10QSB 1 cdt10q2ndqtr2005.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10 - QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2005

Capacitive Deionization Technology Systems, Inc.

(Exact name of registrant as specified in its charter)

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

13636 Neutron Road, Dallas, Texas 75244-4410

(Address of Principal executive offices)

972-934-1586

(Registrant's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

(1) Yes X No

(2) Yes X No

The number of shares outstanding of the registrant's $.0001 par value common stock as of July 31, 2005 was 21,954,660.

Capacitive Deionization Technology Systems, Inc.

Index			Page
Part I	Financial Information

	Item 1	Financial statements

		Balance Sheets as of June 30, 2005 and
		December 31, 2004	3

		Statements of Operations for the three and six
		months ended June 30, 2005 and 2004 and Cumulative Amounts Through June 30, 2005	4

		Statements of Cash Flows for the six
		months ended June 30, 2005 and 2004 and Cumulative Amounts Through June 30, 2005	5

		Notes to Financial Statements	6-8

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

	Item 3	Controls and Procedures	9

Part II	Other Information

	Item 2	Changes in securities	9

	Item 3	Defaults Upon Senior Securities	10

	Item 4	Submission of Matters to a Vote of Security Holders	11

	Item 6	Exhibits and Reports on Form 8-K	11

Signature page			11

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

(A Development Stage Entity)

BALANCE SHEETS

Assets

	June 30,	December 31,
	2005	2004
Current assets:	(Unaudited)	(Audited)
Cash	$ 181,615	$ 355,586
Note receivable	40,000	40,000
Total current assets	221,615	395,586

Furniture and equipment	94,421	37,421
Less accumulated depreciation	(13,969)	(25,442)
Total furniture and equipment	80,452	11,979
	$ 302,067	$ 407,565

Liabilities and Stockholders' Equity (Deficit)

Current liabilities:
Accounts payable	$ 281,573	$ 294,785
Wages payable	703,185	714,388
Accrued liabilities	407,256	286,927
Customer deposits	203,700	203,700
Current portion of long-term debt	304,816	374,816
Current portion of long-term debt - related parties	1,568,000	1,368,000
Total current liabilities	3,468,530	3,242,616

Other long-term debt	427,170	374,925

Commitments and contingencies	-	-

Stockholders' equity (deficit):
Preferred stock, $.0001 par value, 20,000,000 shares
authorized; none issued and outstanding	-	-
Common stock, $.0001 par value, 80,000,000 shares
authorized; 21,688,673 shares issued and outstanding
in 2005; 17,675,499 and 16,581,799 shares
issued and outstanding in 2004	2,168	1,908
Additional paid-in capital	9,382,653	8,635,991
Accumulated deficit from previous operating activities	(3,523,977)	(3,523,977)
Deficit accumulated during the development stage	(9,454,477)	(8,323,898)
Total stockholders' equity (deficit)	(3,593,633)	(3,209,976)
	$ 302,067	$ 407,565

See accompanying notes to financial statements.

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

(A Development Stage Entity)

STATEMENTS OF OPERATIONS

Three and Six Months Ended June 30, 2005 and 2004

And Cumulative Operations as a Development Stage Entity (January 1, 2000 Through June 30, 2005)

(Unaudited)

					Cumulative
	Three Months Ended June 30,		Six Months Ended June 30,		Through
	2005	2004	2005	2004	June 30, 2005

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

Operating expenses:
Cost of sales	-	-	-	-	10,935
Common stock and options issued for services --
General and administrative	34,053	43,588	91,131	112,713	2,112,941
Common stock and options issued for services --
Research and development	7,816	17,250	25,266	52,250	418,614
Other research and development	338,920	75,195	498,428	285,927	3,859,055
General and administrative (excluding
amounts applicable to stock and options
issued for services each period)	102,346	89,686	257,419	199,431	2,350,610
	483,135	225,719	872,244	650,321	8,752,155

Loss from operations	(483,135)	(225,719)	(872,244)	(650,321)	(8,737,155)

Other income (expense):
Other income	-	8,946	-	8,946	25,217
Interest expense	(119,586)	(40,253)	(258,335)	(72,363)	(742,539)
Total other income (expense)	(119,586)	(31,307)	(258,335)	(63,417)	(717,322)
Net loss	$ (602,721)	$ (257,026)	$ (1,130,579)	$ (713,738)	$ (9,454,477)

Basic and diluted net loss per common share:	$ (0.03)	$ (0.01)	$ (0.05)	$ (0.04)

Weighted average common shares outstanding	21,632,213	17,934,999	20,587,778	17,569,316

See accompanying notes to financial statements.

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

(A Development Stage Entity)

STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2005 and 2004

And Cumulative Operations as a Development Stage Entity (January 1, 2000 through June 30, 2005)

(Unaudited)

			Cumulative
			Through
	2005	2004	June 30, 2005

Cash flows from operating activities:
Net loss	$(1,130,579)	$(713,738)	$ (9,454,477)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation	5,386	795	27,100
Writedown of note receivable	-	-	140,611
Shares issued for services	108,736	148,475	1,993,063
Stock options and warrants issued for services	7,661	16,488	540,526
Changes in operating assets and liabilities:
Accounts receivable	-	10,000	-
Note receivable	-	-	(40,000)
Accounts payable and accrued liabilities	219,339	264,669	2,442,507
Net cash used in operating activities	(789,457)	(273,311)	(4,350,670)

Cash flows from investing activities:
Purchase of furniture and equipment	(73,859)	-	(100,155)

Cash flows from financing activities:
Sale of common shares and warrants	297,100	148,300	2,492,264
Net advances from shareholder	-	-	(96,388)
Net payments on long-term debt	(60,000)	(12,000)	(179,315)
Payments to former subsidiary	-	-	(238,192)
Additions to convertible debt and notes payable	452,245	137,425	2,103,170
Proceeds (payments) - notes payable to stockholders	-	-	161,500
Net cash provided by financing activities	689,345	273,725	4,243,039

Net increase (decrease) in cash and cash equivalents	(173,971)	414	(207,786)

Cash at beginning of period	355,586	333	389,401

Cash at end of period	$ 181,615	$ 747	$ 181,615


Supplemental disclosure:
Total interest paid	$ 5,200	$ -	$ 97,164

Non-cash transactions:

During 2005, the Company issued 846,000 common shares to settle $210,000 in notes payable and 493,700

shares to settle $123,425 in accrued interest.

During 2004, the Company issued 216,000 common shares to settle $50,000 accounts payable and $4,000 accrued wages.

During 2004, the Company negotiated a settlement of an account payable in which the note receivable issued for stock

of $45,000 was returned to the creditor for $95,900 in accounts payable, resulting in other income of $50,400.

See accompanying notes to financial statements.

CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

June 30, 2005

Note 1 - Future Operations

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

The Company was funded initially through investment by its co-founder. Since 1998 funding has been through private placements.

The Company recognizes the extent of the financial investment necessary to support the planned business activities. There is no guarantee that the Company can complete management's plan to raise capital and generate additional operating funds. However, the Company is negotiating the following options:

*	An investment bank providing PIPE (Private Investment in a Public Entity) funding necessary to finance the manufacturing facility
*	An equity participation international manufacturing joint venture
*	Expansion of current strategic and investment alliances
*	An alliance with industry and government partners to accelerate pilot systems for the Powder River CBME Gas Wastewater Remediation Project

Business opportunities will rely on the Company executing its polymerization, pyrolization and assembly outsourcing plans. The Company's plans to produce over 1,000 Aqua Cells in the next twelve months are dependent on financing and expanding outsourcing capacities.

To meet the 2005 and 2006 requirements, the Company must obtain the working capital necessary for its planned Texas manufacturing facility, capital equipment and required personnel. To meet these needs, capital must be received or committed by September 30, 2005.

The Company has expanded its commitment to developing a team of strategic partners by providing demonstration AquaCells for technology and application testing. To date, demonstration AquaCells are implemented in Japan, Australia, Holland and Canada, as well as the U.S. Ongoing CDT application development is active at Texas A&M University, Texas Water Development Board, Colorado School of Mines, U.S. Bureau of Reclamation, as well as several multi-national corporate strategic partners' identified applications.

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

Note 2 Summary of Significant Accounting Policies and Practices

(a) Description of Business

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

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

(b) Net Loss per Weighted Average Share

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

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB of Regulations S-B. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements for the year ended December 31, 2004 which has been included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with those financial statements to be included in the Form 10-KSB. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the six months ended June 30, 2005 are not indicative of the results that may be expected for the year ending December 31, 2005.

(d) Stock-Based Compensation

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

The Company issued no options or warrants to employees during the quarter ended June 30, 2005. During the quarter ended March 31, 2005, the Company issued 150,000 options to an employee, exercisable over five years at $.22 per share. The effect on pro forma net loss and net loss per share was nominal.

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

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

Results of operations

To date the Company has recognized nominal revenue. General and administrative expenses were increased to $102,346 in the second quarter of 2005 compared to $89,686 in the second quarter of 2004, principally due to legal and consulting fees relating to the Company's current financing efforts. Research and development expenditures for the second quarter of 2005 increased to $338,920 compared to $75,195 in the second quarter of 2004. R & D expenses totaled 70% of operating expenses in the second quarter of 2005 compared to 41% in 2004.

Liquidity and capital resources.

Management recognizes the requirement for additional investment to execute the Company's business plan and complete the necessary manufacturing and research facilities. Financing transactions are currently being negotiated. These include an investment bank providing PIPE (Private Investment in a Public Entity) funding necessary to finance the manufacturing facility, an equity participation international manufacturing joint venture, and long-term asset financing. There is no certainty that this funding will be completed.

Item 3. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company's principal executive and financial officers have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 as of a date (the "Evaluation Date") the end of the period. Based upon that evaluation, the Company's principal executive and financial officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in ensuring that all material information relating to the Company required to be filed in this quarterly report has been made known to them in a timely manner.

(b) Changes in internal controls.

There have been no significant changes made in the Company's internal controls or in other factors that has or will likely materially affect internal controls over financial reporting.

Part II

Item 1 Legal Proceedings

None.

Item 2 Unregistered Sales of Equity Securities

During the first quarter 2005, three-year convertible debentures, convertible at $.50 per share, provided $31,500 to the Company. In addition, a private placement to individual accredited investors of 1,178,300 shares of the Company's rule 144 common stock was completed. The private placement provided the Company $230,000 in cash through the issuance of 864,834 shares; 69,800 shares were issued for $17,450 of engineering services, 197,666 shares were issued for $49,417 of professional services; and 46,000 shares were issued to settle $10,000 of notes payable.

During the second quarter 2005, three-year convertible debentures, convertible at $.50 per share, provided $20,745 to the Company. In addition, a private placement to individual accredited investors of 1,639,647 shares of the Company's rule 144 common stock was completed. The private placement provided the Company $67,100 in cash through the issuance of 209,397 shares; 27,175 shares were issued for $7,816 of engineering services, 109,375 shares were issued for $34,054 of professional services, 800,000 shares were issued to settle $200,000 of notes payable and 493,700 shares were issued to settle $123,425 in accrued interest.

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

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

Item 3. Defaults Upon Senior Securities

As of June 30, 2005, the Company is in repayment default on the principal and interest on certain of its notes payable in the following amounts: Principal -- $417,816; Interest -- $70,840.

Item 4. Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Stockholders was held on July 14, 2005. At the meeting:

(i) The following persons were elected as directors of the Company, to serve until the next Annual Meeting of Stockholders and until their successors are duly elected and qualified, each receiving the number of votes set forth opposite their names:

	For	Withheld
Thomas Friezen	13,793,392	523,100
Ann Heywood	13,688,892	627,600
Takeshi Ogata	13,689,492	627,000
Dallas Talley	14,079,892	236,600

(ii) The Appointment of Turner, Stone & Company, L.L.P. as the independent auditors for the Company for the year ended December 31, 2005 was ratified, with 14,315,092 shares voting in favor of the appointment and 1,400 voting against.

(iii) The 2001 Stock Option Plan was amended to increase by 2,000,000 the number of shares of our common stock available for grant under the ISO Plan from 1,200,000 shares to 3,200,000 shares. Voting was 11,579,977 shares for the amendment and 137,400 against.

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

(b) Exhibits

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

Reports on Form 8-K

The Company filed a Form 8-K on May 4, 2005 to report a change in its certifying accountant. The Company also filed a Form 8-K on July 18, 2005 to report the addition of a new member of the Board of Directors, John Macgregor, to report certain amendments to the Company's Bylaws and to report the adoption of a Code of Ethics.

SIGNATURE

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

Capacitive Deionization Technology Systems, Inc.

/s/ Dallas Talley

Dallas Talley

Chairman of the Board,

Chief Executive Officer

Dated: August 12, 2005

Capacitive Deionization Technology Systems, Inc.

/s/ Phil Marshall

Phil Marshall

Chief Financial Officer

Dated: August 12, 2005