’s management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.
Deferred costs
Deferred costs represent costs associated with customizing specific units of the Company’s NANO Neutralization System and Reactor Skid products that it plans on licensing in the short term. The direct costs incurred by the Company associated with manufacturing the products have been capitalized and reflected as deferred costs. When sales or licensing of the specific products are made, the amounts recorded as deferred costs will be expensed.
Note 4 -Net Loss Per Share – Basic and Diluted
The Company computes the loss per common share using ASC 260, Earnings Per Share. The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period. The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.
On September 30, 2010, the Company had 1,915,957 stock options and 12,545,618 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 approximately 333,333 shares of common stock. These items were also not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.
Note 5 - Property and Equipment
Property and equipment consisted of the following as of September 30, 2010 (unaudited) and June 30, 2010.
10
September 30, | June 30, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
Leasehold improvement | $ | 2,475 | $ | 2,475 | ||||
Furniture | 26,837 | 26,837 | ||||||
Office equipment | 1,500 | 1,500 | ||||||
Equipment | 68,380 | 68,380 | ||||||
99,192 | 99,192 | |||||||
Less: accumulated depreciation and amortization | (34,128 | ) | (29,587 | ) | ||||
$ | 65,064 | $ | 69,605 |
Depreciation expense amounted to $4,541, $3,539 and $34,128 for the three months ended September 30, 2010 and 2009, and the period from January 29, 2007 (date of inception) through September 30, 2010, respectively.
Note 6 -Bank Loan
On February 7, 2007, the Company executed a $700,000 revolving line of credit from National Bank of California. The line of credit bears interest at the Prime rate plus 1%. On August 1, 2009, the revolving line of credit was replaced by a one-year variable rate loan which matured August 1, 2010. This loan bears interest at the prime rate plus 2.75%, and was repaid with equal monthly installments of $7,396 beginning September 1, 2009 with unpaid amounts due on August 1, 2010. This line of credit is secured by personal guarantees of the Company’s principals and assets.
On August 1, 2010 the Company renewed the loan until November 1, 2010. The amount outstanding at the time of renewal was $520,516. The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%. As of September 30, 2010, the outstanding balance on the loan was $511,875. The Company is in the process of negotiating a renewal of the terms of this loan.
Note 7 – Short-Term Loans
In January 2010, the Company borrowed $9,000 from a shareholder as a short-term loan. The borrowing bears no interest and is due on demand. As of June 30, 2010, the total outstanding amount related to this short-term loan amounted to $9,000. On July 6, 2010, the outstanding short-term loan amount of $9,000 was repaid. There were no amounts outstanding as of September 30, 2010.
In May 2010, the Company received a short-term loan from a shareholder in the amount of $100,000. The borrowing bears no interest and is due on demand. As of September 30, 2010, the total outstanding amount related to this short-term loan amounted to $100,000. Management expects the shareholder to convert this short-term loan into common stock or another financial instrument during the year ended June 30, 2011.
During the three months ended September 30, 2010, the Company received short-term loans from investors in the aggregate total of $279,165. The borrowings bear no interest and are due on demand. Management expects investors to convert these short-term loans into common stock or other financial instruments during the year ended June 30, 2011.
The total outstanding balances of the above loans amounted to $379,165 as of September 30, 2010, and are recorded as short-term loans on the accompanying consolidated balance sheet.
11
Note 8 – Stockholders’ Equity
Common Stock
On July 8, 2010, the Company issued an aggregate total of 349,571 shares of common stock with an aggregate fair value of $52,436 for the payment of services rendered.
On August 3, 2010, the Company issued an aggregate total of 1,854,009 shares of common stock with an aggregate fair value of $352,260 for the payment of services rendered.
On August 3, 2010, the Company sold an aggregate total of 593,211 shares of restricted common for proceeds of $59,321.
On September 8, 2010, the Company issued an aggregate total of 237,192 shares of common stock with an aggregate fair value of $35,579 for the payment of services rendered.
On September 8, 2010, the Company issued an aggregate total of 75,000 shares of common stock with an aggregate fair value of $11,250 for the payment of services rendered.
Preferred Stock
The Company has 5,000,000 shares of Series A Preferred Stock authorized and 111,111 shares outstanding. Series A Preferred Stock is convertible into common stock at a rate of 3 shares of common stock per share of each Series A Preferred Stock held at any time at the option of the preferred shareholders. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred will have liquidation preferences prior to distributions made to any other class of stockholder. The Series A Preferred Stock is not redeemable. On the third anniversary date of the issuance of the preferred shares, any Series A Preferred shares outstanding are automatically converted into common stock, at a conversion rate of 3 shares of common to 1 share of Series A Preferred Stock.
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 be 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. As of September 30, 2010, cumulative dividends amounted to $7,500. As of September 30, 2010, none of the cumulative dividends were paid.
The Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock. The Board of Directors can establish the rights, preferences and privileges of the Series B Preferred Stock. There are no shares of Series B Preferred Stock outstanding.
Stock Options
A summary of the stock option activity for the three months ended September 30, 2010 is presented below.
12
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Life | |||||||||||
Options | Price | (Years) | ||||||||||
Outstanding at June 30, 2010 | 1,987,612 | $ | 0.56 | 6.16 | ||||||||
Granted | - | - | ||||||||||
Forfeited | (71,655 | ) | 0.67 | |||||||||
Outstanding at September 30, 2010 (unaudited) | 1,915,957 | 0.56 | 6.13 | |||||||||
Vested and expected to vest at September 30, 2010 (unaudited) | 1,915,957 | 0.56 | 6.13 | |||||||||
Exercisable at September 30, 2010 (unaudited) | 1,915,957 | 0.56 | 6.13 |
The following table summarizes information about outstanding stock options as of September 30, 2010.
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||
Exercise | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||||
Price | of Shares | Life (Years) | Price | of Shares | Price | |||||||||||||||||
$ | 0.33 | 637,297 | 6.06 | $ | 0.33 | 637,297 | $ | 0.33 | ||||||||||||||
0.67 | 1,278,660 | 6.16 | 0.67 | 1,278,660 | 0.67 | |||||||||||||||||
1,915,957 | 1,915,957 |
Warrants
A summary of the warrant activity for the three months ended September 30, 2010 is presented below.
13
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Life | |||||||||||
Warrants | Price | (Years) | ||||||||||
Outstanding at June 30, 2010 | 12,545,618 | $ | 0.42 | 2.66 | ||||||||
Granted | - | - | ||||||||||
Exercised | - | - | - | |||||||||
Outstanding at September 30, 2010 (unaudited) | 12,545,618 | 0.42 | 2.41 | |||||||||
Vested and expected to vest at September 30, 2010 (unaudited) | 12,545,618 | 0.42 | 2.41 | |||||||||
Exercisable at September 30, 2010 (unaudited) | 12,545,618 | 0.42 | 2.41 |
The following table summarizes information about outstanding warrants as of September 30, 2010.
Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||
Exercise | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||||
Price | of Shares | Life (Years) | Price | of Shares | Price | |||||||||||||||||
$ | 0.20 - 0.37 | 2,339,374 | 2.36 | $ | 0.30 | 2,339,374 | $ | 0.30 | ||||||||||||||
0.42 - 0.58 | 10,206,244 | 2.42 | 0.45 | 10,206,244 | 0.45 | |||||||||||||||||
12,545,618 | 12,545,618 |
Note 9 - 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, 2011, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax or tax liability has been recorded as of and for the period ended September 30, 2010.
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.
14
Note 10 - Commitments and Contingencies
Lease Agreements
On December 30, 2009, the Company extended its existing lease agreement for approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave for a period of two years effective February 1, 2010. Monthly rent under the extended lease agreement is $4,250 per month. The Company has a security deposit of $9,500 associated with this lease.
Total rent expense was $12,750, $15,118, and $212,533 for the three months ended September 30, 2010 and 2009, and for the period from January 29, 2007 (date of inception) through September 30, 2010, respectively.
Future minimum lease payments under non-cancelable operating leases are as follows.
Year Ended | ||||
June 30, | ||||
2011 (remainder of) | 38,250 | |||
2012 | 29,750 | |||
Total | $ | 68,000 |
Royalty Agreements
The Company has entered into Patent Assignment Agreements with each of its President and CEO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CEO have been assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of future gross revenues to each of the CEO and President for future licensing, leasing, or rental revenue generated from products using the assigned technologies. In connection with an employment agreement with a key employee for any technologies invented by the employee, the Company shall pay a royalty of 5% of future revenues received in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee. As of September 30, 2010, the Company had not paid any amounts related to these royalties.
Note 11 – Subsequent Events
The company became listed on the Frankfurt (Germany) stock exchange and began trading October 27, 2010 under the trading symbol WTC.
On October 25, 2010, we received a purchase order for a 10 gallons/minute NANO Neutralization System. The purchase order requires delivery before December 9, 2010. This agreement is attached as Exhibit 99.2.
On October 26, 2010, we entered into a loan agreement with Desmet Ballestra North America, Inc. under which we received a loan of $75,000. The loan bears no interest and is repayable at $25,000 per month beginning January 25, 2011. This document is attached as Exhibit 99.1.
On October 1, 2010, the Board of Directors granted 1,134,517 common shares including 661,000 shares to equity investors valued at $79,320 and 473,517 shares issued to service providers.
On November 1, 2010, the Board of Directors granted 2,422,265 common shares including 1,400,000 shares to equity investors valued at $140,000 and 1,022,265 shares issued to service providers.
15
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
We design and engineer NANO technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water purification, alcoholic beverage enhancement, algae oil extraction, water-oil emulsions and crude oil yield enhancement. To date, we have sold no products and have recorded no revenue. Our cumulative loss since inception on January 29, 2007 through September 30, 2010 is $14,537,312. Cumulative net cash used in operating activities of $3,024,179 was funded largely with approximately $2.5 million in equity and $500,000 in a bank loan. Our investment in research and development is $4,864,653 consisting of $2,713,195 paid in cash and $2,151,458 paid in restricted stock primarily to service providers. We have four full-time employees.
The company is focused on merchandising our NANO Neutralization System – a vegetable oil refining system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors. The principle market for our systems includes the approximate 300 major global refiners who process vegetable oils including soybean, canola and rapeseed. The finished product is used for human consumption as well as animal feed. To date, we have not sold or licensed products and have recorded no revenue.
Management’s Plan
We are a development stage entity engaged in merchandising our NANO Neutralization System which is designed to help refine vegetable oils such as soybean, canola, and rapeseed. Our near term goal is to successfully merchandise our systems. We have no significant operating history and, from January 29, 2007, (inception), through September 30, 2010, generated a net loss of $14,537,312. We also have negative cash flow from operations and negative net equity. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.
Management’s plan is to generate income from operations by successfully finalizing arrangements with prospective clients. We will also attempt to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
Critical Accounting Policies
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.
Revenue Recognition
We recognize revenue 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 collectability is reasonably assured.
16
Deferred Revenue
The Company received total deposits of $104,484 as September 30, 2010 from prospective customers relating to potential orders of the Company’s NANO Neutralization System and Bioforce 9000 Reactor Skid Systems. Because these transactions have not been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidated balance sheet as of September 30, 2010.
Patents
Capitalized patent costs represent legal fees associated with procuring and filing patent applications. We account for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill. As of September, 30, 2010, the Company had incurred $92,284 in gross patent costs less $569 in amortization. These costs are capitalized in the accompanying consolidated balance sheet. We had one patent issued during the three months ended September 30, 2010, which is being amortized over an estimated useful life of 4 years. The patent has a duration through February 27, 2029. For the three months ended September 30, 2010, amortization amounted to $569. We are awaiting final approval and issuance of additional pending patents. Once the patents are issued, we will begin amortizing the capitalized patent costs over their estimated useful lives.
Intangible and Long-Lived Assets
In accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
Stock-Based Compensation
We account for our share-based compensation in accordance ASC 718-20. Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense over the requisite vesting period.
Income Taxes
We account for income taxes in accordance with ASC 740-10. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates on the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid. We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
Deferred costs
Deferred costs represent costs associated with customizing specific units of our NANO Neutralization System that we plan to lease or rent in the short term. The direct costs incurred by the Company associated with manufacturing the products have been capitalized and reflected as deferred costs on the balance sheet. When sales or licensing of the specific products are made, the amounts recorded as Deferred Costs will be expensed.
17
Results of Operations
The following is a comparison of our results of operations for the three months ended September 30, 2010 and 2009.
For the Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
General and administrative expenses | $ | 909,131 | $ | 3,077,874 | $ | (2,168,743 | ) | -70.5 | % | |||||||
Research and development expenses | 241,253 | 62,965 | 178,288 | 283.2 | % | |||||||||||
Total operating expenses | 1,150,384 | 3,140,839 | (1,990,455 | ) | -63.4 | % | ||||||||||
Loss from operations | (1,150,384 | ) | (3,140,839 | ) | 1,990,455 | -63.4 | % | |||||||||
Interest expense | (12,693 | ) | (83,582 | ) | 70,889 | -84.8 | % | |||||||||
Loss before income taxes | (1,163,077 | ) | (3,224,421 | ) | 2,061,344 | -63.9 | % | |||||||||
Income tax expense | - | - | - | 0.0 | % | |||||||||||
Net loss | $ | (1,163,077 | ) | $ | (3,224,421 | ) | 2,061,344 | -63.9 | % |
Operating Expenses
Our operating expenses for the three months ended September 30, 2010 amounted to $1,150,384 compared with $3,140,839 in 2009, a decrease of $1,990,455, or 63.4%. The decrease consisted of a decrease in general and administrative expenses in 2010 of $2,168,743, or 70.5%, offset by an increase in research and development expenses of $178,288, or 283.2%. These components of our operating expenses increased primarily due to the following.
Our general and administrative expenses decreased by $2,168,743 for the three months ended September 30, 2010 as compared to 2009. This decrease is primarily due to the issuance of 17,938,011 shares of common stock valued at $2,805,282 issued during the three months ended September 30, 2009 to consultants, service providers and other key personnel who contributed to the success of the Company. During the three months ended September 30, 2010, we issued 2,515,772 shares of common stock valued at $451,525 including $247,275 in G&A as payment for services and $204,250 in R&D. We also recognized the quarterly amortization of $395,285 in restricted stock issued for services during the year ended June 30, 2010. As a result, total share-based general and administrative expenses for the three months ended September 30, 2010 amounted to $642,560. Share based compensation, therefore declined by $2,162,722 from $2,805,282 to $642,560 during the three months ended September 30, 2010. The remaining expenses for the periods ending September 30, 2010 and 2009 consisted largely of professional fees for legal, audit, and accounting services.
Our research and development expenses increased by $178,288 for the three months ended September 30, 2010 as compared to 2009. This increase is primarily due to the issuance of common stock valued at $204,250 and issued to consultants involved in research and development. There was no such expense in 2009.
Interest Expense
Our interest expense decreased by $70,889, or 84.8%, for the three months ended September 30, 2010 as compared to 2009. This decrease was primarily due to $63,601 attributable to the beneficial conversion feature on convertible debt during 2009. This amount arose as we converted debt into restricted common shares at a 25% discount to the market price. There was no such charge in 2010.
Liquidity and Capital Resources
Bank Loan
On August 1, 2010 we renewed our loan from the National Bank of California through November 1, 2010 for $520,516. The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%. As of September 30, 2010, the outstanding balance on the loan was $511,875. We are in the process of negotiating a renewal of the terms of this loan.
18
Short-Term Loans
During the three months ended September 30, 2010, we received proceeds from short-term loans from investors in the aggregate total of $279,165. The borrowings bear no interest and are due on demand. Management expects investors to convert these short-term loans into common stock or other financial instruments during the year ended June 30, 2011. The total outstanding balances of short-term loans amounted to $379,165 as of September 30, 2010, and are recorded as short-term loans on the accompanying consolidated balance sheet.
Common Stock
During the three months ended September 30, 2010, we issued 593,211 shares of common stock for $59,321 in cash.
Share-based Compensation
During the three months ended September 30, 2010, we issued 2,515,772 shares of common stock valued at $451,525 as payments to service providers. In addition, we incurred $395,285 of expenses relating to the amortization of restricted stock issued during the year ended June 30, 2010.
Cash Flow
Net cash used in operating activities during the three months ended September 30, 2010 amounted to $216,911 compared to $237,632 for the same period in fiscal 2010. During the three months ended September 30, 2010, our net loss amounted to $1,163,077, including non-cash operating expenses of $851,920 arising primarily from common stock issued for services provided. The remaining net cash of $311,157 was used largely to pay salary and related expenses, research and development, interest expense and professional fees such as attorneys and accountants. During the three months ended September 30, 2009, our net loss amounted to $3,224,421, including non-cash operating expenses of $2,877,595 arising primarily from common stock issued for services provided. The remaining net cash of $346,826 was used largely to pay similar salary and professional expenses as in 2010.
Net cash used in investing activities during the three months ended September 30, 2010 amounted to $89,441 which was the result of payment for customization of systems. During the three months ended September 30, 2009, our net cash used in investing activities amounted to $21,020 which resulted from amounts spent for the purchase of property and equipment.
Net cash provided by financing activities during the three months ended September 30, 2010 amounted to $316,611, which resulted from proceeds from the sale of common stock amounting to $59,321 and proceeds from short-term loans of $279,165, offset by the payment of short-term loans of $9,000 and payments for the bank loan of $12,875. During the three months ended September 30, 2009, our net cash provided from financing activities amounted to $260,643 which resulted from proceeds from the sale of common stock of $289,684 offset by payments for convertible notes payable of $20,000 and payments for the bank loan of $9,041.
Commitments
Lease Agreements
On December 30, 2009 we extended our existing lease agreement for approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave for a period of two years effective February 1, 2010. Monthly rent under the extended lease agreement is $4,250 per month.
19
Future minimum lease payments under non-cancelable operating leases are as follows.
Year Ended | ||||
June 30, | ||||
2011 (remainder of) | 38,250 | |||
2012 | 29,750 | |||
Total | $ | 68,000 |
Royalty Agreements
We entered into Patent Assignment Agreements with our President and CEO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CEO have been assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of future gross revenues to each of the CEO and President for future licensing, leasing, or rental revenue generated from products using the assigned technologies. In connection with an employment agreement with a key employee, for any technologies invented by the employee, the Company shall pay a royalty of 5% of future revenues received in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee. As of September 30, 2010, we have not paid any amounts related to these royalties.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable for smaller reporting companies.
ITEM 4. Controls and Disclosures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as defined in Rules 13a-15(b)(e) and 15d-15(b)(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There were no changes in financial control over financial reporting during the first quarter of fiscal 2011 that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.
Our conclusion about the effectiveness of our Internal Controls over Financial Reporting changed from “ineffective” to “effective” during the 4th quarter of fiscal 2010 as we implemented internal controls which we evaluated as working properly and effectively. Changes to our design and operations of our controls primarily related to the increased use of outside consultants and implementation of new internal control procedures. Steps we have taken include:
a. | With the assistance of an outside consultant, we were able to design, implement, and test processes and procedures for Internal Controls over Financial Reporting. |
b. | With the help of an outside consultant, we were able to raise our knowledge and expertise of GAAP to a level that is consistent with our conclusion that our internal controls are effective. |
c. | We updated and implemented new internal control procedures which address our risk assessment process, entity level control evaluations, and testing of key controls over financial reporting. |
d. | We continue to monitor our internal control processes and procedures on a regular basis. |
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
The following is a listing of unregistered security activity during the three months ended September 30, 2010.
Sales of Restricted Common Stock
On August 3, 2010, we issued 593,211 shares of common stock to Suzahnna Tepper for a total purchase price of $59,321. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances
20
Issuance of Restricted Common Stock for Services
On July 8, 2010, we issued 125,000 shares of common stock to RL Hartshorn, the Company’s CFO, for services provided. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On July 8, 2010, we issued 98,025 shares of common stock to Mike Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On July 8, 2010, we issued 97,546 shares of common stock to Tomer Tal for legal services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On July 8, 2010, we issued 10,000 shares of common stock to Irakli Gagua for consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On July 8, 2010, we issued 9,000 shares of common stock to Shannon Stokes for services provided. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On July 8, 2010, we issued 10,000 shares of common stock to Fred Ramberg for consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 250,000 shares of common stock to Undiscovered Equity, Inc. for consulting services.
The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 250,000 shares of common stock to Christopher Castaldo for consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
21
On August 3, 2010, we issued 75,000 shares of common stock to Viktor Grichko for research and development services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 37,500 shares of common stock to James Fuller for consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 50,000 shares of common stock to Kirk Wiggins for consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 1,000,000 shares of common stock to Bioworld Technology Management for research and development services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 91,099 shares of common stock to Mike Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 60,410 shares of common stock to Tomer Tal for legal services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 3, 2010, we issued 40,000 shares of common stock to Stacie Jovancevic for consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On August 30, 2010, we issued 75,000 shares of common stock to Fred Ramburg for consulting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On September 8, 2010, we issued 156,660 shares of common stock to Tomer Tal for legal services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On September 8, 2010, we issued 80,532 shares of common stock to Mike Psomas for accounting services. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public but solely to the aforementioned purchaser or service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
22
With the exception of RL Hartshorn and Jim Fuller who are affiliates of the company, none of the aforementioned service providers are affiliates of the Company.
Item 3 – Defaults Upon Senior Securities
None
Item 4 – (Reserved and Removed)
Item 5 – Other Information
On October 25, 2010, we received a purchase order for a 10 gallons/minute NANO Neutralization System. The purchase order requires delivery before December 9, 2010.
On October 26, 2010, we entered into a loan agreement with Desmet Ballestra North America, Inc. under which we received a loan of $75,000. The loan bears no interest and is repayable at $25,000 per month beginning January 25, 2011.
On October 1, 2010, the Board of Directors granted 1,134,517 common shares including 661,000 shares to equity investors valued at $79,320 and 473,517 shares issued to service providers.
On November 1, 2010, the Board of Directors granted 2,422,265 common shares including 1,400,000 shares to equity investors valued at $140,000 and 1,022,265 shares issued to service providers.
Item 6 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Nano Reactor Loan Agreement between the Company and Desmet Ballestra North America, Inc. dated October 26, 2010.
99.2 Purchase Order from AG Natural, LLC dated October 25, 2010.
23
SIGNATURES
PURSUANT 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.
SIGNATURE | TITLE | DATE | ||
/s/ Roman Gordon | Chief Executive Officer and Director | November 12, 2010 | ||
Roman Gordon | (Principal Executive Officer) Chairman of the Board | |||
/s/ Igor Gorodnitsky | President | November 12, 2010 | ||
Igor Gorodnitsky | ||||
/s/ R.L. Hartshorn | Chief Financial Officer | November 12, 2010 | ||
R.L. Hartshorn | (Principal Financial Officer and Accounting Officer) |
24