ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31,
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2016
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June 30,
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(unaudited)
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2015
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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730,443
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$
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1,478,565
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Accounts receivable
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154,388
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-
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Inventory, net
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210,819
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135,599
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Total current assets
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1,095,650
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1,614,164
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Property and equipment, net
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132,465
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100,372
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Patents, net
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20,765
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37,166
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Other assets
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9,500
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9,500
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Total assets
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$
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1,258,380
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$
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1,761,202
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities:
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Accounts payable and accrued expenses
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$
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226,687
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$
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198,686
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Accrued payroll and payroll taxes due to officers
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1,016,223
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1,016,223
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Related party payable
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1,147
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1,147
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Advances from distributor
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1,372,551
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1,620,701
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Total current liabilities
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2,616,608
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2,836,757
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Commitments and contingencies
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Stockholders’ deficit:
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Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2016 and June 30, 2015, respectively.
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-
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-
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Common stock, $0.001 par value, 1,000,000,000 shares authorized, 193,997,906 and 184,968,551 shares issued and outstanding as of March 31, 2016 and June 30, 2015, respectively
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193,999
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184,968
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Additional paid-in capital
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22,062,887
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21,259,285
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Common stock issuable, 9,029,251 shares
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-
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812,633
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Accumulated deficit
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(23,615,114
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)
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(23,332,441
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)
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Total stockholders’ deficit
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(1,358,228
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)
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(1,075,555
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)
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Total liabilities and stockholders’ deficit
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$
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1,258,380
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$
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1,761,202
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See accompanying notes, which are an integral part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
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For the Nine Months Ended
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March 31,
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March 31,
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2016
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2015
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2016
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2015
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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Revenue
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$
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85,000
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$
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333,662
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$
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725,666
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$
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333,662
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Cost of revenue
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19,446
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52,038
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85,737
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52,038
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Gross profit
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65,554
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281,624
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639,929
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281,624
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General and administrative expenses
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280,946
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331,850
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903,272
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1,336,924
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Research and development expenses
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4,502
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2,742
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19,330
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16,746
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Total operating expenses
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285,448
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334,592
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922,602
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1,353,670
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Loss from operations
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(219,894
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)
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(52,968
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)
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(282,673
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(1,072,046
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)
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Interest expense and other
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-
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(2
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)
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-
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(1,447
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)
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Net Loss
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$
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(219,894
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)
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$
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(52,970
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)
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$
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(282,673
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)
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$
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(1,073,493
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)
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Net loss per share,
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Basic and diluted
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.01
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)
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Weighted average shares outstanding,
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Basic and diluted
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193,997,906
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184,167,693
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193,997,906
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183,781,811
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT (Unaudited)
Nine Months Ended March 31, 2016
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Common Stock
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Additional Paid-
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Common Stock
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Accumulated
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Shares
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Amount
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in Capital
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Issuable
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Deficit
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Total
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Balance at June 30, 2015
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184,968,551
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$
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184,968
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$
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21,259,285
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$
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812,633
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$
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(23,332,441
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)
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$
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(1,075,555
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)
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Common stock issued to Note holders
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9,029,355
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9,031
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803,602
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(812,633
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)
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-
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Net loss
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(282,673
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(282,673
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Balance at March 31, 2016
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193,997,906
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$
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193,999
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$
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22,062,887
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$
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-
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$
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(23,615,114
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)
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$
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(1,358,228
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)
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Nine Months Ended March 31,
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2016
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2015
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(unaudited)
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(unaudited)
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Operating activities:
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Net loss
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$
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(282,673
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)
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$
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(1,073,493
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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45,873
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64,391
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Fair value of common stock, options and warrants issued for services
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-
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299,083
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Effect of changes in:
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Inventory
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(75,220
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)
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3,068
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Accounts payable and accrued expenses
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28,001
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(17,480
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)
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Accrued payroll and payroll taxes
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-
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(13,809
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)
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Accounts receivable
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(154,388
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)
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-
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Advances from distributor
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300,000
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1,000,000
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Reduction in distributor advances from recognition of revenue
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(548,150
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)
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(333,662
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)
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Net cash used in operating activities
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(686,557
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)
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(71,901
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)
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Investing activities:
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Purchase of property and equipment
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(61,565
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)
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-
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Net cash used by investing activities
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(61,565
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)
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-
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Financing activities:
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Proceeds from sale of common stock
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-
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375,498
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Net cash provided by financing activities
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-
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375,498
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Net increase (decrease) in cash
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(748,122
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)
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303,597
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Cash, beginning of period
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1,478,565
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1,226,508
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Cash, end of period
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$
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730,443
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$
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1,530,105
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$
|
-
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$
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-
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Cash paid for income taxes
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$
|
1,600
|
|
|
$
|
1,600
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|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine months ended March 31, 2016 and 2015
Note 1 - Organization and Basis of Presentation
Basis of Presentation
The accompanying condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated
in the United States of America (“U.S.”) and with instructions to Form 10-Q pursuant to the rules and regulations of
Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and Article 8-03 of Regulation S-X under the Exchange
Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary
(consisting of normal recurring adjustments) for a fair presentation. Operating results for the nine months ended March 31, 2016
are not indicative of the results that may be expected for the fiscal year ending June 30, 2016. You should read these unaudited
condensed consolidated financial statements in conjunction with the audited financial statements and the notes thereto included
in the Company’s annual report on Form 10-K for the year ended June 30, 2015 filed on October 13, 2015. The condensed consolidated
balance sheet as of June 30, 2015 has been derived from the audited financial statements included in the Form 10-K for that year.
Cavitation Technologies, Inc. (referred
to herein, unless otherwise indicated, as “the Company,” “CTi,” “we,” “us,” and “our”)
is a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented, and commercialized
proprietary technology that may be used in liquid processing applications. CTi’s patented
Nano Reactor®
is the critical
component of CTi
Nano Neutralization® System
which is commercially proven to reduce operating costs and increase yields
in refining vegetable oils. CTi has two patented systems and has filed several national and international patents to employ its
proprietary technology in applications including, vegetable oil refining, wastewater treatment, biodiesel, algae oil extraction,
and alcoholic beverage enhancement.
Management’s Plan Regarding Going Concern
The accompanying condensed consolidated
financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation
of the Company as a going concern. During the nine months ended March 31, 2016, the Company incurred a net loss of $282,673
and used $688,557 of cash in operating activities. As of March 31, 2016, the Company had a working capital deficiency of
$1,520,958 and a stockholders’ deficit of $1,358,228. These factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern. In addition, our independent auditors, in their report on our audited financial
statements for the fiscal year ended June 30, 2015 expressed substantial doubt about our ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability
of the Company to continue as a going concern.
As of March 31, 2016, we had cash and cash
equivalents on hand of $730,443 and are not generating sufficient funds to cover operations. In addition to the funds on hand,
Management believes we will require additional funds to continue to operate our business. Management’s plan is to generate income
from operations by continuing to license our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet).
Desmet has agreed to provide us monthly advances of $50,000 to be applied against future sales pursuant to a January 2016 agreement.
This new agreement replaces the agreement dated on May 12, 2012 that ended on May 12, 2015. During the nine months ended March
31, 2016, the Company received $300,000 advances from Desmet.
We will also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that
such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, that the Company will
be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management
fail to obtain such financing, the Company may curtail its operations.
Note 2 - Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include
the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Intercompany transactions
and balances have been eliminated in consolidation.
Fair Value Measurement
FASB Accounting Standards Codification
(“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of
a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The following table presents information
about the Company’s assets and liabilities measured and reported in the financial statements at fair value on a recurring basis
as of March 31, 2016 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
The three levels of the fair value hierarchy are as follows:
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·
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Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or
liabilities that the entity has the ability to access.
|
|
·
|
Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the
full term of the assets or liabilities.
|
|
·
|
Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
|
At March 31, 2016 and June 30, 2015, the
fair values of cash and cash equivalents, accounts receivable, inventory and accounts payable and accrued expenses approximate
their carrying values due to their short term nature.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date, and reported amounts of revenue and expenses during the reporting period. Estimates and assumptions used by management affected
impairment analysis for fixed assets, capitalized patent cost, amounts of potential liabilities and valuation of issuance of equity
securities. Actual results could differ from these estimates.
Revenue Recognition
Revenue from the sale of our
Nano Reactor®
Systems
is recognized when persuasive evidence of an agreement exists; shipment has occurred, including transfer of title and
risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable;
and collectability is reasonably assured.
The Company is also entitled to certain
non-refundable profit share from our distributor from the sale of the reactors. Pursuant to the May 2012 agreement with our distributor,
the profit share was fixed and determinable at the time of shipment, and as such, recorded upon shipment and acceptance of the
reactors by the distributor. Pursuant to the January 2016 agreement with our distributor, the profit share is not fixed at the
time of delivery, and as such, revenue will be recognized when the profit shares is fixed and determinable, which will generally
be upon delivery of the
NANO Neutralization System
by the distributor to its customer.
Share-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting
period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative
guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over
the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the
non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the
measurement date.
The fair value of the Company’s common
stock options and warrants grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation
expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The
assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Dependence on Desmet Ballestra
Our revenue is almost entirely dependent
on Desmet Ballestra who is our exclusive distribution agent with regard to the
CTi Nano Neutralization® System
for edible
oils. During fiscal 2016, our revenue was derived from Desmet sales efforts (see Note 3).
Basic Loss Per Share
The Company’s computation of earnings
(loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss)
available to common stockholders by the weighted average number of common shares during the period. Diluted EPS reflects the potential
dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company.
In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds
are used to purchase common stock at the average market price during the period.
As of March 31, 2016, the Company had 12,595,992
stock options and 64,926,510 stock warrants outstanding to purchase shares of common stock that were not included in the diluted
net loss per common share because their effect would be anti-dilutive.
Recent Accounting Pronouncements
On August 27, 2014, the FASB issued ASU
2014-15, Disclosures of Uncertainties about and Entity’s Ability to Continue as a Going Concern, which provides guidance on determining
when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform
interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial
statements is issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s
ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December
15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact of adopting
ASU 2014-15 on its results of operations or financial condition.
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will
eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle
based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value
of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature,
amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes
in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting
periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either
retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the
adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process
of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future
consolidated financial statements.
Note 3 - Agreement with Desmet Ballestra
and Revenue Recognition
During the nine months ended on March
31, 20016 the Company recorded a total of $725,666 in revenue, of which $548,150 was recorded under the provisions of May 2012
agreement, and $177,516 under the terms of the new January 2016 agreement. Please see below for a further discussion of agreements
with Desmet Ballestra.
2012 Agreement
On May 14, 2012 the Company signed a three
year global
Research and Development, Marketing and Technology License Agreement
with the n.v. Desmet Ballestra Group s.a.
(Desmet), a Belgian company that is actively marketing the
NANO Neutralization System
, the key component of which is the
Company’s reactor to soybean and other vegetable oil refiners. The agreement provided Desmet (licensee) a limited, exclusive license
and right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devices on a global basis
but is limited to oils and fats and oleo chemical applications. The Company (licensor) remains owner of the current patents and
patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet provided, under
certain conditions, limited monthly advance payments of $125,000 against future sales to CTi through May 15, 2015. The agreement
with Desmet expired in May 2015.
Pursuant to the 2012 Agreement, the Company
was recognizing revenue from the sale of the reactors upon shipment and acceptance by Desmet as the Company had no further obligations
to Desmet other than the reactor’s two year standard warranty. In addition, the Company was also entitled to a share in gross
margin or profit from the sale of Desmet’s integrated neutralization system to its customer of which the reactors are an
integral component. Such revenues were recognized upon shipment of the reactors to Desmet as these amounts were fixed and the Company
had no further obligation or commitment in the installation of the integrated neutralization system to Desmet’s customer,
other than the reactors warranty.
As of June 30, 2015, outstanding advances
due to Desmet amounted to $1,620,701. During the nine months ended March 31, 2016, the Company recognized revenue of $548,150 related
to the shipment and acceptance of reactors to Desmet, including the Company’s share in gross margin or profit. As of March
31, 2016, the outstanding advances from Desmet under the May 2012 agreement amounted to $1,072,551.
Although the agreement expired in May 2015,
as of March 31, 2016, there are still open purchase orders from Desmet under this agreement for the delivery of approximately 15
more reactors during 2016. Once these reactors are shipped and accepted by Desmet, the corresponding revenues will be recognized
and the advance due Desmet eliminated.
2016 Agreement
On January 22, 2016, the Company signed
a similar three year agreement with Desmet effective August 1, 2015. As part of the agreement, Desmet will provide, under certain
conditions, limited monthly advance payments of $50,000 against future sales to CTi. The agreement may be terminated by Desmet
every August 1 should Desmet and its affiliates fail to convert a minimum of six Nano Reactors System to sold status during the
period of June 1 to May 31. The agreement may also be terminated in case the Company loses ownership of patents and patent applications
being used in the
NANO Neutralization System.
Pursuant to the 2016 Agreement, the Company
recognizes revenue from sale of reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet
other than the reactor’s two year standard warranty. In addition, Desmet now pays for such reactors on credit terms and the
amount of the sale is recorded as a receivable upon acceptance by Desmet. The Company also continues to receive a share in gross
margin or profit from the sale of Desmet’s integrated neutralization system to its customer of which the reactors are an
integral component, however, such amount is now subject to adjustment based on certain factors including costs over run. The Company
deemed that such amount is not yet fixed and determinable upon shipment of the reactors. As a result, the corresponding revenue
is now being recognized upon installation and acceptance of the integrated neutralization system by Desmet’s customer.
During the nine months ended March 31,
2016, the Company recognized revenue of $177,516 related to the shipment and acceptance of reactors to Desmet. In addition, the
Company also received advances in the aggregate of $300,000 which has not been recorded as revenue, but reported as part of Advances
from distributor in the accompanying balance sheet as of March 31, 2016. The Company expects to recognize approximately $295,000
from its share in gross margin in future periods upon delivery and acceptance of the
NANO Neutralization System
by Desmet
to its customer.
Note 4 - Property and Equipment
Property and equipment consisted of the
following as of March 31, 2016 and June 30, 2015:
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,475
|
|
|
$
|
2,475
|
|
Furniture
|
|
|
26,837
|
|
|
|
26,837
|
|
Office equipment
|
|
|
1,499
|
|
|
|
1,499
|
|
Equipment
|
|
|
129,945
|
|
|
|
68,380
|
|
Systems
|
|
|
291,084
|
|
|
|
291,084
|
|
|
|
|
451,840
|
|
|
|
390,275
|
|
Less: accumulated depreciation and amortization
|
|
|
(319,375
|
)
|
|
|
(289,903
|
)
|
Property and equipment, net
|
|
$
|
132,465
|
|
|
$
|
100,372
|
|
Depreciation expense for the nine months
ended March 31, 2016 and 2015 amounted to $29,472 and $45,633, respectively.
Note 5 - Accrued Payroll and Payroll
Taxes
As of March 31, 2016 and June 30, 2015,
the Company had accrued unpaid salaries due to current and former officers of the Company amounting to $936,866 respectively. In
addition, the Company also accrued the estimated payroll taxes due to this unpaid payroll of $79,357 respectively. The accrued
payroll is unsecured, non-interest bearing and is due upon demand.
Note 6 - Stockholders’ Deficit
Common Stock
During the nine months ended on March 31,
2016, the Company issued 9,029,355 shares of common stock pursuant to a settlement of notes payable in April 2014. These shares
were reflected as Common Stock issuable in the accompanying Statement of Changes in Stockholders’ Deficit as of June 30,
2015 and such amount was reclassified to additional paid in capital during the period ended March 31, 2016.
Stock Options
The Company has not adopted a formal stock
option plan, however, it has assumed outstanding stock options resulting from the acquisition of its wholly owned subsidiary, Hydrodynamic
Technology, Inc. In addition, the Company has made periodic non- plan grants.
A summary of the stock option activity
for the nine months ended March 31, 2016 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
|
12,810,957
|
|
|
$
|
0.10
|
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
(214,965
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2016
|
|
|
12,595,992
|
|
|
$
|
0.11
|
|
|
|
5.19
|
|
Exercisable and vested at March 31, 2016
|
|
|
12,595,992
|
|
|
$
|
0.11
|
|
|
|
5.19
|
|
The intrinsic value of the outstanding
options was $110,000 as of March 31, 2016. The following table summarizes additional information concerning options outstanding
and exercisable at March 31, 2016.
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
5.21
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
5.21
|
|
$
|
0.33
|
|
|
|
422,332
|
|
|
|
0.56
|
|
|
$
|
0.33
|
|
|
|
422,332
|
|
|
|
0.56
|
|
$
|
0.67
|
|
|
|
1,173,660
|
|
|
|
0.93
|
|
|
$
|
0.67
|
|
|
|
1,173,660
|
|
|
|
0.93
|
|
|
|
|
|
|
12,595,992
|
|
|
|
|
|
|
|
|
|
|
|
12,595,992
|
|
|
|
|
|
Warrants
A summary of the Company’s warrant activity
for the nine months ended on March 31, 2016 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
|
68,259,843
|
|
|
$
|
0.07
|
|
|
|
5.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
(3,333,333
|
)
|
|
$
|
0.12
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
64,926,510
|
|
|
$
|
0.07
|
|
|
|
5.04
|
|
Vested and exercisable at March 31, 2016
|
|
|
64,926,510
|
|
|
$
|
0.07
|
|
|
|
5.04
|
|
As of March 31, 2016, all warrants granted
were vested. The intrinsic value of the outstanding warrants was $0 as of March 31, 2016. The following table summarizes additional
information concerning warrants outstanding and exercisable at March 31, 2016.
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.04 - 0.07
|
|
|
|
44,599,851
|
|
|
|
6.00
|
|
|
$
|
0.05
|
|
|
|
44,599,851
|
|
|
$
|
0.05
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
|
3.50
|
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
$
|
0.12
|
|
|
|
|
|
|
64,926,510
|
|
|
|
|
|
|
|
|
|
|
|
64,926,510
|
|
|
|
|
|
Note 7 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, the Company’s wholly
owned subsidiary entered into Patent Assignment Agreements with two parties, our President as well as our former Chief Executive
Officer (CEO) and current Chief Technology Officer (CTO), where certain devices and methods involved in the hydrodynamic cavitation
processes invented by the President and former CEO/current CTO have been assigned to the subsidiary. In exchange, that
subsidiary agreed to pay a royalty of 5% of gross revenues to each of the CTO and President and former CEO for licensing of the
technology and leasing of the related equipment embodying the technology. These agreements were subsequently assumed by the Company
on May 13, 2010 from its subsidiary. The Company’s CTO and President both waived their rights to receive royalty payments
that have accrued, or that may accrue, on any gross revenue generated through March 31, 2016.
On April 30, 2008 and as amended on November 22, 2010, the Company’s
wholly owned subsidiary entered into an employment agreement with its former Director of Chemical and Analytical Department (the
“Inventor”) to pay, in the first year, an amount equal to 5% of actual gross revenue received by the Company on any patent
for which the Inventor was a legally named inventor, and, in each subsequent year, 3% of actual gross revenue received by the Company
on any such patent. Since entering into that employment agreement, and during the term of this employment agreement, the Company
has not received any revenue on any patents for which the Inventor was a legally named inventor.
Litigation
The
Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except
for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management
concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated
with the contingency are expensed as incurred.
In
August 2014, a former employee and former Director filed an administrative Complaint for approximately $179,000 in unpaid wages,
plus penalties and interest, with the California Labor Commissioner’s Office (CLCO). In January 2016, the CLCO ruled
in favor of the Company and dismissed the case. As a result of this ruling, the Company’s obligation to the former employee
and former Director only amounted to approximately $134,000 which was already accrued in prior periods and included as part of
Accrued Payroll and payroll taxes due to officers in a the accompanying balance sheet.
In
February 2016, the former employee and former Director has now appealed this ruling to the Los Angeles County Superior Court.
In addition to defending itself, the Company also has filed a cross-complaint against the former employee and former Director
for breach of contract and breach of fiduciary duty as a Director. Trial is currently scheduled to begin in August 2016.
Based upon available information at this very early stage of litigation, Management believes the likelihood of material loss resulting
from this lawsuit to be remote.
Note 8 – Income Taxes
At June 30, 2015, the Company had Federal
and State net operating loss (NOL) carry forwards available to offset future taxable income of approximately $8.4 million and $8.3
million, respectively. These carry forwards will begin to expire in the years ending June 30, 2027 and June 30, 2017, respectively,
subject to statutory limitations, including change in ownership.
Authoritative guidance issued by the ASC
Topic 740 –
Income Taxes
requires that a valuation allowance be established when it is more likely than not that all
or a portion of deferred tax assets will not be realized. Based on a study performed by an outside third party during the third
quarter of 2011 and due to the restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership
of companies with loss carry forwards, the utilization of the Company’s NOL is limited to $1.8 million per year as a result
of recent cumulative changes in stock ownership. NOL’s of $8.4 million, which were incurred subsequent to the latest change
in control, are not subject to the $1.8 million per year limitation. As a result of the limitations related to Internal Revenue
Code Section 382 and the Company’s lack of history of profits, the Company recorded a 100% valuation allowance against its
net deferred tax assets as of March 31, 2016 and June 30, 2015.
In assessing the realize-ability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. The Company has existing limitations on
its available federal NOL due to its previous changes in ownership under Internal Revenue Service Section 382 guidelines. These
restrictions limit the amount of NOL the Company can utilize over the next several years.
ITEM 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis
should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements
based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions.
Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. (“CTi”),
a Nevada corporation, was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly
technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels,
water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our
systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process
and product development firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized
proprietary technology that can be used for processing of industrial fluids. CTi’s patented
Nano Reactor®
is the critical
components of
the CTi Nano Neutralization®
System which is commercially proven to reduce operating costs and increase
yields in processing oils and fats. CTi has two issued patents relating to our Nano
Reactor®
systems and has filed several
national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel
production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the nine months ended March 31,
2016, we recorded revenue of $725,666, net loss of $282,673 and used cash in operations of $686,557.
Management’s Plan
We are engaged in merchandising our Neutralization
System, which is designed to help refine vegetable oils such as soybean, canola, sunflower and rapeseed. Our near term
goal is to continue to merchandise our systems through our partner, Desmet Ballestra. During the nine months ended March 31, 2016,
we recorded revenues of $725,666 and incurred a net loss of $282,673. As of March 31, 2016, we had a working capital deficiency
of $1,520,958 and a stockholders’ deficit of $1,358,228. The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation of the Company as a going concern.
As of March 31, 2016, we had cash and cash
equivalents on hand of $730,443 and are not generating sufficient funds to cover operations. In addition to the funds on hand,
Management believes we will require additional funds to continue to operate our business. Management’s plan is to generate income
from operations by continuing to license our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet).
Desmet has agreed to provide us monthly advances of $50,000 to be applied against future sales pursuant to a January of 2016 agreement.
This new agreement replaces the agreement dated on May 12, 2012 that ended on May 12, 2015. During the nine months ended March
31, 2016, the Company received $300,000 advances from Desmet.
In addition to these advances, we anticipate
that we will need additional funding, and we will attempt to raise additional debt and/or equity financing to fund operations and
to provide additional working capital. However, there is no assurance that such agreement with Desmet will be successful and such
financing will be consummated or obtained in sufficient amounts necessary to meet our needs, or that we will be able to meet our
future contractual obligations. Should management fail to obtain such financing, we may curtail operations. The accompanying condensed
consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. As
a result of the aforementioned factors, our independent auditors, in their report on our audited financial statements for the fiscal
year ended June 30, 2015, expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
CTi’s critical accounting policies and estimates are included
in its Annual Report on Form 10-K for the year ended June 30, 2015, and did not change for the nine months ended March 31, 2016.
Recent Accounting Pronouncements
Recent Accounting Pronouncements applicable to the Company are
discussed in Note 2 to the Notes to the Financial Statements included elsewhere in this Form 10-Q.
Results of Operations
Results of Operations for the Three Months Ended March 31,
2016 Compared to the Three Months Ended March 31, 2015
The following is a comparison of our results of operations for
the three months ended March 31, 2016 and 2015.
|
|
For the Quarter Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
85,000
|
|
|
$
|
333,662
|
|
|
$
|
(248,662
|
)
|
|
|
-74.5
|
%
|
Cost of revenue
|
|
|
19,446
|
|
|
|
52,038
|
|
|
|
(32,592
|
)
|
|
|
-62.6
|
%
|
Gross profit
|
|
|
65,554
|
|
|
|
281,624
|
|
|
|
(216,070
|
)
|
|
|
-76.7
|
%
|
General and administrative expenses
|
|
|
280,946
|
|
|
|
331,850
|
|
|
|
(50,904
|
)
|
|
|
-15.3
|
%
|
Research and development expenses
|
|
|
4,502
|
|
|
|
2,742
|
|
|
|
1,760
|
|
|
|
64.2
|
%
|
Total operating expenses
|
|
|
285,448
|
|
|
|
334,592
|
|
|
|
(49,144
|
)
|
|
|
-14.7
|
%
|
Loss from operations
|
|
|
(219,894
|
)
|
|
|
(52,968
|
)
|
|
|
(166,926
|
)
|
|
|
315.1
|
%
|
Interest expense and other
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
-100.0
|
%
|
Net loss
|
|
$
|
(219,894
|
)
|
|
$
|
(52,970
|
)
|
|
$
|
(166,924
|
)
|
|
|
315.1
|
%
|
Revenue
We recorded $85,000 in revenue in the third quarter of fiscal
2016, as opposed to $333,662 in the same period of fiscal 2015, representing a decrease of 75%. The decrease in revenue was attributed
to a new agreement with distributor signed in January of 2016 according to which the licensing portion of revenues is unknown upon
shipment as it was before and is recognized by the Company upon final acceptance by the end user. In fiscal 2016, we shipped reactors
to Desmet customers in Japan, Canada and India. During the three months ended March 31, 2016, our cost of revenue amounted to $19,446,
which was the result of the revenue transactions described above, a reduction of 37% as compared to the cost of revenue of $52,038
for the three months ended March 31, 2015.
Operating Expenses
General and administrative expenses for
the three months ended March 31, 2016 amounted to $280,946 compared with $331,850 for the same period in fiscal 2015, a decrease
of $50,904, or 15%. In both periods, the major expense component was salaried compensation. Another major expense item in the third
quarter of fiscal 2015 was non-salaried compensation to consultants of $41,000, with such compensation expense in third quarter
of fiscal 2016 only amounting to $9,100. In the third quarter of fiscal 2016, total salaried compensation amounted to $103,053
or 37% of total operating expenses compared with $112,287 or 34% of operating expenses in the third quarter of fiscal 2015.
During the third quarter of 2016, the other
major components of general and administrative expenses were professional service fees related to auditors, accounting, and legal
services which amounted to $33,019 or 11.5% of total operating expenses, and various insurance premiums totaling $18,964. The same
expenses in the third quarter of fiscal 2015 amounted to $35,862 or 11% of total operating expenses, and $24,058 respectively.
Research and development (R&D) expenses
remained relatively low as we continued to rely on Desmet Ballestra for support in R&D. It is our intention to pursue R&D
as our cash position permits.
Results of Operations for the Nine Months Ended March 31,
2016 Compared to the Nine Months Ended March 31, 2015
The following is a comparison of our results of operations for
the nine months ended March 31, 2016 and 2015.
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
725,666
|
|
|
$
|
333,662
|
|
|
$
|
392,004
|
|
|
|
117.5
|
%
|
Cost of revenue
|
|
|
85,737
|
|
|
|
52,038
|
|
|
|
33,699
|
|
|
|
64.8
|
%
|
Gross profit
|
|
|
639,929
|
|
|
|
281,624
|
|
|
|
358,305
|
|
|
|
127.2
|
%
|
General and administrative expenses
|
|
|
903,272
|
|
|
|
1,336,924
|
|
|
|
(433,652
|
)
|
|
|
-32.4
|
%
|
Research and development expenses
|
|
|
19,330
|
|
|
|
16,746
|
|
|
|
2,584
|
|
|
|
15.4
|
%
|
Total operating expenses
|
|
|
922,602
|
|
|
|
1,353,670
|
|
|
|
(431,068
|
)
|
|
|
-31.8
|
%
|
Loss from operations
|
|
|
(282,673
|
)
|
|
|
(1,072,046
|
)
|
|
|
789,373
|
|
|
|
-73.6
|
%
|
Interest expense and other
|
|
|
-
|
|
|
|
(1,447
|
)
|
|
|
1,447
|
|
|
|
-100.0
|
%
|
Net loss
|
|
$
|
(282,673
|
)
|
|
$
|
(1,073,493
|
)
|
|
$
|
790,820
|
|
|
|
-73.7
|
%
|
Revenue
We recorded $725,666 in revenue in the
nine months ended March 31, 2016 which consisted primarily of
NANO Neutralization System
reactor sold to Desmet customers
in United States, Canada, India and Japan. During the nine months ended March 31, 2015, we recorded revenue of $333,662 which consisted
primarily of
NANO Neutralization System
reactor sold to Desmet customer in Mexico. The increase in revenue amounted to $392,004
or 117.5%.
Cost of Revenue
During the nine months ended March 31,
2016, our cost of revenue increased by $33,699 or 65% to $85,737, which was the result of the revenue transactions described above.
In the 3
rd
quarter of fiscal 2015 cost of revenue amounted to $52,038.
Operating Expenses
Operating expenses for the nine months
ended March 31, 2016 amounted to $922,602 compared with $1,353,670 for the same period in 2015, a decrease of $431,068, or 32%.
The decrease was attributable largely to a $433,652 decrease in General and administrative expenses (G&A) (attributable mostly
to costs of $272,598 relating to the vesting of options and warrants issued for services recorded in the first and second quarters
of fiscal 2015 and some other non-cash charges).
The primary expenditures during the 3 quarters
of fiscal 2016 were approximately $115,587 for professional service fees such as auditors, attorneys, and SEC related services,
$36,501 in service and consulting fees, $72,842 in marketing and travel expenses, $67,760 in insurance expenses and $334,653 in
salaries and salary related expenses. The primary expenditures during the first 3 quarters of fiscal 2015 were $103,876 for professional
service fees such as auditors, attorneys, and SEC related services, $117,595 in consulting and service fees excluding items relating
to vested options and warrants, $74,374 in insurance expenses, $346,847 in salaries and salary related expenses and $235,003 relating
to the vesting of options and warrants issued for services.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements
have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as
a going concern. During the nine months ended March 31, 2016, we incurred a net loss of $282,673 and used cash in operations
of $686,557. As of March 31, 2016, we had a working capital deficiency of $1,520,958 and a stockholders’ deficit of $1,358,228.
Furthermore, we have been dependent on most of our funding from a technology agreement with a distributor. These factors, among
others, raise substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on
our audited financial statements for the fiscal year ended June 30, 2015 expressed substantial doubt about our ability to continue
as a going concern. The accompanying condensed consolidated financial statements do not include adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
from an inability of us to continue as a going concern.
Management’s plan is to generate income from operations by licensing
our technology globally through our strategic partner, Desmet Ballestra Group (Desmet). Desmet had provided us monthly advances
of $125,000 against future sales through May of 2015. The agreement with Desmet expired in May 2015. We have recently signed a
new agreement with Desmet with the same terms as the prior agreement except that the monthly advances will be changed to $50,000.
We will need additional funding, and we will attempt to raise additional debt and/or equity financing to fund operations and to
provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient
amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should
management fail to obtain such financing, the Company may curtail its operations.
At March 31, 2016, we had cash on hand in the amount of $730,443
and is not generating sufficient funds to cover operations. In addition to the funds on hand, we will require additional funds
to continue to operate our business. This includes expenses we will incur in connection with costs to manufacture and ship our
products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs
of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual
property. In addition, we have contractual commitments for salaries to our executive officers. In light of our financial commitments
over the next several months and its liquidity constraints, we have implemented cost reduction measures in all areas of operations.
We intend to review these measures on an ongoing basis and make additional decisions as may be required.
Cash Flow
Net cash used by operating activities during the nine months
ended March 31, 2015 amounted to $71,901, compared to net cash used of $686,557 for the same period in fiscal 2016. Funding for
the operating activities was provided by $300,000 in advances from our distributor in the first nine months of fiscal 2016 and
from cash reserves. For the first nine months of fiscal 2016, we paid approximately $335,000 in employees’ compensation,
approximately $229,000 in fixed operating costs, $116,000 in professional services fees and $68,000 in various insurance premiums.
For the first three quarters of fiscal 2015, we paid $346,847 in employees’ compensation, $103,876 for professional service fees
such as auditors, attorneys, and SEC related services, $117,595 in consulting and service fees, $74,374 in insurance expenses and
about $430,000 in various operating costs and other obligations.
For the period ended March 31, 2016, cash used in investing
activities amounted to $61,565 due to purchase of property and equipment. There were no such activities in the fiscal 2015.
For the period ended March 31, 2015, financing activities provided
a net cash of $375,498 via common stock issuance. There were no such activities in the fiscal 2016.
Off-Balance Sheet Arrangements
During the nine
months ended March 31, 2016, we did not have, and we do not currently have, any off-balance sheet arrangements, as defined under
SEC rules.
Contractual Obligations
There have been
no material changes to our contractual obligations during the period covered by this report from those disclosed in our Annual
Report on Form 10-K for the year ended June 30, 2015.