See accompanying notes, which are an integral
part of these condensed consolidated financial statements
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Three months ended September 30, 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 three months ended September 30, 2016 are not
indicative of the results that may be expected for the fiscal year ending June 30, 2017. 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, 2016 filed on October 13, 2016. The condensed consolidated balance sheet
as of June 30, 2016 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, waste water 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 three months ended September 30, 2016, the Company incurred a net loss of $246,756
and used $214,359 of cash in operating activities. As of September 30, 2016, the Company had a working capital deficiency
of $1,026,241 and a stockholders' deficit of $889,531. 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, 2016 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 September 30, 2016, we had cash and cash
equivalents on hand of $443,036 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.
During the three months ended September 30, 2016, the Company received $100,000 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. Inter-company transactions
and balances have been eliminated in consolidation.
Fair Value Measurement
FASB Accounting Standards Codification ("ASC")
820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized
on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy
are as follows:
|
·
|
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 September 30, 2016 and June 30, 2016, the
fair values of cash and cash equivalents, inventory and accounts payable 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. Significant estimates are used in reserve for inventory
obsolescence, impairment analysis for fixed assets, accrual of potential liabilities and valuing our stock options, warrants, and
common stock issued for services, among other items. 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 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 share is fixed and determinable,
which will generally be upon delivery of the
NANO Neutralization System
by the distributor to its customer.
Patents
Capitalized patent costs represent legal fees
associated with procuring and filing patent applications. The Company accounts for patents in accordance with ASC 350-30,
General
Intangibles Other Than Goodwill
. The Company has five patents issued in fiscal 2014, 2012 and 2011. During fiscal years 2015
and 2016, we also received approvals in the US for another 5 patents for various processes and 1 for another device/apparatus.
We also received 1 patent approval for its device in Singapore. As of September 30, 2016, the Company has a total of 15 patents
pending. The patents have duration of twenty years from filing date. The Company amortizes its patents over a four-year period
which we believe is a reasonable estimate based upon its estimate of time until the next generation of reactors is developed or
until other forms of competition appear.
During the three months ended September 30,
2016 and 2015, we recorded amortization expense of $3,358 and $6,021 respectively which was recorded as part of General and Administrative
Expenses in the accompanying Statement of Operations. As of September 30, 2016, and June 30, 2016 the Company had remaining unamortized
patent costs of $12,978 and $16,336 respectively.
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 entirely dependent on Desmet
Ballestra who is our exclusive distribution agent with regard to the
CTi Nano Neutralization® System
for edible oils.
During the period ended September 30, 2016, 100% of 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. Shares of restricted stock
subject to vesting are included in basic weighted average common shares outstanding from the time they vest. 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 and there were no instruments that would result
in issuance of additional shares during the period.
As of September 30, 2016, the Company had 11,685,852
stock options and 64,326,510 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
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.
In March 2016, the FASB issued the ASU 2016-09,
Compensation
- Stock Compensation (Topic 718)
: Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require,
among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled.
The ASU also allows for an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without
triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The amendments in this
ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early
adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the expected impact that
the standard could have on its financial statements and related 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.
Business and Credit Concentrations
The Company’s cash balances in financial
institutions at times may exceed federally insured limits. As of September 30, 2016, and June 30, 2016, before adjustments for
outstanding checks and deposits in transit, the Company had approximately $443,000 and $657,000, respectively, deposited in one
financial institution. The deposits are federally insured up to $250,000. The Company believes that no significant concentration
of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability
of this financial institution.
All recorded revenues during the three months
ended September 30, 2016 of $85,000 were attributable to one customer (see Note 3).
Note 3 - Agreement with Desmet Ballestra
On January 22, 2016, the Company signed a three-year
agreement with Desmet effective August 1, 2015 for the sale and marketing of the Company’s Nano reactor system. 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 three months ended September 30,
2016, the Company recognized revenue of $85,000 related to the shipment and acceptance of reactors to Desmet and received advances
in the aggregate of $100,000 pursuant to this agreement. As of September 30, 2016, the Company also recorded receivable from Desmet
in the aggregate of $127,500, as such, for financial reporting purposes, the Company deducted this amount from the advance payments
received which resulted in a net balance of $472,500 in advances from distributor, net as of that date. The Company expects to
recognize approximately $317,000 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 September 30, 2016 and June 30, 2016:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,475
|
|
|
$
|
2,475
|
|
Furniture
|
|
|
26,837
|
|
|
|
26,837
|
|
Office equipment
|
|
|
1,499
|
|
|
|
1,499
|
|
Equipment
|
|
|
68,380
|
|
|
|
68,380
|
|
Systems
|
|
|
352,655
|
|
|
|
352,655
|
|
|
|
|
451,846
|
|
|
|
451,846
|
|
Less: accumulated depreciation and amortization
|
|
|
(337,614
|
)
|
|
|
(329,205
|
)
|
Property & Equipment, net
|
|
$
|
114,232
|
|
|
$
|
122,641
|
|
Depreciation expense for the three months ended
September 30, 2016 and 2015 amounted to $8,409 and $9,824, respectively which was recorded as part of General and Administrative
Expenses in the accompanying Statement of Operations.
Note 5 - Accrued Payroll and Payroll Taxes
As of September 30, 2016 and June 30, 2016,
the Company had accrued unpaid salaries due to current and former officers of the Company and the corresponding estimated payroll
taxes in the aggregate of $994,033.
Note 6 - Stockholders' Deficit
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 from September
30, 2016 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2016
|
|
|
12,595,992
|
|
|
$
|
0.10
|
|
|
|
4.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
(910,140
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2016
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
5.02
|
|
Exercisable and vested at September 30, 2016
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
5.02
|
|
The intrinsic value of the outstanding options
was $0 as of September 30, 2016.
The following table summarizes additional information
concerning options outstanding and exercisable at September 30, 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
|
|
|
|
5.71
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
5.71
|
|
$
|
0.33
|
|
|
|
174,022
|
|
|
|
1.85
|
|
|
$
|
0.33
|
|
|
|
174,022
|
|
|
|
1.85
|
|
$
|
0.67
|
|
|
|
511,830
|
|
|
|
1.75
|
|
|
$
|
0.67
|
|
|
|
511,830
|
|
|
|
1.75
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
Warrants
A summary of the Company's warrant activity
and related information for the three months ended on September 30, 2016 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
5.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
4.83
|
|
Vested and exercisable at September 30, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
4.83
|
|
As of September 30, 2016, all warrants granted
were vested. The intrinsic value of the outstanding warrants was $0 as of September 30, 2016. The following table summarizes additional
information concerning warrants outstanding and exercisable at September 30, 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
|
|
|
|
43,999,851
|
|
|
|
5.69
|
|
|
$
|
0.05
|
|
|
|
43,999,851
|
|
|
$
|
0.05
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
|
3.00
|
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
$
|
0.12
|
|
|
|
|
|
|
64,326,510
|
|
|
|
|
|
|
|
|
|
|
|
64,326,510
|
|
|
|
|
|
Note 7 - Commitments and Contingencies
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
the accompanying balance sheet.
In February 2016, the former employee and former
Director 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 2017. 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.