PINX:BSHF Bioshaft Water Tech Inc Quarterly Report 10-Q Filing - 7/31/2012

Effective Date 7/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2012

or

 

[  ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to ______________

 

Commission File Number 000-52393


BIOSHAFT WATER TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)


Nevada

 

98-0494003

(State or other jurisdiction of

 incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

1 Orchard Road, # 220, Lake Forest, CA

 

92630

(Address of principal executive offices)

 

(Zip Code)


(949) 748-8050

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)


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.  [X] YES  [  ] NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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). [X] YES  [  ] NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

Accelerated filer [  ]

Non-accelerated filer [  ]

(Do not check if a smaller reporting company)

Smaller reporting company [X]

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act .  [  ] YES  [X] NO





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS


Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.  .  [  ] YES  [  ] NO

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

104,383,000 common shares issued and outstanding as of September 12, 2012.


























PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements


Our unaudited interim financial statements for the three month period ended July 31, 2012 form part of this quarterly report. They are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles.











































2




INDEX TO UNAUDITED FINANCIAL STATEMENTS

 

 

Financial Statements of Bioshaft Water Technology, Inc.

 

 

 

 

 

Balance Sheets as of July 31, 2012 and April 30, 2012

F-1

 

 

 

 

Statements of Operations for the Three Months Ended July 31, 2012 and 2011

F-2

 

 

 

 

Statements of Cash Flows for the Three Months Ended July 31, 2012 and 2011

F-3

 

 

 

 

Notes to the Financial Statements

F-4






























3







BIOSHAFT WATER TECHNOLOGY, INC.

BALANCE SHEETS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

July 31,

 

April 30,

 

 

 

2012

 

2012

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

96,314

 

$

303,568

 

Accounts receivable, net

 

 

97,784

 

 

-

 

Prepaid expenses

 

 

14,753

 

 

44,531

Total Current Assets

 

 

208,851

 

 

348,099

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

2,524

 

 

2,807

 

 

 

 

 

 

 

 

Deposits

 

 

2,248

 

 

2,248

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

213,623

 

$

353,154

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

705,570

 

$

665,498

 

Due to related party

 

 

2,559

 

 

24,120

 

Billings in excess of costs and estimated earnings
   on uncompleted projects

 

 

139,413

 

 

71,933

 

Accrued interest

 

 

322,750

 

 

302,901

 

Loans payable, net of debt discount of $0
   and $250,000, respectively

 

 

525,000

 

 

275,000

 

Derivative liability

 

 

820,011

 

 

2,713,933

TOTAL LIABILITIES

 

 

2,515,303

 

 

4,053,385

 

 

 

 

 

 

 

 

STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

Common stock, $0.001 par value; 300,000,000 shares
   authorized, 104,383,000 and 101,050,000 issued and
   outstanding, respectively Preferred stock, $0.001 par value;
   25,000,000 shares authorized, none issued and outstanding

 

 

104,383

 

 

104,383

 

Additional paid-in capital

 

 

17,680,533

 

 

17,642,389

 

Accumulated deficit

 

 

(20,086,596)

 

 

(21,447,003)

TOTAL STOCKHOLDERS' DEFICIT

 

 

(2,301,680)

 

 

(3,700,231)

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$

213,623

 

$

353,154




See accompanying notes to financial statements


F-1




BIOSHAFT WATER TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

For the Three

Months Ended

July 31, 2012

 

For the Three

Months Ended

July 31, 2011

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

Net revenue from projects

 

$

269,945

 

$

3,200

 

Net revenue (expense) from sale of products

 

 

(350)

 

 

-

TOTAL REVENUES

 

 

269,595

 

 

3,200

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

240,410

 

 

-

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

29,185

 

 

3,200

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

Selling, general, and administrative

 

 

113,077

 

 

124,280

 

Advertising, marketing, and promotions

 

 

4,634

 

 

-

 

Consulting fees

 

 

107,000

 

 

-

 

Depreciation

 

 

283

 

 

2,496

 

Stock-based compensation

 

 

67,930

 

 

10,128

TOTAL OPERATING EXPENSES

 

 

292,924

 

 

136,904

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

 

(263,739)

 

 

(133,704)

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

Interest income (expense), net

 

 

(19,776)

 

 

(13,084)

 

Amortization of debt discount

 

 

(250,000)

 

 

-

 

Change in fair value of derivative liability

 

 

1,893,922

 

 

-

TOTAL OTHER INCOME (EXPENSE)

 

 

1,624,146

 

 

(13,084)

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE PROVISION
   FOR INCOME TAXES

 

 

1,360,407

 

 

(146,788)

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

 

-

 

 

-

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

1,360,407

 

$

(146,788)

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE: BASIC

 

$

0.01

 

$

(0.00)

NET INCOME (LOSS) PER SHARE: DILUTED

 

$

0.01

 

$

(0.00)

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF
   SHARES OUTSTANDING:

 

 

 

 

 

 

   BASIC

 

 

104,383,000

 

 

101,259,935

   DILUTED

 

 

131,330,147

 

 

101,259,935




See accompanying notes to financial statements


F-2




BIOSHAFT WATER TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

For the Three

Months Ended

July 31, 2012

 

For the Three

Months Ended

July 31, 2011

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

1,360,407

 

$

(146,788)

Adjustments to reconcile net income (loss) to net cash used
   for operating activities:

 

 

 

 

 

 

Depreciation expense

 

283

 

 

2,496

Amortization of debt discount

 

250,000

 

 

-

Stock-based compensation

 

67,930

 

 

10,128

Change in fair value derivative liability

 

(1,893,922)

 

 

-

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(97,784)

 

 

-

Prepaid expenses

 

(8)

 

 

15,014

Accounts payable and accrued expenses

 

40,072

 

 

(3,999)

Due to related party

 

(21,561)

 

 

-

Billings in excess of costs and estimated earnings
   on uncompleted projects

 

67,480

 

 

-

Accrued Interest

 

19,849

 

 

13,233

Customer deposits

 

-

 

 

108,680

Net Cash Used in Operating Activities

 

 

(207,254)

 

 

(1,236)

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of property and equipment

 

-

 

 

(3,151)

Net Cash Used in Investing Activities

 

 

-

 

 

(3,151)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from issuance of stock

 

-

 

 

100,000

Net Cash Provided by Operating Activities

 

 

-

 

 

100,000

 

 

 

 

 

 

 

Change in cash during the period

 

 

(207,254)

 

 

95,613

Cash at beginning of period

 

 

303,568

 

 

611,729

Cash at end of period

 

$

96,314

 

$

707,342

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

-

 

$

16,827

Cash paid for income taxes

 

$

-

 

$

-





See accompanying notes to financial statements


F-3






BIOSHAFT WATER TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



NOTE 1 - GENERAL ORGANIZATION AND BUSINESS


Bioshaft Water Technology, Inc. (the “Company”) was originally incorporated under the laws of the state of Nevada on March 8, 2006.   The Company owns worldwide patented technology and is in the business of designing, manufacturing and installing wastewater (sewage) treatment plants using its technology.


The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. The Company has used cash flows from operations and incurred net losses of approximately $20,087,000 since inception.  The Company currently has limited liquidity, and does not yet have enough revenues sufficient to cover operating costs over an extended period of time.  If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors cause significant doubt regarding the Company to continue as a going concern.


Management anticipates that the Company will be dependent, for the foreseeable future, on additional investment capital to fund operating expenses. The Company intends to position itself so that it may be able to raise additional funds through the capital markets. In light of management’s efforts, there are no assurances that the Company will be successful in this or any of its endeavors or become financially viable and continue as a going concern.


The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES


Basis of Presentation


The accounting policies of the Company are in accordance with the accounting principles generally accepted in the United States of America and are presented in United States dollars (“USD”).  Outlined below are those policies considered particularly significant. The accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of July 31, 2012, and the results of its operations and cash flows for the three months ended July 31, 2012 and 2011. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission. The Company believes that the disclosures in the unaudited financial statements are adequate to make the information presented not misleading.  The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year.  For further information, refer to the financial statements and notes included in the Company’s Form 10-K for the year ended April 30, 2012.


Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.  





F-4






BIOSHAFT WATER TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



Fair Value of Financial Instruments


The Company follows accounting guidance issued by the Financial Accounting Standards Board (“FASB”) on “Fair Value Measurements” for assets and liabilities measured at fair value on a recurring basis.  The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the FASB requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.


The guidance also establishes a fair value hierarchy for measurements of fair value as follows:


Level 1:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

 

 

Level 2:

Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

 

Level 3:

Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.


Our company discloses the estimated fair value for all financial instruments for which it is practicable to estimate fair value. As of July 31, 2012 and April 30, 2012, the fair value of short-term financial instruments including cash, accounts receivable, accounts payable and accrued expenses, approximates book value due to their short-term maturity. The fair value of property and equipment is estimated to approximate its net book value. The fair value of debt obligations, other than convertible debt obligations approximates their face values due to their short-term maturities and/or the variable rates of interest associated with the underlying obligation.   


As of July 31, 2012 and April 30, 2012, the Company’s convertible loan payable of $500,000 and $250,000, and the Company’s derivative liability of $820,011 and $2,713,933, respectively were considered level 2 liabilities.  


Basic Loss per Common Share


Basic loss per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net loss available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.  Under the treasury stock method, the exercise price of an award, if any, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when an award is settled are assumed to be used to repurchase shares in the current period.  


The Company excluded 13,300,000 and 7,100,000 common stock equivalents outstanding as of July 31, 2012 and 2011, respectively, as their exercise prices were in excess of the average closing market price of the Company’s common stock, causing their effects to be anti-dilutive using the treasury stock method.  





F-5





The following is a summary of outstanding securities which have been included in the calculation of diluted net income per share and reconciliation of net income to net income available to common stock holders for the three months ended July 31, 2012:

 

 

 

For the Three

Months Ended

July 31, 2012

 

Weighted average common shares outstanding used in calculating

   basic earnings per share

 

 

104,383,000

 

Warrants

 

 

6,947,147

 

Effect of conversion feature on loans payable

 

 

20,000,000

 

Weighted average common and common equivalent shares used in

   calculating diluted earnings per share

 

 

131,330,147

 

 

 

 

 

 

Net income as reported

 

$

1,360,407

 

Add - Interest on convertible loans payable

 

 

18,904

 

Net income available to common stockholders

 

$

1,379,311

 


Revenue Recognition


The Company recognizes revenues from contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.


Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. No profit is recognized on change orders until they have been approved by the customer.


The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenues recognized.


New Accounting Pronouncements

 

The FASB issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature in the Accounting Standards Codification (“ASC”). There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.






F-6






BIOSHAFT WATER TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



NOTE 3 - LOANS PAYABLE


On August 11, 2008, the Company secured a loan payable of $500,000 accruing interest at 15%, secured by the assets of the Company, subject to a 3% financing fee and repayable on the one year anniversary date of the agreement.  


On February 13, 2012, the terms of the loan were changed to reflect a conversion feature and extend the maturity date to August 11, 2012. The loan is convertible into shares of the Company’s common stock, up to 20,000,000, at a price of $0.025 per share. Accrued interest related to this loan is $309,923 as of July 31, 2012.


The Company accounts for the fair value of the conversion feature in accordance with ASC 815-15 “Derivatives and Hedging; Embedded Derivatives” which requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible loan. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component of results of operations. The Company valued the embedded derivative using the Black-Scholes pricing model. On February 13, 2012, the fair value of the conversion feature was recorded as a derivative liability and a discount to the convertible loan of $1,363,664 and $500,000, respectively. Amortization of the debt discount was $250,000 and zero for the three months ended July 31, 2012 and 2011, respectively.  As of July 31, 2012, there is no remaining debt discount on the loan.


The derivative liability is revalued each reporting period using the Black-Scholes model. The Company estimated the fair value of the derivative liability using the Black-Scholes model on the July 31, 2012 and April 30, 2012 reporting dates using the following assumptions:


 

July 31, 2012

 

April 30, 2012

Exercise price

$0.025

 

$0.025

Risk free interest rate

0.7%

 

1.4%

Expected dividend yield

0%

 

0%

Volatility

56%

 

161%

Expected life of options

.03 years

 

.5 years


During the three months ended July 31, 2012 and 2011, the Company recorded a gain on the change in fair value of derivative liability of $1,893,922 and zero, respectively.


On March 6, 2009, the Company secured a loan payable of $25,000 accruing interest at 15%, due March 6, 2010 and secured by the assets of the Company.  The term of this loan has been extended to September 6, 2012. Accrued interest related to this loan is $12,827 as of July 31, 2012.


As of the date of the filing of these financial statements, both of the loans payable disclosed are in default for non-payment.





F-7






BIOSHAFT WATER TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)



NOTE 4 - STOCKHOLDERS’ DEFICIT


Authorized


The Company is authorized to issue 300,000,000 shares of $0.001 par value common stock and 25,000,000 shares of $0.001 par value preferred stock. All common stock shares have equal voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company. The preferred shares may be issued in series, with the powers, rights and limitations of the preferred shares to be determined by the Board.


Stock Options and Stock-Based Compensation


The Company previously granted 13,300,000 stock options to various employees and consultants for services rendered and to be rendered. As of July 31, 2012 and April 30, 2012, the Company had $12,493 and $42,279 in prepaid stock-based compensation for services to be rendered related to said options. The remaining prepaid stock-based compensation will be amortized over the next two quarters.


During the three months ended July 31, 2012 and 2011, the Company recorded $67,930 and $10,182 in stock-based compensation, respectively.


NOTE 5 - RELATED PARTY TRANSACTIONS


As of July 31, 2012, the Company has consulting contracts with four related parties for total annual compensation of $380,000. Total amounts due to these related parties as of July 31, 2012 was $77,274. The amounts are included in accounts payable and accrued expenses on the accompanying balance sheet. There were no payments made on this obligation during the three months ended July 31, 2012.


As of July 31, 2012 and April 30, 2012, a former officer and current shareholder of the Company is due $206,000 for consulting services performed which is included in accounts payable and accrued expenses on the accompanying balance sheet. There were no payments made on this obligation during the three months ended July 31, 2012.


As of July 31, 2012 and April 30, 2012, another consultant, shareholder and officer of the Company is due a net $171,966 which is included within accounts payable and accrued expenses on the accompanying balance sheet.


As of April 30, 2012, the Company had a net amount due to a related party of $2,559. The amount was comprised of accounts receivable and accounts payable in which have the right of offset. The Company recognized net expense of $350 from the related party during the three months ended July 31, 2012.


During the three months ended July 31, 2012, the Company generated revenues of $248,060 from an entity controlled by a newly appointed board of director. As of July 31, 2012, the Company had a receivable from this entity of $80,000 included in accounts receivable on the accompanying balance sheet.


NOTE 6 - SUBSEQUENT EVENTS


See Note 3 for status of loans payable subsequent to the three months ended July 31, 2012.






F-8






Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations


Forward Looking Statements


This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.


Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.


Our financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.


In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to "common shares" refer to the common shares in our capital stock.


As used in this quarterly report, the terms "Bioshaft", "we", "us", "our" and "our company" mean Bioshaft Water Technology, Inc., a Nevada corporation, unless otherwise indicated.


General


We were incorporated on March 8, 2006, under the laws of the State of Nevada as "Pointstar Entertainment Corp." Effective September 28, 2007, we completed a merger with our subsidiary, "Bioshaft Water Technology, Inc.", also a Nevada corporation. As a result, we changed our name from "Pointstar Entertainment Corp." to "Bioshaft Water Technology, Inc." Our stock symbol is "BSHF".


Our principal executive offices are located at 1 Orchard Road, # 220, Lake Forest CA, 92630 and our telephone number is (949) 748-8050.


Current Business


We are currently engaged in treating both industrial wastewater and domestic waste water or sewage treatment.


On September 18, 2007, we entered into an asset purchase agreement with Hans Bio Shaft Limited and Hassan Hans Badreddine, pursuant to which we acquired from Hans Bio Shaft U.K. Patent GB2390365 titled "Waste Water Treatment Plant and Method" and related United States and European patent applications for the design of a certain waste water treatment plant system. In consideration for the U.K. patent and related United States and European patent applications.


Effective September 28, 2007, we changed our name from "Pointstar Entertainment Corp." to "Bioshaft Water Technology, Inc.".


With the completion of the asset purchase agreement, we changed our business to the business of designing and manufacturing domestic waste water treatment plant systems, using our patented BioShaft unit - the BioShaft System.




4






Details of these activities were as follows:


·

Bioshaft sold a containerized 15m3/day (3,963 GPD) to Kobelco-Eco, for testing at an industrial application in Kobe, Japan. The plant was installed and has been treating medium/ high strength wastewater utilizing the Bioshaft Pilot Turbo MBBR for several months with exceptional results. Bioshaft received a much larger request for quote from the same Kobelco-Eco for another industrial application in Japan.


·

Bioshaft completed the installation of its first plant for industrial application for a new brewery in Texas, USA. The 36m3/day (9,600 GPD) containerized plant is now ready to treat the influent from the brewery as soon as it reaches its planned capacity.


·

A contract was signed with a development and construction management company based in Colorado, USA, for a major refurbishment and capacity increase of WWTP for the ANA Hospital, A USA military hospital, in Kabul, Afghanistan. Bioshaft received approval from USACOE for the design and installation. Currently, Bioshaft is finishing the installation and will be commissioning the system during the third quarter of 2012.


·

As of May 1, 2012, Bioshaft and Zuhier A. Zahran agreed to modify the implementation of the teaming projects. It was agreed that Zuhier A. Zahran would sign the contract with the clients and then issue a purchase order for the turnkey project to Bioshaft.  Bioshaft then would manage the financial accounting, engineering, and implement the project according to the contract.


·

The continued marketing efforts in the Middle East resulted in Bioshaft being awarded contracts for the WETICO/ MODA project in Saudi Arabia and the DELMON project in Bahrain.


·

BioShaft received a purchase order for a 14,000 M3/DAY (3,700,000 GPD) Domestic waste water treatment plant for the Ministry of Defense in Saudi Arabia and is located at the Saudi Arabian Military City near Hafr ElBaten. Procurement and fabrication was started and completion is anticipated during the third quarter of 2012.


·

A purchase order was received for a 400 M3/DAY (105,715 GPD) WWTP for the DELMON Poultry in Bahrain. Construction was started and completion is anticipated during the September 2012.


On March 6, 2009 we entered a loan agreement with Premier Financial and Marketing Co. Ltd. pursuant to which Premier loaned our company $25,000 for the purposes of working capital. The loan bears interest at the rate of 15% per annum with interest to be paid monthly in arrears on the last business day of each month, commencing March 6, 2010.  The principal and all accrued and unpaid interest shall be due and paid in full on March 6, 2010.  On September 6, 2011 Premier agreed to extend the loan agreement until September 6, 2012.


On March 6, 2010 we signed a teaming agreement with Zuhier Zahran & Co., a development company based in Jeddah, Saudi Arabia. The agreement provided our company with an experienced and established business developer to immediately pursue and implement our business plan in the Saudi Arabian and the gulf market. This teaming agreement boosted sales orders and qualified Bioshaft to bid for large size plants and provided the recognition of Bioshaft technology by government agencies and design engineering firms. Some of these highlights are:


·

May, 2010 we installed a 50 m3/day (13,210 GPD) plant at a residential complex in Jeddah, Saudi Arabia. Tests results were consistent and satisfactory for over a year of operation with superior effluent quality and no sludge production or extraction.


·

Bioshaft Technology was approved for a 2,000 m3/day (528,400 GPD) plant from the City of Jazan, Saudi Arabia, ministry of water and electricity. Several other approvals are being formalized for high rise tower projects in Jeddah, Saudi Arabia where minimum footprint is a great advantage.




5






·

A 60 m3/day (15,852 GPD) plant is under construction in a Jeddah commercial center. Another 60 m3/day (15,852 GPD) was approved on February 21, 2011 serving the Al-Rai pharmaceutical industrial plant at Jeddah's industrial area.


·

Our company completed the sales and installation of a 30 m3/ day (7,920 GPD) plant in Jeddah -Saudi Arabia through the appointed distributor Water Masters. Two other plants serving residential facilities were sold to Water Masters. A 30m3/day (7.920 GPD) on November 3, 2010 and a 15m3/day (3,960 GPD) on February 12, 2010. Both plants are under construction.  Both plants are awaiting delivery to their corresponding site and installation.  


·

Four more plants were sold to Water Masters, Jeddah, SA for residential complex applications in the Kingdom of Saudi Arabia. A 500 m3/day (134,000 GPD) concrete above ground plant is under construction. A 200 m3/day (52,800 GPD) packaged steel plant was fully installed on site and is awaiting client’s approval for startup after their completion of the residential development. Another 170 m3/day (44,900 GPD) packaged container plant was received from vendor and is being prepared for shipment to the site for installation. Also, a 100 m3/day (26,400 GPD) domestic container above ground plant was installed and is in process of being released to the end user.


Effective February 23, 2012, we entered into an assignment of debt wherein we have agreed to accept US$250,000 as consideration for the assignment of obligations under a loan agreement with Pedernales Brewing Company, LLC and Lee Hereford.  Pursuant to the terms of the assignment of debt, we have agreed to absolutely and unconditionally assign, transfer and set over all of our right, title and interest in and to the loan.  Further to the terms, we have the right to repurchase the loan for the remaining principal balance plus unpaid interest.


Also on February 23, 2012, we entered into an amending agreement to a loan agreement and promissory note to modify the loan agreement and promissory note we originally entered into with Premier Financial Marketing Co. Ltd.  The parties agreed to amend the loan agreement to provide for a conversion feature.  Pursuant to the amending agreement, any amounts outstanding under the loan are convertible at the price of $0.025 per share of common stock upon the provision of seven days notice by the lender.


Effective February 24, 2012, we entered into an employment agreement, dated February 1, 2012, with Walter J. Zurawick, Jr., whereby Mr. Zurawick has agreed to perform executive duties and responsibilities as president and chief executive officer of our company for a period of 24 months.  The employment agreement became effective upon the resignation of Mr. Zurawick’s predecessor, Hassan Hans Badreddine.  As compensation, we have agreed to pay Mr. Zurwick a base salary at an annual rate of US$210,000, pro-rated on a monthly basis.


As of April 30, 2012, our company agreed to a settlement with Imad A. Yassine, our chief operating officer, chief financial officer, secretary, treasurer and director, regarding his consulting fees for the period from May 1, 2011 through April 30, 2012. Mr. Yassine is to receive a monthly consulting fee of $15,000. The total consulting fees accrued during that period amount to $180,000 and are to be paid in accordance with a mutually agreed upon schedule and terms.


Furthermore, our company agreed to the payment of the following in settlement with Imad a Yassine:


1.

The balance for the loan taken by Imad A. Yassine in October 2011 of $215,000.

2.

The balance of the expense charges paid on behalf of our company by Mr. Yassine of $12,402.82.

3.

The total of the Geico auto insurance for Imad Yassine of $2,423.35.

4.

Our company agreed to sell the 2005 BMW company car for a net price of $6,000.


Effective May 1, 2012, we entered into a consulting agreement with Sustainable Water Corp., a company operated by Imad Yassine.  Under the terms of the consulting agreement, Sustainable Water Corp. will receive a monthly consulting fee of $15,000.




6






On July 1, 2012, we entered into a consulting agreement with Canadian Environmental Designers Inc., a company operated by our director Bashir Amin, to assist our company in marketing, sales and business development. Under the terms of the consulting agreement, Canadian Environmental Designers Inc. shall be paid by our company as per direct costs to the projects being worked on, all other projects under the teaming agreement are paid by Zuhier Zahran & Co. Additionally special pre-approved expenses are invoiced and paid by our company within 30 days.  The term of the consulting agreement is through June 30, 2013.


Effective July 1, 2012, we entered into a consulting agreement with SRA Real Estate Services, Inc. to assist our company in its organization and preparation corporate finance, administrative and management matters. For its services, SRA received compensation of $10,000 on execution of the consulting agreement and will receive $10,000 every 30 days afterward. The term of the agreement is until December 31, 2012.


Effective July 1, 2012, we entered into a consulting agreement with Hydro E+, LLC to assist our company in its corporate finance, marketing and business development matters. For its services, Hydro E+ received compensation of $7,000 on execution of the consulting agreement and will receive $7,000 every 30 days afterward. The term of the agreement is until June 30, 2013.


Results of Operations


Three Months Summary


 

 

Three Months Ended

 

                                                                

 

July 31,

 

 

 

2012

 

 

2011

 

Total revenue

$

269,595

 

$

3,200

 

Cost of goods sold

 

240,410

 

 

3,200

 

Operating expenses

 

292,924

 

 

136,804

 

Other income (expense)

 

1,624,146

 

 

(13,084

)

Net income (loss)

$

1,360,407

 

$

(146,788

)


Revenue


We have earned revenue of $269,595, during three month period ended July 31, 2012 as we enter into an agreements with our potential customers for the purchase and sale of our products.


Expenses


 

 

Three Months Ended

 

 

 

July 31,

 

 

 

2012

 

 

2011

 

Selling, general and administrative

$

113,077

 

$

124,280

 

Advertising, marketing and promotions

 

4,634

 

 

Nil

 

Consulting fees

 

107,000

 

 

Nil

 

Depreciation and amortization

 

283

 

 

2,496

 

Stock based compensation expense

 

67,930

 

 

10,128

 

Net loss from operations

$

(263,739

)

$

(133,704

)


Total operating expenses during the three months ended July 31, 2012 increased as compared to the comparative period in 2011 primarily due to increased advertising, marketing and promotions, consulting fees and stock based compensation expenses.





7






Liquidity and Financial Condition


Working Capital


As of July 31, 2012, our total current assets were $208,851 and our total current liabilities were $2,515,303 and we had a working capital deficit of $2,306,452.


 

 

July 31,

 

 

April 30,

 

                                                                               

 

2012

 

 

2012

 

Current assets

$

208,851

 

$

348,099

 

Current liabilities

 

2,515,303

 

 

4,053,385

 

Working capital deficiency

$

(2,306,452

)

$

3,705,286

 


Cash Flows


 

 

Three Months Ended

 

 

 

July 31,

 

 

 

2012

 

 

2011

 

Net cash flows provided by (used in) operating activities

$

(207,254

)

$

(1,236

)

Net cash flows provided by (used in) investing activities

 

Nil

 

 

(3,151

)

Net cash flows provided by (used in) financing activities

 

Nil

 

 

100,000

 

Change in cash and cash equivalents during period

$

(207,254

)

$

95,613

 


Future Financing


We have not had significant revenues from inception and cash on hand is currently our only source of liquidity. The ability of our company to meet our financial liabilities and commitments is primarily dependent upon the continued financial support of our directors and shareholders, the continued issuance of equity to new stockholders and our ability to achieve and maintain profitable operations.


Management believes that our cash and cash equivalents and cash provided by operating activities will not be sufficient to meet our working capital requirements for the next twelve month period. We estimate that we will require an additional $1,500,000 over the next twelve month period to fund our operating cash shortfall. We plan to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirements for the next twelve months primarily through the private placement of our equity securities. There are no assurances that we will be able to obtain funds required for our continued operation. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease the operation of our business.


There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon obtaining further long-term financing, successful and sufficient market acceptance of our products and achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.


Capital Expenditures


We do not have any material commitments for capital expenditures and management does not anticipate that we will spend additional material amounts on capital expenditures in the near future.




8






Employees


We plan to employ a number of executive officers including a vice president of marketing and three sales engineers. We anticipate that we may spend up to $780,000 to employee officers and employees and up to $50,000 in payroll taxes. We do and will continue to outsource contract employment as needed.


Other than as disclosed herein, we have no plans to significantly change our number of employees for the next 12 months.


Off-Balance Sheet Arrangements


There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.


Critical Accounting Policies


Our financial statements have been prepared in accordance with the U.S. GAAP. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates which have been made using careful judgment.


The financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of significant accounting policies.


Basis of Presentation


The accounting policies of our company are in accordance with the accounting principles generally accepted in the United States of America and are presented in United States dollars (“USD”).  Outlined below are those policies considered particularly significant. The accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of our company as of July 31, 2012, and the results of its operations and cash flows for the three months ended July 31, 2012 and 2011. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission. Our company believes that the disclosures in the unaudited financial statements are adequate to make the information presented not misleading.  The operating results of our company on a quarterly basis may not be indicative of operating results for the full year.  For further information, refer to the financial statements and notes included in our company’s Form 10-K for the year ended April 30, 2012.


Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.  


Fair Value of Financial Instruments


Our company follows accounting guidance issued by the Financial Accounting Standards Board (“FASB”) on “Fair Value Measurements” for assets and liabilities measured at fair value on a recurring basis.  The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the FASB requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.




9






The guidance also establishes a fair value hierarchy for measurements of fair value as follows:


Level 1:

Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

 

 

Level 2:

Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

 

Level 3:

Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.


Our company discloses the estimated fair value for all financial instruments for which it is practicable to estimate fair value. As of July 31, 2012 and April 30, 2012, the fair value of short-term financial instruments including cash, accounts receivable, accounts payable and accrued expenses, approximates book value due to their short-term maturity. The fair value of property and equipment is estimated to approximate its net book value. The fair value of debt obligations, other than convertible debt obligations approximates their face values due to their short-term maturities and/or the variable rates of interest associated with the underlying obligation.   


As of July 31, 2012 and April 30, 2012, our company’s convertible loan payable of $500,000 and $250,000, and our company’s derivative liability of $820,011 and $2,713,933, respectively were considered level 2 liabilities.  


Basic Loss per Common Share


Basic loss per share is calculated by dividing our company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing our company’s net loss available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.  Under the treasury stock method, the exercise price of an award, if any, the amount of compensation cost, if any, for future service that our company has not yet recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when an award is settled are assumed to be used to repurchase shares in the current period.  


Our company excluded 13,300,000 and 7,100,000 common stock equivalents outstanding as of July 31, 2012 and 2011, respectively, as their exercise prices were in excess of the average closing market price of our company’s common stock, causing their effects to be anti-dilutive using the treasury stock method.  


The following is a summary of outstanding securities which have been included in the calculation of diluted net income per share and reconciliation of net income to net income available to common stock holders for the three months ended July 31, 2012:


 

 

For the Three

Months Ended

July 31, 2012

 

Weighted average common shares outstanding used in calculating

   basic earnings per share

 

 

104,383,000

 

Warrants

 

 

6,947,147

 

Effect of conversion feature on loans payable

 

 

20,000,000

 

Weighted average common and common equivalent shares used in

   calculating diluted earnings per share

 

 

131,330,147

 

 

 

 

 

 

Net income as reported

 

$

1,360,407

 

Add - Interest on convertible loans payable

 

 

18,904

 

Net income available to common stockholders

 

$

1,379,311

 





10






Revenue Recognition


Our company recognizes revenues from contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.


Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. No profit is recognized on change orders until they have been approved by the customer.


The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess of revenues recognized.


Recent Accounting Pronouncements


The FASB issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature in the Accounting Standards Codification (“ASC”). There have been a number of ASUs to date that amend the original text of ASC. Our company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to our company or (iv) are not expected to have a significant impact on our company.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk


As a "smaller reporting company", we are not required to provide the information required by this Item.


Item 4.  Controls and Procedures


Management's Report on Disclosure Controls and Procedures


We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our president (our principal executive officer) and our chief financial officer (our principal financial officer and principle accounting officer) to allow for timely decisions regarding required disclosure.


As of the end of the quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our president (our principal executive officer) and our chief financial officer (our principal financial officer and principle accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president (our principal executive officer) and our chief financial officer (our principal financial officer and principle accounting officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.


Changes in Internal Control over Financial Reporting


During the period covered by this report there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




11






PART II - OTHER INFORMATION


Item 1.  Legal Proceedings


We know of no material, existing or pending legal proceedings 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 beneficial shareholder, is an adverse party or has a material interest adverse to our interest.


Item 1A.  Risk Factors


Much of the information included in this quarterly report includes or is based upon estimates, projections or other forward-looking statements. Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements.


Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below. We caution readers of this quarterly report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward-looking statements. In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.


Risks Related to Our Business


We have a history of losses and limited revenues, which raise substantial doubt about our ability to continue as a going concern.


From inception to July 31, 2012, we have incurred an accumulated deficit of $20,086,596. We can offer no assurance that we will ever operate profitably or that we will generate positive cash flow in the future. In addition, our operating results in the future may be subject to significant fluctuations due to many factors not within our control, such as the unpredictability of when customers will order products, the size of customers’ orders, the demand for our products, and the level of competition and general economic conditions.


Our company’s operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. No assurance can be given that we may be able to operate on a profitable basis.


Due to the nature of our business and the early stage of our development, our securities must be considered highly speculative. We have not realized a profit from our operations to date and there is little likelihood that we will realize any profits in the short or medium term. Any profitability in the future from our business will be dependent upon the successful commercialization or licensing of our core products, which themselves are subject to numerous risk factors as set forth below.


We expect to continue to incur development costs and operating costs. Consequently, we expect to incur operating losses and negative cash flows until our products gain market acceptance sufficient to generate a commercially viable and sustainable level of sales, and/or additional products are developed and commercially released and sales of such products made so that we are operating in a profitable manner. Our history of losses and limited revenues raise substantial doubt about our ability to continue as a going concern.




12






We have had negative cash flows from operations since inception. We will require significant additional financing, the availability of which cannot be assured, and if our company is unable to obtain such financing, our business may fail.


To date, we have had negative cash flows from operations and have depended on sales of our equity securities and debt financing to meet our cash requirements. We may continue to have negative cash flows. We have estimated that we will require approximately $1,500,000 to carry out our business plan for the next twelve months. There is no assurance that actual cash requirements will not exceed our estimates. We will require additional financing to finance working capital and pay for operating expenses and capital requirements until we achieve a positive cash flow.


Our ability to market and sell our waste water treatment plant system will be dependent upon our ability to raise significant additional financing. If we are unable to obtain such financing, we will not be able to fully develop our business. Specifically, we will need to raise additional funds to:


·

support our planned growth and carry out our business plan;


·

protect our intellectual property;


·

hire top quality personnel for all areas of our business;


·

address competing technological and market developments; and


·

market and develop our technologies.


We may not be able to obtain additional equity or debt financing on acceptable terms as required. Even if financing is available, it may not be available on terms that are favorable to us or in sufficient amounts to satisfy our requirements. Any additional equity financing may involve substantial dilution to our then existing shareholders. If we require, but are unable to obtain, additional financing in the future, we may be unable to implement our business plan and our growth strategies, respond to changing business or economic conditions, withstand adverse operating results and compete effectively. More importantly, if we are unable to raise further financing when required, we may be forced to scale down our operations and our ability to generate revenues may be negatively affected.


We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.


We have a history of limited revenues from operations and have no significant tangible assets. We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. We have only recently completed our acquisition of the U.K. patent in respect to the BioShaft System and our company has limited operating history in the business of designing and manufacturing domestic waste water treatment plant system. Accordingly, we must be considered in the development stage. Our success is significantly dependent on a successful commercialization of our waste water treatment plant system. Our operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to develop a useful waste water treatment system or achieve commercial acceptance of our waste water treatment plant system or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.





13






If we fail to effectively manage the growth of our company and the commercialization of our products and technology, our future business results could be harmed and our managerial and operational resources may be strained.


As we proceed with the commercialization of our products, technologies and the expansion of our marketing and commercialization efforts internationally, we expect to experience significant growth in the scope and complexity of our business. We will need to add staff to market our services, manage operations, handle sales and marketing efforts and perform finance and accounting functions. We anticipate that we will be required to hire a broad range of additional personnel in order to successfully advance our operations. This growth is likely to place a strain on our management and operational resources. The failure to develop and implement effective systems, or to hire and retain sufficient personnel for the performance of all of the functions necessary to effectively service and manage our potential business, or the failure to manage growth effectively, could have a material adverse effect on our business and financial condition.


We do not have the ability to manufacture our product on a commercial scale and will need to rely on third-party manufacturers and other third parties for production of our products, and our dependence on these manufacturers may impair the development of our product candidates.


Currently, we do not have the ability to internally manufacture our product on a commercial scale. We are in the process of identifying manufacturers for long-term supply contracts of components and subassemblies of our product. There are several potential manufacturers capable of manufacturing components and subassemblies for our waste water treatment plant system. There can be no assurance that we will be able to successfully negotiate long-term agreements with any of such potential manufacturers at a reasonable price and on other acceptable terms.

If our third-party manufacturers fail to deliver our products on a timely basis, with sufficient quality, and at commercially reasonable prices, we may be required to delay, suspend or otherwise discontinue development and production of our product. While we may be able to identify replacement third-party manufacturers or develop our own manufacturing capabilities for our product, this process would likely cause a delay in the availability of our product and an increase in costs. We may also be required to enter into long-term manufacturing agreements that contain exclusivity provisions and/or substantial termination penalties. In addition, third-party manufacturers may have a limited number of facilities in which our product can be produced, and any interruption of the operation of those facilities due to events such as equipment malfunction or failure or damage to the facility by natural disasters could result in the cancellation of shipments, loss of product in the manufacturing process or a shortfall in available product.


We depend upon a number of third party suppliers for component parts for our products, and any disruption from such suppliers could prevent us from delivering our products to our customers within required timeframes or at scheduled prices, which could result in order cancellations and a decline in sales.


We assemble our products using materials and components procured from a number of third-party suppliers. If we fail to maintain our relationships with these suppliers, we may be unable to assemble our products or our products may be available only at a higher cost or after a long delay. We may be unable to obtain comparable materials and components from alternative suppliers. Our failure to obtain components that meet our quality, quantity, technological and cost requirements in a timely manner may interrupt or impair our ability to assemble our products or it may increase our manufacturing cost. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. Any of these factors could prevent us from delivering our products to our customers within required timeframes, and we may experience order cancellations which would adversely affect our business operations.





14






We may lose our competitiveness if we are not able to protect our proprietary technology and intellectual property rights against infringement, and any related litigation may be time-consuming and costly.


Our success and ability to compete depends to a significant degree on our proprietary technology. If any of our competitors copy or otherwise gain access to our proprietary technology or develop similar technologies independently, we may not be able to compete as effectively. The measures we have implemented to protect our proprietary technology and other intellectual property rights are currently based upon a combination of a patent, patent applications and trade secrets. These measures, however, may not be adequate to prevent the unauthorized use of our proprietary technology and our other intellectual property rights. Our pending patent applications may not result in the issuance of any patents or any issued patents that will offer protection against competitors with similar technology. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, may result in substantial costs and a diversion of our company's resources. In addition, notwithstanding our rights to our intellectual property, other persons may bring claims against us alleging that we have infringed on their intellectual property rights or claims that our intellectual property rights are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate, divert our attention and resources, result in the loss of goodwill associated with our business or require us to make changes to our technology.


The manufacture, use or sale of our waste water treatment plant system may infringe on the patent rights of others, and we may be forced to litigate if an intellectual property dispute arises.


If we infringe or are alleged to have infringed another party's patent rights, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, do not successfully defend an infringement action or are unable to have infringed patents declared invalid, we may:


·

incur substantial monetary damages;


·

encounter significant delays in marketing our waste water treatment plant system;


·

be unable to conduct or participate in the manufacture, use or sale of our waste water treatment plant system;


·

lose patent protection for our inventions and products; or


·

find that our patents are unenforceable, invalid, or have a reduced scope of protection.


Parties making such claims may be able to obtain injunctive relief that could effectively block our ability to further develop or commercialize our waste water treatment plant system in United States, Central and Eastern Europe, Asia and Middle East and could result in the award of substantial damages. Defense of any lawsuit or failure to obtain any such license could substantially harm our company. Litigation, regardless of outcome, could result in substantial cost to and a diversion of efforts by our company.


Because our waste water treatment plant system has not been accepted as a recognized form of waste water treatment, we face significant barriers to acceptance of our services.


Our waste water treatment plant system has not been fully utilized in any particular market. The use of equipment such as ours is a relatively new form of waste water treatment. Traditionally, these services are provided through other treatment methodologies, such as chemicals or other aeration methods. Accordingly, we face significant barriers to overcome the consumer preferences of traditionally used treatment programs for the type of waste water treatment products and services that we offer.




15






Market acceptance of our products and services will depend in large part upon our ability to demonstrate the technical and operational advantages and cost effectiveness of our products and services as compared to alternative, competing products and services, and our ability to train customers concerning the proper use and application of our products. There can be no assurance that our products and services will achieve a level of market acceptance that will be profitable for us.


Our waste water treatment plant system may not achieve market acceptance at a level necessary for us to operate successfully.


Our waste water treatment plant system may not achieve market acceptance at a level necessary to enable production at a reasonable cost, to support the required sales and marketing effort, to effectively service and maintain, and to support continuing research and development costs. In addition, our waste water treatment plant system may:


·

be difficult or overly expensive to produce;


·

fail to achieve performance levels expected by customers;


·

have a price level that is unacceptable in our targeted industries; or


·

be precluded from commercialization by the proprietary rights of others or other competitive forces.


We cannot assure you that we will be able to successfully manufacture and market our waste water treatment plant system on a timely basis, achieve anticipated performance levels or throughputs, gain and maintain industry acceptance of our waste water treatment plant system or develop a profitable business. The failure to achieve any of these objectives would have a material adverse effect on our business, financial condition and results of operations.


Because we face intense competition from larger and better-established companies that have more resources than we do, we may be unable to implement our business plan or increase our revenues.


The market for our waste water treatment products and services is intensely competitive and highly fragmented. Many of these competitors may have longer operating histories, greater financial, technical and marketing resources, and enjoy existing name recognition and customer bases. New competitors may emerge and rapidly acquire significant market share. In addition, new technologies likely will increase the competitive pressures we face. Competitors may be able to respond more quickly to technological change, competitive pressures, or changes in consumer demand. As a result of their advantages, our competitors may be able to limit or curtail our ability to compete successfully.


In addition, many of our large competitors may offer customers a broader or superior range of services and technologies. Some of our competitors may conduct more extensive promotional activities and offer lower commercialization and licensing costs to customers than we do, which could allow them to gain greater market share or prevent us from establishing and increasing our market share. Increased competition may result in significant price competition, reduced profit margins or loss of market share, any of which may have a material adverse effect on our ability to generate revenues and successfully operate our business. Our competitors may develop technologies superior to those that our company currently possess. In the future, we may need to decrease our prices if our competitors lower their prices. Our competitors may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Such competition will potentially affect our chances of achieving profitability, and ultimately affect our ability to continue as a going concern.


If product liability lawsuits are successfully brought against us, we will incur substantial liabilities and may be required to limit commercialization of our products.


We face an inherent business risk of exposure to product liability claims in the event that an individual is harmed because of the failure of our products to function properly. If we cannot successfully defend ourselves against the product liability claim, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:



16






·

decreased demand for our products;


·

injury to our reputation;


·

costs of related litigation;


·

substantial monetary awards to plaintiffs;


·

loss of revenues; and


·

the inability to commercialize our technologies.


We currently carry no product liability insurance. Although we expect to obtain product liability insurance coverage in connection with the commercialization of our products, such insurance may not be available on commercially reasonable terms or at all, or such insurance, even if obtained, may not adequately cover any product liability claim. A product liability or other claim with respect to uninsured liabilities or in excess of insured liabilities could have a material adverse effect on our business and prospects.


Products which incorporate our waste water treatment technology will be subject to extensive regulation, which can be costly and time-consuming and could subject us to unanticipated delays or prevent us from obtaining the required approvals to commercialize our products.


Before we can market and sell products which incorporate our waste water treatment technology in the United States and abroad, extensive regulatory testing, inspection and approvals may be required. The regulatory process can be costly and time consuming. Our products which incorporate the waste water treatment technology may not receive necessary regulatory approval. Even if these products receive approval, the approval process might delay marketing and sale of our products, which may lead to a failure to meet our sales projections.


We will be subject to laws, regulations and other procedures with respect to government procurement.


Because we plan to sell some of our products to government agencies, we will be subject to laws, regulations and other procedures that govern procurement and contract implementation by those agencies. These agencies are likely to impose vendor qualification requirements, such as requirements with respect to financial condition, insurance and history. We have limited experience with government procurement and cannot assure you that we will be able to meet existing or future procurements laws, regulations and procedures or that we will be able to qualify as a vendor.


Substantially all of our assets and a majority of our directors and officers are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.


Although we are organized under the laws of the State of Nevada, United States, a majority of our directors and our officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States. As a result, it may be difficult for investors to enforce judgments against us that are obtained in the United States in any action, including actions predicated upon civil liability provisions of federal securities laws. In addition, as the majority of our assets are located outside of the United States, it may be difficult to enforce United States bankruptcy proceedings against us. Under bankruptcy laws in the United States, courts typically have jurisdiction over a debtor's property, wherever it is located, including property situated in other countries. Courts outside of the United States may not recognize the United States bankruptcy court's jurisdiction. Accordingly, you may have trouble administering a United States bankruptcy case involving a Nevada company as debtor with most of its property located outside the United States. Any orders or judgments of a bankruptcy court obtained by you in the United States may not be enforceable.




17






Our by-laws contain provisions indemnifying our officers and directors against all costs, charges and expenses incurred by them.


Our by-laws contain provisions with respect to the indemnification of our officers and directors against all expenses, liability and loss (including attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him or her in connection with any action, suit or proceeding to which they were made parties by reason of his or her being or having been one of our directors or officers.


Currency translation and transaction risk may negatively affect our net sales, cost of sales and gross margins, and could result in exchange losses.


Although our reporting currency is the United States dollar, we intend to conduct our business and incur costs in the local currency of the other countries in which we intend to operate. Changes in exchange rates between foreign currencies and the United States dollar could affect our net sales and cost of sales figures, and could result in exchange losses. In addition, we incur currency transaction risk whenever we enter into either a purchase or a sales transaction using a dollar currency other than the United States.


Risks Related to Our Common Stock


A decline in the price of our common stock could affect our ability to raise further working capital, it may adversely impact our ability to continue operations and we may go out of business.


A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because we may attempt to acquire a significant portion of the funds we need in order to conduct our planned operations through the sale of equity securities, a decline in the price of our common stock could be detrimental to our liquidity and our operations because the decline may cause investors to not choose to invest in our stock. If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer and not be successful and we may go out of business. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our common stock and we may be forced to go out of business.


If we issue additional shares in the future, it will result in the dilution of our existing shareholders.


We are authorized to issue up to 300,000,000 shares of common stock and 25,000,000 preferred shares with a par value of $0.001. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares will result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our company.


Trading of our stock may be restricted by the Securities Exchange Commission's penny stock regulations, which may limit a stockholder's ability to buy and sell our stock.


The Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the



18






penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.


FINRA sales practice requirements may also limit a stockholder's ability to buy and sell our stock.


In addition to the "penny stock" rules described above, the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers or NASD, has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds


None.


Item 3.  Defaults Upon Senior Securities


None.


Item 4.  Mine Safety Disclosures


Not applicable.


Item 5.  Other Information


None.












19






Item 6.  Exhibits


Exhibit

Number

Description

(3)

Articles of Incorporation and Bylaws

3.1

Articles of Incorporation (incorporated by reference from our Registration Statement on Form SB-2 filed on June 13, 2006)

3.2

By-laws (incorporated by reference from our Registration Statement on Form SB-2 filed on June 13, 2006)

3.3

Certificate of Amendment (incorporated by reference from our Current Report on Form 8-K filed on August 6, 2007)

3.4

Articles of Merger filed with the Secretary of State of Nevada on September 24, 2007 and which is effective September 28, 2007 (incorporated by reference from our Current Report on Form 8- K filed on September 28, 2007)

(10)

Material Contracts

10.1

Asset Purchase Agreement dated September 18, 2007 between Hans Bio Shaft Limited, Hassan Hans Badreddine and our company (incorporated by reference from our Current Report on Form 8-K filed on September 24, 2007)

10.2

Patent Assignment Agreement dated September 18, 2007 between Hans Bio Shaft Limited and our company (incorporated by reference from our Current Report on Form 8-K filed on September 24, 2007)

10.3

Stock Option Plan of our company dated December 15, 2007 (incorporated by reference from our Quarterly Report on Form 10-QSB filed on March 17, 2008)

10.4

Consulting Agreement dated January 21, 2008 between our company and Tom Houston (incorporated by reference from our Annual Report on Form 10-KSB/A filed on August 14, 2008)

10.5

Loan Agreement made as of August 11, 2008 between our company and Premier Financial and Marketing Co. Ltd. (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 12, 2008)

10.6

General Security Agreement made as of August 11, 2008 between our company and Premier Financial and Marketing Co. Ltd. (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 12, 2008)

10.7*

Loan Agreement made as of March 6, 2009 between our company and Premier Financial and Marketing Co. Ltd.

10.8

Teaming Agreement dated March 6, 2010 between our company and Zuheir Zahran & Co. (incorporated by reference from our quarterly report on Form 10-Q filed on December 15, 2011)

10.9

Stock Option Agreement made as of August 2, 2011 between our company and Walter Zurawick (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 19, 2011)

10.10

Stock Option Agreement made as of August 15, 2011 between our company and Canadian Environmental Consulting (incorporated by reference from our Quarterly Report on Form 10-Q filed on September 19, 2011)

10.11

Employment Agreement made as of February 1, 2012 between our company and Walter J. Zurawick Jr. (incorporated by reference from our Quarterly Report on Form 10-Q filed on February 29, 2012)

10.12

Amending Agreement made as of February 23, 2012 between our company and Premier Financial Marketing Co. Ltd. (incorporated by reference from our Current Report on Form 8-K filed on March 7, 2012)

10.13

Assignment Agreement made as of February 23, 2012 between our company and Six Capital Limited (incorporated by reference from our Current Report on Form 8-K filed on March 7, 2012)




20






Exhibit

Number

Description

10.14*

Consulting Agreement made as of May 1, 2012 between our company and Sustainable Water Corp.

10.15*

Consulting Agreement made as of July 1, 2012 between our company and Canadian Environmental Designers, Inc.

10.16*

Non-Disclosure Agreement made as of July 1, 2012 between our company and Canadian Environmental Designers, Inc.

10.17*

Consulting Agreement made as of July 1, 2012 between our company and SRA Real Estate Services, Inc.

10.18*

Consulting Agreement made as of July 1, 2012 between our company and Hydro E+, LLC

(14)

Code of Ethics

14.1

Code of Ethics and Business Conduct dates effective July 1, 2008 (incorporated from our Annual Report on Form 10-KSB/A filed on August 14, 2008)

(31)

Rule 13a-14(a)/15d-14(a) Certifications

31.1*

Section 302 Certification under Sarbanes-Oxley Act of 2002 of Walter J. Zurawick, Jr.

31.2*

Section 302 Certification under Sarbanes-Oxley Act of 2002 of Imad Kamel Yassine

(32)

Section 1350 Certifications

32.1*

Section 906 Certification under Sarbanes-Oxley Act of 2002 of Walter J. Zurawick, Jr.

32.2*

Section 906 Certification under Sarbanes-Oxley Act of 2002 of Imad Kamel Yassine

101**

Interactive Data File

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document



*

Filed herewith.


**

To be filed by amendment. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.









21






SIGNATURES


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


 

BIOSHAFT WATER TECHNOLOGY, INC.

 

 

Date:  September 14, 2012

/s/ Walter J. Zurawick, Jr.

 

Walter J. Zurawick, Jr.

 

President, Chief Executive Officer and Director

 

(Principal Executive Officer)

 

 

 

 

 

 

Date:  September 14, 2012

/s/ Imad Kamel Yassine

 

Imad Kamel Yassine

 

Chief Operating Officer, Chief Financial Officer,

 

Secretary, Treasurer and Director

 

(Principal Financial Officer and Principal Accounting Officer)





















22


PINX:BSHF Bioshaft Water Tech Inc Quarterly Report 10-Q Filling

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