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 December 31, 2010
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 o 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 o | Accelerated Filer o |
Non-Accelerated Filer o (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
As of February 11, 2011, the issuer had 138,681,636 shares of common stock outstanding.
TABLE OF CONTENTS
Page | ||||
Part I. | FINANCIAL INFORMATION | 3 | ||
Item 1. | Consolidated Financial Statements | 3 | ||
Consolidated Balance Sheets at December 31, 2010 (unaudited) and June 30, 2010 | 3 | |||
Consolidated Statements of Operations - Three and Six Months Ended December 31, 2010 (unaudited) and December 31, 2009 (unaudited) | 4 | |||
Consolidated Statement of Stockholders' Deficit - Six Months Ended December 31, 2010 (unaudited) | 5 | |||
Consolidated Statements of Cash Flows – Six Months Ended December 31, 2010 (unaudited) and December 31, 2009 (unaudited) | 7 | |||
Notes to Consolidated Financial Statements (unaudited) | 8 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 | ||
Item 4. | Controls and Procedures | 24 | ||
Part II. | OTHER INFORMATION | 24 | ||
Item 1. | Legal Proceedings | 24 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24 | ||
Item 3. | Defaults Upon Senior Securities | 28 | ||
Item 4. | (Removed and Reserved) | 28 | ||
Item 5. | Other Information | 28 | ||
Item 6. | Exhibits | 29 | ||
Signatures | 30 |
2
PART I – FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements.
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
December 31, | June 30, | |||||||
2010 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 185 | $ | 270 | ||||
Prepaid expenses and other current assets | 588 | 3,158 | ||||||
Total current assets | 773 | 3,428 | ||||||
Property and equipment, net | 60,523 | 69,605 | ||||||
Deferred costs | 204,581 | 71,683 | ||||||
Patents, net | 90,910 | 92,284 | ||||||
Other assets | 9,500 | 9,500 | ||||||
Total assets | $ | 366,287 | $ | 246,500 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities: | ||||||||
Bank overdraft | $ | 13,027 | $ | 2,747 | ||||
Accounts payable | 183,334 | 160,179 | ||||||
Accrued expenses | 88,014 | 75,656 | ||||||
Accrued payroll | 79,416 | 83,051 | ||||||
Advances | 67,896 | 17,262 | ||||||
Deferred revenue | 16,950 | 33,499 | ||||||
Short-term loans | 287,025 | 109,000 | ||||||
Bank loan | 498,760 | 524,750 | ||||||
Total current liabilities | 1,234,422 | 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 December 31, 2010 and June 30, 2010 | 111 | 111 | ||||||
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 138,154,600 (unaudited) and 130,581,562 shares are issued and outstanding as of December 31, and June 30, 2010, respectively | 138,155 | 130,582 | ||||||
Additional paid-in capital | 14,524,513 | 12,656,723 | ||||||
Deficit accumulated during the development stage | (15,530,914 | ) | (13,547,060 | ) | ||||
Total stockholders' deficit | (868,135 | ) | (759,644 | ) | ||||
Total liabilities and stockholders' deficit | $ | 366,287 | $ | 246,500 |
See accompanying notes, which are an integral part of these financial statements
3
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
January 29, 2007, | ||||||||||||||||||||
Inception, | ||||||||||||||||||||
For the Three Months Ended | For the Six Months Ended | Through | ||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2010 | ||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||
Revenue | $ | 248,600 | $ | - | $ | 248,600 | $ | - | $ | 248,600 | ||||||||||
Cost of sales | 36,700 | - | 36,700 | - | 36,700 | |||||||||||||||
Gross profit | 211,900 | - | 211,900 | - | 211,900 | |||||||||||||||
General and administrative expenses | 915,316 | 1,249,554 | 1,824,447 | 4,327,428 | 10,086,817 | |||||||||||||||
Research and development expenses | 104,817 | 91,968 | 346,070 | 154,933 | 4,969,470 | |||||||||||||||
Total operating expenses | 1,020,133 | 1,341,522 | 2,170,517 | 4,482,361 | 15,056,287 | |||||||||||||||
Loss from operations | (808,233 | ) | (1,341,522 | ) | (1,958,617 | ) | (4,482,361 | ) | (14,844,387 | ) | ||||||||||
Interest expense | (9,544 | ) | (10,167 | ) | (22,237 | ) | (93,749 | ) | (510,702 | ) | ||||||||||
Loss before income taxes | (817,777 | ) | (1,351,689 | ) | (1,980,854 | ) | (4,576,110 | ) | (15,355,089 | ) | ||||||||||
Income tax expense | - | - | - | - | - | |||||||||||||||
Net loss | $ | (817,777 | ) | $ | (1,351,689 | ) | $ | (1,980,854 | ) | $ | (4,576,110 | ) | $ | (15,355,089 | ) | |||||
Deemed dividends to preferred stockholders | (1,500 | ) | (1,500 | ) | (3,000 | ) | (3,000 | ) | (175,825 | ) | ||||||||||
Net loss available to common stockholders | $ | (819,277 | ) | $ | (1,353,189 | ) | $ | (1,983,854 | ) | $ | (4,579,110 | ) | $ | (15,530,914 | ) | |||||
Net loss available to common shareholders per share: | ||||||||||||||||||||
Basic and Diluted | $ | (0.01 | ) | $ | (0.01 | ) | (0.01 | ) | $ | (0.04 | ) | |||||||||
Weighted average shares outstanding: | ||||||||||||||||||||
Basic and Diluted | 136,734,911 | 111,567,617 | 134,613,680 | 107,253,064 |
See accompanying notes, which are an integral part of these financial statements
4
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 | ) |
5
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 issued as payment for services on October 1, 2010 | 473,517 | 474 | 70,554 | 71,028 | ||||||||||||||||||||||||
Common stock issued as payment for services on November 1, 2010 | 1,020,482 | 1,020 | 131,643 | 132,663 | ||||||||||||||||||||||||
Common stock issued as payment for services on November 22, 2010 | 100,000 | 100 | 11,900 | 12,000 | ||||||||||||||||||||||||
Common stock issued as payment for services on December 7, 2010 | 459,056 | 459 | 50,037 | 50,496 | ||||||||||||||||||||||||
Common stock sold for cash on August 3, 2010 | 593,211 | 593 | 58,728 | 59,321 | ||||||||||||||||||||||||
Common stock sold for cash on October 1, 2010 | 661,000 | 661 | 78,659 | 79,320 | ||||||||||||||||||||||||
Common stock sold for cash on November 1, 2010 | 1,400,000 | 1,400 | 142,600 | 144,000 | ||||||||||||||||||||||||
Common stock sold for cash on November 22, 2010 | 350,000 | 350 | 41,650 | 42,000 | ||||||||||||||||||||||||
Warrants issued as payment for services on November 22, 2010 | 46,735 | 46,735 | ||||||||||||||||||||||||||
Amortization of restricted stock issued for services | 786,275 | 786,275 | ||||||||||||||||||||||||||
Dividends on preferred stock | (3,000 | ) | (3,000 | ) | ||||||||||||||||||||||||
Net loss | (1,980,854 | ) | (1,980,854 | ) | ||||||||||||||||||||||||
Balance at December 31, 2010 (unaudited) | 111,111 | $ | 111 | 138,154,600 | $ | 138,155 | $ | 14,524,513 | $ | (15,530,914 | ) | $ | (868,135 | ) |
See accompanying notes, which are an integral part of these financial statements
6
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows (Unaudited)
January 29, 2007, | ||||||||||||
Inception, | ||||||||||||
For the Six Months Ended | Through | |||||||||||
December 31, | December 31, | |||||||||||
2010 | 2009 | 2010 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
Operating activities: | ||||||||||||
Net loss | $ | (1,980,854 | ) | $ | (4,576,110 | ) | $ | (15,355,089 | ) | |||
Adjustments to reconcile net loss to net cash | ||||||||||||
used in operating activities: | ||||||||||||
Depreciation and amortization | 10,456 | 7,940 | 40,043 | |||||||||
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 | 1,503,987 | 3,763,232 | 10,464,131 | |||||||||
Stock option compensation | - | - | 307,512 | |||||||||
Warrants issued for services | 46,735 | 5,173 | 337,359 | |||||||||
Effect of changes in: | ||||||||||||
Prepaid expenses and other current assets | 2,570 | 1,989 | (588 | ) | ||||||||
Deposits | - | - | (9,500 | ) | ||||||||
Bank overdraft | 10,280 | - | 13,027 | |||||||||
Accounts payable and accrued expenses | 32,513 | 131,914 | 272,807 | |||||||||
Accrued payroll | (3,635 | ) | - | 358,338 | ||||||||
Advances | 67,896 | - | 67,896 | |||||||||
Deferred revenue | (33,811 | ) | 7,480 | 16,950 | ||||||||
Net cash used in operating activities | (343,863 | ) | (594,781 | ) | (3,151,131 | ) | ||||||
Investing activities: | ||||||||||||
Purchase of property and equipment | - | (21,020 | ) | (99,192 | ) | |||||||
Payments for systems | (132,898 | ) | - | (204,581 | ) | |||||||
Payments for patents | - | - | (92,284 | ) | ||||||||
Net cash used in investing activities | (132,898 | ) | (21,020 | ) | (396,057 | ) | ||||||
Financing activities: | ||||||||||||
Proceeds from (payments on) bank loan borrowings | (25,990 | ) | (86,771 | ) | 498,760 | |||||||
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 | 324,641 | 709,510 | 1,856,588 | |||||||||
Proceeds from short-term loans | 187,025 | 18,500 | 296,025 | |||||||||
Payments of short-term loans | (9,000 | ) | - | (9,000 | ) | |||||||
Net cash provided by financing activities | 476,676 | 621,239 | 3,547,373 | |||||||||
Net increase in cash | (85 | ) | 5,438 | 185 | ||||||||
Cash, beginning of period | 270 | 5,038 | - | |||||||||
Cash, end of period | $ | 185 | $ | 10,476 | $ | 185 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 22,237 | $ | 30,368 | $ | 173,219 | ||||||
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 | $ | 3,000 | $ | - | $ | 9,000 | ||||||
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
7
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2010
Note 1 - Nature of Operations
Cavitation Technologies, Inc. (the “Company”) is a Nevada Corporation originally 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-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 principal global market for our systems includes major refiners who process vegetable oils including soybean, canola and rapeseed. The finished product is used for human consumption as well as animal feed. During the three months ended December 31, 2010, we recorded revenue of $248,600. Our cumulative loss since inception on January 29, 2007 is $15,355,089, including $10,464,131 in common stock issued for services. Cumulative net cash used in operating activities of $3,151,131 was funded largely with $2,816,588, in equity issuances, including proceeds of $725,000 from the sale of preferred stock and $235,000 from convertible debt, and $498,760 in a bank loan. Our investment in research and development since inception on January 29, 2007 through December 31, 2010 is $4,969,470, consisting of $2,737,662 paid in cash and $2,231,808 paid in restricted stock primarily to service providers. We have four full-time employees and no part-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 December 31, 2010, generated a net loss of $15,355,089. 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 Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. 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 December 31, 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.
8
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 in consolidation.
Fair Value Measurement
FASB Accounting Standards Codification (“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 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 $16,950 as of December 31, 2010 relating to fabrication of the Company’s NANO Neutralization Systems. Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidated balance sheet as of December 31, 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.
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 |
9
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 six months ended December 31, 2010 or 2009. Warrants granted during the six months ended December 31, 2010 and 2009 were valued using the following assumptions.
Six | Six | |||
Months Ended | Months Ended | |||
December 31, | December 31, | |||
2010 | 2009 | |||
Expected life in years | 3.0 | 3.0 | ||
Stock price volatility | 132.1% | 64.0% | ||
Risk free interest rate | 0.72% | 1.60% | ||
Expected dividends | None | None | ||
Forfeiture rate | 0% | 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.
Advertising and Promotion Costs
Advertising costs (including marketing expenses) incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $12,281, $11,291 and $151,584 for the six months ended December 31, 2010 and 2009, and the period from January 29, 2007 (date of inception) through December 31, 2010, respectively. Advertising expenses amounted to $8,178 and $8,556 for the three months ended December 31, 2010 and 2009, respectively.
10
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 December 31, 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 six months ended December 31, 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 and six months ended December 31, 2010, amortization amounted to $806 and $1,375, respectively. 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. 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 as cost of sales.
Note 4 -Net Loss Per Share – Basic and Diluted
The Company computes the loss per common share using ASC 260, Earnings Per Share. The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period. The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.
On December 31, 2010, the Company had 1,810,957 stock options and 13,145,618 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.
11
Note 5 - Property and Equipment
Property and equipment consisted of the following as of December 31, 2010 (unaudited) and June 30, 2010.
December 31, | 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 | (38,669 | ) | (29,587 | ) | ||||
$ | 60,523 | $ | 69,605 |
Depreciation expense amounted to $9,082, $7,940 and $38,669 for the six months ended December 31, 2010 and 2009, and the period from January 29, 2007 (date of inception) through December 31, 2010, respectively. Depreciation expense amounted to $4,541 and $4,401 for the three months ended December 31, 2010 and 2009, respectively.
Note 6 -Bank Loan
On August 1, 2010 the Company renewed its loan with National Bank of California 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%. On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payment of $6,000 and a final payment of $474,171 The interest rate floor was increased from 7.0% to 7.5%. As of December 31, 2010, the outstanding balance on the loan was $498,760.
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.
On October 26, 2010, the Company entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000. The loan bears no interest and is repayable at $25,000 per month beginning January 25, 2011.
As of December 31, 2010, the Company had short-term loans from shareholders in the amount of $212,025. The borrowings bear no interest and are due on demand. Management expects the shareholders to convert these short-term loans into common stock or another financial instrument during the year ending June 30, 2011.
The total outstanding balances of the above loans amounted to $287,025 as of December 31, 2010, and are recorded as short-term loans on the accompanying consolidated balance sheet.
Note 8 – Stockholders’ Deficit
Common Stock
On July 8, 2010, the Company issued an aggregate total of 349,571 shares of restricted common stock with an aggregate fair value of $52,436 for the payment of services rendered.
12
On August 3, 2010, the Company issued an aggregate total of 1,854,009 shares of restricted 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 stock for proceeds of $59,321.
On August 30, 2010, the Company issued an aggregate total of 75,000 shares of restricted common stock with an aggregate fair value of $11,250 for the payment of services rendered.
On September 8, 2010, the Company issued an aggregate total of 237,192 shares of restricted common stock with an aggregate fair value of $35,579 for the payment of services rendered.
On October 1, 2010, the Company issued an aggregate total of 473,517 shares of restricted common stock with an aggregate fair value of $71,028 for the payment of services rendered.
On October 1, 2010, the Company sold an aggregate total of 661,000 shares of restricted common stock for proceeds of $79,320.
On November 1, 2010, the Company issued an aggregate total of 1,020,482 shares of restricted common stock with an aggregate fair value of $132,663 for payment of services rendered.
On November 1, 2010, the Company sold an aggregate total of 1,400,000 shares of restricted common stock for proceeds of $144,000.
On November 22, 2010, the Company issued an aggregate total of 100,000 shares of restricted common stock with an aggregate fair value of $12,000 for payment of services rendered.
On November 22, 2010, the Company sold an aggregate total of 350,000 shares of restricted common stock for proceeds of $42,000.
On December 7, 2010, the Company issued an aggregate total of 459,056 shares of restricted common stock with an aggregate fair value of $50,496 for 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 for 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 December 31, 2010, cumulative dividends amounted to $9,000. As of December 31, 2010, none of the cumulative dividends were paid and are recorded in accrued expenses on the accompanying consolidated balance sheet.
The Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock. The Board of Directors can establish the rights, preferences and privileges of the Series B Preferred Stock. There are no shares of Series B Preferred Stock outstanding.
13
Stock Options
A summary of the stock option activity for the six months ended December 31, 2010 is presented below.
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 | (176,655 | ) | 0.67 | |||||||||
Outstanding at December 31, 2010 (unaudited) | 1,810,957 | 0.55 | 6.23 | |||||||||
Vested and expected to vest | ||||||||||||
at December 31, 2010 (unaudited) | 1,810,957 | 0.55 | 6.23 | |||||||||
Exercisable at December 31, 2010 (unaudited) | 1,810,957 | 0.55 | 6.23 |
The following table summarizes information about outstanding stock options as of December 31, 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 | 1,173,660 | 6.71 | 0.67 | 1,173,660 | 0.67 | ||||||||||||||||||
1,810,957 | 1,810,957 |
14
Warrants
A summary of the warrant activity for the six months ended December 31, 2010 is presented below.
Weighted- | ||||||||||||
Average | ||||||||||||
Weighted- | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Life | |||||||||||
Warrants | Price | (Years) | ||||||||||
Outstanding at June 30, 2010 | 12,545,618 | $ | 0.42 | 2.66 | ||||||||
Granted | 600,000 | 0.25 | ||||||||||
Exercised | - | - | ||||||||||
Outstanding at December 31, 2010 (unaudited) | 13,145,618 | 0.42 | 2.19 | |||||||||
Vested and expected to vest | ||||||||||||
at December 31, 2010 (unaudited) | 13,145,618 | 0.42 | 2.19 | |||||||||
Exercisable at December 31, 2010 (unaudited) | 13,145,618 | 0.42 | 2.19 |
The following table summarizes information about outstanding warrants as of December 31, 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 | 2,939,374 | 2.27 | $ | 0.29 | 2,939,374 | $ | 0.29 | |||||||||||||||
0.42 - 0.58 | 10,206,244 | 2.16 | 0.45 | 10,206,244 | 0.45 | ||||||||||||||||||
13,145,618 | 13,145,618 |
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 December 31, 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.
15
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 $25,500, $30,235, and $226,183 for the six months ended December 31, 2010 and 2009, and for the period from January 29, 2007 (date of inception) through December 31, 2010, respectively. Total rent expense was $12,750 and $15,118 for the three months ended December 31, 2010 and 2009, respectively.
Future minimum lease payments under non-cancelable operating leases are as follows.
Year Ended | ||||
June 30, | ||||
2011 (remainder of) | 25,500 | |||
2012 | 29,750 | |||
Total | $ | 55,250 |
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary 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 gross revenues to each of the CEO and President for licensing, leasing, or rental revenue generated from products using the assigned technologies. These were subsequently assigned to Cavitation Technologies on May 13, 2010.
On April 30, 2008, our wholly owned subsidiary entered into an employment agreement with Varvara Grichko, a member of the Board of Directors. For any technologies invented by Ms. Grichko, the Company shall pay a royalty of 5% of revenues received in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee.
During the three months ended December 31, 2010, we incurred royalty expenses relating to these agreements. As of December 31, 2010, we had not paid any amounts related to these royalties, and the amounts are reflected in accrued expenses on the accompanying balance sheet.
Licensing Agreement
On November 15, 2010 we signed a Technology License, Marketing &Collaboration Agreement with N.V. Desmet Ballestra Group S.A. (“Desmet”). The agreement gives Desmet the exclusive worldwide license to market the CTI Nano Reactor System (“CTI System”) in the field of vegetable oil processing (the “Licensed Field”). Under this Agreement, Desmet is responsible for the marketing of the CTI System to end users in the Licensed Field, as well as the construction, installation and maintenance of the system. In consideration for services rendered, we agreed to pay Desmet a fee. We intend to generate revenues from the licensing of systems. This agreement supersedes a previous agreement between the parties signed January 15, 2010.
As of December 31, 2010, the Company received advances of $67,896 from Desmet to assist with funding the production of specific CTI Systems. The Company has agreed to pay these amounts back at the time the systems are sold or licensed. These amounts are reflected as Advances on the accompanying consolidated balance sheets as of December 31, 2010 and June 30, 2010.
16
Note 11 – Subsequent Events
On January 10, 2011, we issued 110,000 restricted shares of common stock to Anita McCormick for a total purchase price of $12,100.
On January 10, 2010, we issued 31,836 shares of common stock to Michael Psomas for accounting services.
On January 10, 2010, we issued 76,080 shares of common stock to Tomer Tal for legal services.
On January 10, 2011, we issued 9,000 shares of common stock to Shannon Stokes for administrative services.
On February 1, 2011, we issued convertible promissory notes in an amount equal to $61,212 to the Tripod Group, LLC. The notes bear interest rate of 6% per annum and have a maturity of one year or less. The holder of the notes may elect to convert the outstanding principal and accrued interest into shares of our common stock at a conversion price equal to 65% of the lowest closing bid price of any of the four trading days prior to the conversion.
On Feb 8, 2011 the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. under which Asher Enterprises, Inc. purchased a convertible promissory note in the amount of $42,500. The convertible promissory note bears interest at a rate of 8% p.a. and matures on Nov 10, 2011. The holder of the note may elect to convert principal and accrued interest into shares of common stock at a conversion price equal to 58% of the average lowest closing bid prices of the Company’s common stock for 3 of any 10 trading days prior to conversion.
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, alcoholic beverage enhancement, algae oil extraction, water-oil emulsions and crude oil yield enhancement. During the three months ended December 31, 2010, we recorded revenue of $248,600. Our cumulative loss since inception on January 29, 2007 is $15,355,089, including $10,464,131 in common stock issued for services. Cumulative net cash used in operating activities of $3,151,131 was funded largely with $2,816,588 in proceeds from equity sales, including proceeds of $725,000 from the sale of preferred stock and $235,000 from convertible debt, and $498,760 in a bank loan. Our investment in research and development since inception on January 29, 2007 through December 31, 2010 is $4,969,470, consisting of $2,737,662 paid in cash and $2,231,808 paid in restricted stock primarily to service providers. We have four full-time employees and no part-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 principal market for our systems includes 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 licensed one system and recorded nominal revenue.
17
Management’s Plan
We are a development stage entity engaged in merchandising our NANO Neutralization System which is designed to help refine vegetable oils such as soybean, canola, and rapeseed. Our near term goal is to successfully merchandise our systems. We have no significant operating history and, from January 29, 2007, (inception), through December 31, 2010, generated a net loss of $15,355,089. 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.
Deferred Revenue
The Company received total deposits of $16,950 as of December 31, 2010 relating to fabrication of the Company’s NANO Neutralization Systems. Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidated balance sheet as of December 31, 2010.
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 December 31, 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 six months ended December 31, 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 and six months ended December 31, 2010, amortization amounted to $806 and $1,375, respectively. In addition to one approved patent, we have 10 pending United States patents and 10 pending international patent applications filed under the Patent Corporation Treaty. The Company is awaiting final approval and issuance of these additional pending patents. Once the patents are issued, the Company will begin amortizing the capitalized patent costs over their estimated useful lives. CTi also received the “CE Marking” certification which allows us to market our systems in the European Union. We plan to continue to file for new and improved patents on a regular basis.
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.
18
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 units of our NANO Neutralization System that we plan to lease or rent. 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 as cost of sales.
Results of Operations for the Three Months Ended December 31, 2010 Compared to the Three Months Ended December 31, 2009
The following is a comparison of our results of operations for the three months ended December 31, 2010 and 2009.
For the Three Months Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenue | $ | 248,600 | $ | - | $ | 248,600 | 100.0 | % | ||||||||
Cost of sales | 36,700 | - | 36,700 | 100.0 | % | |||||||||||
Gross profit | 211,900 | - | 211,900 | 100.0 | % | |||||||||||
General and administrative expenses | 915,316 | 1,249,554 | (334,238 | ) | -26.7 | % | ||||||||||
Research and development expenses | 104,817 | 91,968 | 12,849 | 14.0 | % | |||||||||||
Total operating expenses | 1,020,133 | 1,341,522 | (321,389 | ) | -24.0 | % | ||||||||||
Loss from operations | (808,233 | ) | (1,341,522 | ) | 533,289 | -39.8 | % | |||||||||
Interest expense | (9,544 | ) | (10,167 | ) | 623 | -6.1 | % | |||||||||
Loss before income taxes | (817,777 | ) | (1,351,689 | ) | 533,912 | -39.5 | % | |||||||||
Income tax expense | - | - | - | 0.0 | % | |||||||||||
Net loss | $ | (817,777 | ) | $ | (1,351,689 | ) | 533,912 | -39.5 | % |
19
Revenue
During the three months ended December 31, 2010, our revenue consisted primarily of a sale that we completed in December 2010 with a customer located in North Carolina for a 10 gallons/minute NANO Neutralization System for $187,600.
In addition, we also recognized revenue of $35,000 associated with the rental of a NANO Neutralization System. From May through November 2010, we received monthly rental payments of $5,000 from a commercial vegetable oil refining plant located in South Carolina. These payments were received as compensation for use of our NANO Neutralization System. This facility was sold in mid December 2010 and will be used for purposes other than soybean oil refining. As a result, we will receive no further monthly rental payments from this facility. The equipment has been returned to us and we expect to use it in another facility.
We also recognized $26,000 in revenue associated with the sale of a Bioforce 9000 Reactor Skid System.
We had no revenue during the three months ended December 31, 2009.
Cost of Sales
During the three months ended December 31, 2010, our cost of sales amounted to $36,700 which was the result of the revenue transactions described above. We had no cost of sales during the three months ended December 31, 2009, as we had no sales during that period. One of the units sold in 2010 was a prototype, and as a result much of the associated cost was expensed in a prior year. As a result, we do not expect our gross profit percentage to be as high on future sales.
Operating Expenses
Our operating expenses for the three months ended December 31, 2010 amounted to $1,020,133 compared with $1,341,522 in 2009, a decrease of $321,389, or 24.0%. The decrease consisted of a decrease in general and administrative expenses in 2010 of $334,238, or 26.7%, offset by an increase in research and development expenses of $12,849, or 14.0%. These components of our operating expenses increased primarily due to the following.
Our general and administrative expenses decreased by $334,238 for the three months ended December 31, 2010 as compared to 2009. This decrease is primarily due to a decrease in our expenses related to the issuance of share-based compensation as payment for services. During the three months ended December 31, 2009, we issued 1,985,670 shares of common stock valued at $562,667 to consultants, service providers and other key personnel who contributed to the success of the Company. During the three months ended December 31, 2010, we issued 2,053,055 shares of common stock valued at $266,187, including $185,837 in general and administrative expenses and $80,350 in research and development expenses. We also issued 600,000 warrants as payment for services during the three months ended December 31, 2010 resulting in $46,734 in general and administrative expenses. As a result, our total general and administrative expenses relating to share-based compensation decreased by $330,096. The primary reason for this decrease is due to the decrease in the value of our common stock in 2010 as compared to 2009. During the three months ended December 31, 2010, our common stock had an average value per share of approximately $0.13 per share, as compared with an average value per share of approximately $0.29 during the three months ended December 31, 2009. The remaining expenses for the three months ending December 31, 2010 and 2009 consisted mostly of compensation expense and professional fees for legal, audit, and accounting services which remained fairly consistent between the periods.
Our research and development expenses increased by $12,849 for the three months ended December 31, 2010 as compared to 2009. This increase is primarily due to the issuance of common stock valued at $80,350 and issued to consultants that were added in 2010 involved in research and development. There was no such expense in 2009. The increase was offset by a general decrease in research and development spending in 2010 due to cash flow constraints.
Interest Expense
Our interest expense decreased by $623, or 6.1%, for the three months ended December 31, 2010 as compared to 2009. This decrease was primarily due to a decrease in the outstanding balance of the loan in 2010.
20
Results of Operations for the Six Months Ended December 31, 2010 Compared to the Six Months Ended December 31, 2009
The following is a comparison of our results of operations for the six months ended December 31, 2010 and 2009.
For the Six Months Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenue | $ | 248,600 | $ | - | $ | 248,600 | 100.0 | % | ||||||||
Cost of sales | 36,700 | - | 36,700 | 100.0 | % | |||||||||||
Gross profit | 211,900 | - | 211,900 | 100.0 | % | |||||||||||
General and administrative expenses | 1,824,447 | 4,327,428 | (2,502,981 | ) | -57.8 | % | ||||||||||
Research and development expenses | 346,070 | 154,933 | 191,137 | 123.4 | % | |||||||||||
Total operating expenses | 2,170,517 | 4,482,361 | (2,311,844 | ) | -51.6 | % | ||||||||||
Loss from operations | (1,958,617 | ) | (4,482,361 | ) | 2,523,744 | -56.3 | % | |||||||||
Interest expense | (22,237 | ) | (93,749 | ) | 71,512 | -76.3 | % | |||||||||
Loss before income taxes | (1,980,854 | ) | (4,576,110 | ) | 2,595,256 | -56.7 | % | |||||||||
Income tax expense | - | - | - | 0.0 | % | |||||||||||
Net loss | $ | (1,980,854 | ) | $ | (4,576,110 | ) | 2,595,256 | -56.7 | % |
Revenue
During the six months ended December 31, 2010, our revenue consisted primarily of a sale that we completed in December 2010 with a customer located in North Carolina for a 10 gallons/minute NANO Neutralization System for $187,600. In addition, we recognized revenue amounting to $35,000 associated with the rental of a NANO Neutralization System, as well as $26,000 associated with the sale of a Bioforce 9000 Reactor Skid System. We had no revenue during the six months ended December 31, 2009.
Cost of Sales
During the six months ended December 31, 2010, our cost of sales amounted to $36,700 which was the result of the revenue transactions described above. We had no cost of sales during the six months ended December 31, 2009, as we had no sales during that period. One of the units sold in 2010 was a prototype, and as a result much of the associated cost was expensed in a prior year. As a result, we go not expect our gross profit percentage to be as high on future sales.
Operating Expenses
Our operating expenses for the six months ended December 31, 2010 amounted to $2,170,517 compared with $4,482,361 in 2009, a decrease of $2,311,844 or 51.6%. The decrease consisted of a decrease in general and administrative expenses in 2010 of $2,502,981, or 57.8%, offset by an increase in research and development expenses of $191,137, or 123.4%. These components of our operating expenses increased primarily due to the following.
Our general and administrative expenses decreased by $2,502,981 for the six months ended December 31, 2010 as compared to 2009. This decrease is primarily due to a decrease in share-based compensation during the six months ended December 31, 2010. During the six months ended December 31, 2009, our total share-based compensation recorded as general and administrative expenses amounted to $3,768,405 which consisted of $3,763,232 relating to the issuance of 19,698,681 shares of common stock to consultants, service providers and other key personnel who contributed to the success of the Company, as well as $5,173 relating to the issuance of warrants as payment for services. The increased number of shares issued for services was due primarily to bonuses in July 2009 to kep employees and consultants. During the six months ended December 31, 2010, we issued 4,568,827 shares of common stock as payment for services valued at $717,712, including $433,112 in general and administrative expenses and $284,600 in research and development. During the six months ended December 31, 2010, we also recognized amortization of $786,275 in restricted stock issued for services during the year ended June 30, 2010, as well as $46,734 in expenses relating to warrants issued as payment for services. As a result, total share-based general and administrative expenses for the six months ended December 31, 2010 amounted to $1,266,121. Share based compensation, therefore declined by $2,502,284 during the six months ended December 31, 2010. The remaining expenses for the six months ending December 31, 2010 and 2009 consisted largely of salaries, professional fees for legal, audit, and accounting services, and remained fairly consistent between the periods.
21
Our research and development expenses increased by $191,137 for the six months ended December 31, 2010 as compared to 2009. This increase is primarily due to the issuance of common stock valued at $284,600 and issued to consultants that were added in 2010 involved in research and development. There was no such expense in 2009. The increase was offset by a general decrease in research and development spending in 2010 due to cash flow constraints.
Interest Expense
Our interest expense decreased by $71,512, or 76.3%, for the six months ended December 31, 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. The remaining decrease was due primarily to a decrease in the outstanding loan balance 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%. On August 1, 2010, we 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%. On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payments of $6,000 and a final payment of $474,171. The interest rate floor was increased from 7.0% to 7.5%. As of December 31, 2010, the outstanding balance on the loan was $498,760.
Short-Term Loans
As of December 31, 2010, we had outstanding short-term loans from shareholders in the amount of $212,025. The borrowings bear no interest and are due on demand. We expect the shareholders to convert these short-term loans into common stock or another financial instrument during the year ending June 30, 2011.
On October 26, 2010, we entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000. The loan bears no interest and is repayable at $25,000 per month beginning January 25, 2011. This agreement was restructured on January 21, 2011 extending the due date on the initial payment to March 31, 2011.
Common Stock
During the six months ended December 31, 2010, we issued 3,004,211 shares of common stock for $324,641 in cash.
Share-based Compensation
During the six months ended December 31, 2010, we issued 4,568,827 shares of common stock valued at $717,712 as payments to service providers. In addition, we incurred $786,275 of expenses relating to the amortization of restricted stock issued during the year ended June 30, 2010. We also issued warrants as payment for services during the six months ending December 31, 2010, resulting in $46,735 in expenses.
22
Cash Flow
Net cash used in operating activities during the six months ended December 31, 2010 amounted to $343,863 compared to $594,781 for the same period in 2009. During the six months ended December 31, 2010, our net loss amounted to $1,980,854, including non-cash operating expenses of $1,561,178 arising primarily from common stock issued for services provided. The remaining net cash of $419,676 was used largely to pay salary and related expenses, research and development, interest expense and professional fees such as attorneys and accountants. During the six months ended December 31, 2009, our net loss amounted to $4,576,110, including non-cash operating expenses of $3,839,946 arising primarily from common stock issued for services provided. The remaining net cash of $736,164 was used largely to pay similar salary and professional expenses as in 2010.
Net cash used in investing activities during the six months ended December 31, 2010 amounted to $132,898 which was the result of payment for customization of systems. During the six months ended December 31, 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 six months ended December 31, 2010 amounted to $476,676, which resulted from proceeds from the sale of common stock amounting to $324,641 and proceeds from short-term loans of $187,025, offset by the payment of short-term loans of $9,000 and payments for the bank loan of $25,990. During the six months ended December 31, 2009, our net cash provided from financing activities amounted to $621,239 which resulted from proceeds from the sale of common stock of $709,510 offset by payments for convertible notes payable of $20,000 and payments for the bank loan of $86,771.
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.
Future minimum lease payments under non-cancelable operating leases are as follows.
Year Ended | ||||
June 30, | ||||
2011 (remainder of) | 25,500 | |||
2012 | 29,750 | |||
Total | $ | 55,250 |
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary 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 gross revenues to each of the CEO and President for licensing, leasing, or rental revenue generated from products using the assigned technologies. These were subsequently assigned to Cavitation Technologies on May 13, 2010.
On April 30, 2008, our wholly owned subsidiary entered into an employment agreement with Varvara Grichko, a member of the Board of Directors. For any technologies invented by Ms. Grichko, the Company shall pay a royalty of 5% of revenues received in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable for smaller reporting companies.
23
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
In accordance with the requirements of Rule 13a-15(d) of the Securities Exchange Act of 1934, there were no changes in internal control over financial reporting during the second quarter of fiscal 2011 that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 Legal Proceedings
We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Since our previous disclosure in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, the following is a listing of unregistered security activity during the quarter ended December 31, 2010.
Sales of Restricted Common Stock
On October 1, 2010, we issued 100,000 shares of common stock to Charles Collier for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 42,000 shares of common stock to Richard Burns for a total purchase price of $5,040. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 84,000 shares of common stock to Nathanial D. Conrad for a total purchase price of $10,080. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 84,000 shares of common stock to Constance Troncale for a total purchase price of $10,080. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
24
On October 1, 2010, we issued 16,000 shares of common stock to Nick Pomeranz for a total purchase price of $1,920. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 126,000 shares of common stock to Gerald Healy for a total purchase price of $15,120. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 125,000 shares of common stock to David P. Conrad for a total purchase price of $15,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 84,000 shares of common stock to Philip L. Terry for a total purchase price of $10,080. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 100,000 shares of common stock to Kathleen Elliott for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 100,000 shares of common stock to Patricia Morales for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 1,000,000 shares of common stock to West Pointe Partners, LTD for a total purchase price of $100,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 100,000 shares of common stock to Anna Mosk for a total purchase price of $10,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 100,000 shares of common stock to Suzahnna Tepper for a total purchase price of $10,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
25
On November 22, 2010, we issued 100,000 shares of common stock to Janice Tamoto for a total purchase price of $12,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 22, 2010, we issued 150,000 shares of common stock to Rose De Santos for a total purchase price of $18,000. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
Issuance of Restricted Common Stock for Services
On October 1, 2010, we issued 101,370 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 78,147 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 250,000 shares of common stock to RL Hartshorn for CFO services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 9,000 shares of common stock to Shannon Stokes for office services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On October 1, 2010, we issued 35,000 shares of common stock to Varvara Grichko for research and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 88,800 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 116,954 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
26
On November 1, 2010, we issued 47,728 shares of common stock to Kelly Lowry & Kelley, LLP for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 150,000 shares of common stock to James Hurley for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 500,000 to AM-PM Appliance Service for research and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 30,000 shares of common stock to Irakli Gagua for IT services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 37,500 shares of common stock to James Fuller for board of director services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 1, 2010, we issued 50,000 shares of common stock to Kirk Wiggins for marketing and sales services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 22, 2010, we issued 75,000 shares of common stock to Viktor Grichko for research and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On November 22, 2010, we issued 25,000 shares of common stock to Strategic IR, LTD for investor relation services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On December 7, 2010, we issued 55,062 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
27
On December 7, 2010, we issued 170,107 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On December 7, 2010, we issued 10,000 shares of common stock to Varvara Grichko for research and development services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
On December 7, 2010, we issued 226,887 shares of common stock to Snapshot, LTD for investor relation services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. These shares were not offered via general solicitation to the public but solely to the aforementioned service provider. The Company issued restricted shares in connection with these issuances. No sales commissions or other remuneration was paid in connection with these issuances.
With the exception of RL Hartshorn, Varvara Grichko, and James Fuller who are affiliates of the company, none of the aforementioned service providers are affiliates of the Company.
Issuance of Warrants
On November 22, 2010, we issued Pinnacle Financial Group warrants to purchase 600,000 shares of common stock at an exercise price of $0.25 for investor relation services. The warrants are fully vested as of the issuance date and can be exercised at any time through November 22, 2013.
We have granted the above securities in reliance on Section 4(2) of the Securities Act of 1933, as amended. These warrants were not offered via general solicitation to the public but solely to the aforementioned service provider. No sales commissions or other remuneration was paid in connection with these issuances.
Item 3 – Defaults Upon Senior Securities
None
Item 4 – (Reserved and Removed)
Item 5 – Other Information
None
28
Item 6 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report or incorporated by reference.
Incorporated by Reference | ||||||
Filed | ||||||
Exhibit | Exhibit Description | Herewith | Form | Pd. Ending | Exhibit | Filing Date |
3(i)(a) | Articles of Incorporation - original name of Bioenergy, Inc. | SB-2 | N/A | 3.1 | Oct. 19, 2006 | |
3(i)(b) | Articles of Incorporation - Amended and Restated | 10-Q | Dec. 31, 2008 | 3-1 | February 17, 2009 | |
3(i)( c ) | Articles of Incorporation - Amended and Restated | 10-Q | June 30 2009 | 3-1 | May 14, 2009 | |
3(i)(d) | Articles of Incorporation - Amended; increase in authorized shares | 8K | N/A | N/A | October 29, 2009 | |
3(i)(e) | Articles of Incorporation - Certificate of Amendment; forward split | 10Q | 30-Sep-09 | 3-1 | November 16, 2009 | |
3(ii)(a) | By-laws - originally Bioenergy, Inc. | SB-2 | N/A | 3.2 | Oct. 19, 2006 | |
10.1 | Licensing agreement | X | ||||
10.2 | CFO agreement | X | ||||
10.3 | Employment Agreement | X | ||||
10.4 | Employment Agreement | X | ||||
10.5 | Assignment of Patent Assignment Agreement | 8K | N/A | 10.3 | May 18, 2010 | |
10.6 | Assignment of Patent Assignment Agreement | 8K | N/A | 10.4 | May 18, 2010 | |
10.7 | Patent Assignment Agreement | 8K | N/A | 10.1 | May 18, 2010 | |
10.8 | Patent Assignment Agreement | 8K | N/A | 10.2 | May 18, 2010 | |
31.1 | Certificat of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | X | ||||
31.2 | Certificat of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | X | ||||
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted | X | ||||
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted | X | ||||
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
29
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 | February 11, 2011 | ||
Roman Gordon | (Principal Executive Officer) Chairman of the Board | |||
/s/ Igor Gorodnitsky | President | February 11, 2011 | ||
Igor Gorodnitsky | ||||
/s/ R.L. Hartshorn | Chief Financial Officer | February 11, 2011 | ||
R.L. Hartshorn | (Principal Financial Officer and Accounting Officer) |
30