ITEM 7. 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
Hydrodynamic Technology, Inc. was incorporated
on January 29, 2007 as a California corporation. It is a wholly owned subsidiary of Cavitation Technologies, Inc., a Nevada corporation
originally incorporated under the name Bio Energy, Inc. We are a process and product development firm that has developed, patented,
and commercialized 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, 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 have developed, patented, and commercialized
proprietary technology that can be used for processing of industrial fluids. Ourpatented
Nano Reactor®
is the critical
components of
the CTi Nano Neutralization®
System which has been shown to reduce operating costs and increase yields
in processing oils and fats. CTi has five 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 and crude oil refining,
waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the year ended June 30, 2016, we
recorded revenue of $1,798,217. Our income from operations in 2016 was $432,780 and cumulative net cash used in operating activities
was $759,604, which was funded largely by advances received from a strategic partner and distributor, Desmet Ballestra Group (Desmet)
in the amount of $500,000 (which is reported as Advances from the Distributor Payable in our financial statements) as well as cash
reserves and additional cash receipts from Desmet under the January 2016 agreement in the amount of $113,767.
Management’s Plan of Operation
We are engaged in merchandising our
CTi
NanoNeutralization System
which is designed to help refine vegetable oils such as soybean, canola, and rapeseed. Our
near term goal is to continue to merchandise our systems through our partner, Desmet Ballestra.
We have a working capital deficiency of
$791,252 and a stockholders’ deficit of $642,775 as of June 30, 2016. The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.
Management’s plan is to generate
income from operations by licensing our technology globally through our strategic partner, Desmet Ballestra Group (Desmet). Desmet
is obligated to provide us with monthly advances of $50,000 against future sales under an agreement that may be terminated on each
August 1 under certain circumstances. During the year ended June 30, 2016, advances received from Desmet amounted to $500,000.
These funds service operational expenses on a monthly basis. 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 our
CTi
Nano Neutralization System.
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 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. For a more detailed discussion of our
plan, please review to Part I, Item 1,
Business
. Management estimates that cash on hand together with advances from Desmet
will allow the Company to operate beyond fiscal 2018.
The accompanying 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 a result of the aforementioned factors, our independent auditors, in their report on our audited financial statements as of
and for the year ended June 30, 2016, expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies and Revenue
Recognition
Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities
and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those we consider
most critical in preparing its consolidated financial statements. The following is a review of the accounting policies and estimates
that include significant judgments made by management using information available at the time the estimates are made. However,
these estimates could change materially if different information or assumptions were used instead.
Note 3 to our consolidated financial statements
includes a summary of significant accounting policies, estimates, and methods used in the preparation of our financial statements.
Accounting estimates are an integral part of the preparation of financial statements and are based on judgments by management using
its knowledge and experience about the past and current events and assumptions regarding future events, all of which we consider
to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain and that affect the
carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts of expenses during
the reporting period.
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.
We are 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 share is fixed and determinable, which will generally be upon delivery
of our
CTi Nano Neutralization System
by the distributor to its customer.
Recoverability of Intangible and Long
Lived Assets
Management believes that the accounting
estimate related to the recoverability of its intangible and long-lived assets is a “critical accounting estimate”
because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including
net income and non-current assets.
Testing intangible and long-lived assets
for impairment involves a high degree of judgment due to the assumptions that underlie the undiscounted cash flows analysis. In
accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that
the net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future
cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value based on market value when available
or discounted expected cash flows of those assets and is recorded in the period in which the determination is made. Management
believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change
or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
Share-Based Compensation
We periodically issues stock options and
warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account 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. We account
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.
Determining the fair value of share-based
awards at the measurement date requires judgment, including estimating the expected term that stock options and warrants will be
outstanding prior to exercise, the associated volatility, and the expected dividends. We estimate the fair value of options granted
using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period the options are
expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of our stock for a period approximating the expected life, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life. Judgment is also required
in estimating the amount of share-based awards that will be forfeited prior to vesting. We believe that these assumptions are “critical
accounting estimates” because significant changes in the assumptions used to develop the estimates could materially affect
key financial measures including net income (loss).
Recent Accounting Pronouncements
See Note 3 of the financial statements
for discussion of recent accounting pronouncements.
Results of Operations
Below is summary comparing fiscal 2016
and fiscal 2015.
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,798,217
|
|
|
$
|
489,255
|
|
|
$
|
1,308,962
|
|
|
|
267.5
|
%
|
Cost of revenue
|
|
|
121,505
|
|
|
|
73,253
|
|
|
|
48,252
|
|
|
|
65.9
|
%
|
Gross profit
|
|
|
1,676,712
|
|
|
|
416,002
|
|
|
|
1,260,710
|
|
|
|
303.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,214,561
|
|
|
|
1,772,618
|
|
|
|
(558,057
|
)
|
|
|
-31.5
|
%
|
Research and development expenses
|
|
|
29,371
|
|
|
|
22,310
|
|
|
|
7,062
|
|
|
|
31.7
|
%
|
Total operating expenses
|
|
|
1,243,932
|
|
|
|
1,794,928
|
|
|
|
(550,996
|
)
|
|
|
-30.7
|
%
|
Income (loss) from operations
|
|
|
432,780
|
|
|
|
(1,378,926
|
)
|
|
|
1,811,706
|
|
|
|
-131.4
|
%
|
Interest expense and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Net income (loss)
|
|
$
|
432,780
|
|
|
$
|
(1,378,926
|
)
|
|
|
1,811,706
|
|
|
|
-131.4
|
%
|
Revenue
During the year ended June 30, 2016, revenue
increased 267% to $1,798,217 and was derived from the sale of four of our
CTi Nano Neutralization Systems
and fifteen reactor
lines (a total of 45 reactors) delivered to Desmet as part of the revised agreement entered into in January 2016. During the year
ended June 30, 2015, revenue of $489,255 was derived largely from the sale of three of our
CTi Nano Neutralization Systems
.
Operating Expenses
Operating expenses for fiscal 2016 amounted
to $1,243,932 versus $1,794,928 fiscal 2015, a decrease of $550,996 or 31%. The decrease was mostly attributable to a 32% reduction
in General and administrative (G&A) expenses, which in turn was mostly affected by a reduction in non-cash compensation for
officers and consultants. Non-cash expense items such as amortization and depreciation expense of $60,126, and inventory valuation
loss of $18,792 among others, amounted to a small proportion of G&A expenses, with major expense categories being salaries
and payroll taxes of approximately $505,000, professional fees of approximately $174,000, various insurance policies amounting
to $96,333 and travel, insurance and marketing services fees. Research and development (R&D) expense increased by $7,062 for
the year ended June 30, 2016 due to reactor systems tested in fiscal 2016 and as we tended to rely less on our partner, Desmet
Ballestra, for R&D.
In fiscal 2015, non-cash expense items
such as share based compensation of $64,080 and consulting expense of $245,375, together with patent amortization and depreciation
expense of $154,554, among others, amounted to just over 25% of G&A expenses, with other major expense categories being salaries
and payroll taxes of approximately $476,000, professional fees of approximately $130,000, and travel, insurance and marketing services
fees being some of the other major cash expense items.
Our reported Net Income in fiscal 2016
was $432,780 as compared to a Net Loss of $1,378,926 in fiscal 2015.
Liquidity and Capital Resources
During the fiscal year ended on June 30,
2016, cash used in operating activities of $759,604 and net investing activities (purchases of inventory) of $61,565 were financed
with cash reserves and receipts of cash as both advances and sales from our partner, Desmet Ballestra.
During the fiscal year ended June 30, 2015,
proceeds from sale of 5.2 million shares of common stock amounted to $375,498. These proceeds financed operating activities of
$100,691 and investing activities resulting in purchase of equipment of $22,750. These activities resulted in net increase in cash
of $252,057.
The accompanying 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 year ended June 30, 2016, we utilized $759,604 of cash in operations. As of June
30, 2016, we had a working capital deficiency of $791,252 and a stockholders’ deficit of $642,775. We have also
been dependent on certain aspects of its funding from a technology agreement with a distributor. These factors, among others, raise
substantial doubt about our ability to continue as a going concern.
The accompanying consolidated financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from an inability of us to continue as a going concern. In addition,
our independent registered public accounting firm, in its report on our June 30, 2016 consolidated financial statements, has raised
substantial doubt about our ability to continue as a going concern. Management’s plan is to generate income from operations
by continuing to license its technology globally through our strategic partner with the Desmet Ballestra Group (Desmet). Pursuant
to a R&D, Marketing and Technology License agreement with Desmet that was signed in January 2016, Desmet has provided us monthly
advances of $50,000 which started in January of 2016 and are expected to continue through August 2018 but can be terminated on
each August 1 under certain circumstances. These advances will be applied against future sales to Desmet. During the year ended
June 30, 2016 advances received from Desmet amounted to $500,000.
We will also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing
will be available in the future or obtained in sufficient amounts necessary to meet our needs, that we will be able to achieve
profitable operations or that we will be able to meet our future contractual obligations. Should management fail to obtain such
financing, we may curtail its operations.
Sources and Uses of Cash
During the fiscal year ended June 30, 2016,
net cash used in operating activities amounted to $759,604, an increase over fiscal 2015 of almost $658,913. During the year ended
June 30, 2016 we received gross proceeds of $500,000 in advances against future sales from our partner, Desmet Ballestra, and $113,767
as payment for reactors. This cash was used largely to pay operating costs, professional service providers such as auditors and
accountants, acquire new inventory, pay management salaries and to pay travel and insurance expenses. The Agreement with Desmet
expired in May 2015 and the new agreement was signed in January of 2016 which provides for monthly advances of $50,000 to us.
During fiscal 2015, net cash used in operating activities amounted to $100,691 and we received gross proceeds of $1,375,000 in
advances against future sales from our partner, Desmet Ballestra.
Net cash used in investing activities for
property, plant, and equipment during fiscal 2016 and fiscal 2015 amounted to $61,565 and $22,750 respectively.
We did not conduct any financing activities
in the current fiscal year ended June 30, 2016. For the fiscal year ended June 30, 2015 net cash provided by financing activities
of $375,498 consisted of cash received as a result of the sale of our common stock. These proceeds financed the operating and investing
activities and provided net cash increase for future operations.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cavitation Technologies, Inc.
Los Angeles, CA
We have audited the accompanying consolidated
balance sheets of Cavitation Technologies, Inc. (the “Company”) as of June 30, 2016 and 2015 and the related consolidated
statements of operations, stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
our audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that we
considered appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Cavitation Technologies, Inc.
as of June 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has
experienced recurring net losses since inception and has a stockholders deficit as of June 30, 2016. These matters raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2 to the financial statements. These financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Weinberg & Company, P.A.
Weinberg & Company, P.A.
Los Angeles, California
February 8, 2017
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
657,396
|
|
|
$
|
1,478,565
|
|
Inventory, net
|
|
|
153,811
|
|
|
|
135,599
|
|
Total current assets
|
|
|
811,207
|
|
|
|
1,614,164
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
122,641
|
|
|
|
100,372
|
|
Patents, net
|
|
|
16,336
|
|
|
|
37,166
|
|
Other assets
|
|
|
9,500
|
|
|
|
9,500
|
|
Total assets
|
|
$
|
959,684
|
|
|
$
|
1,761,202
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
171,029
|
|
|
$
|
198,686
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
994,033
|
|
|
|
1,016,223
|
|
Related party payable
|
|
|
1,147
|
|
|
|
1,147
|
|
Advances from distributor, net
|
|
|
436,250
|
|
|
|
1,620,701
|
|
Total current liabilities
|
|
|
1,602,459
|
|
|
|
2,836,757
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2016 and June 30, 2015, respectively
|
|
|
-
|
|
|
|
-
|
|
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 June 30, 2016 and 2015, respectively
|
|
|
193,998
|
|
|
|
184,968
|
|
Additional paid-in capital
|
|
|
22,062,888
|
|
|
|
21,259,285
|
|
Common stock issuable, 9,029,251 shares
|
|
|
-
|
|
|
|
812,633
|
|
Accumulated deficit
|
|
|
(22,899,661
|
)
|
|
|
(23,332,441
|
)
|
Total stockholders’ deficit
|
|
|
(642,775
|
)
|
|
|
(1,075,555
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
959,684
|
|
|
$
|
1,761,202
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the Years Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,798,217
|
|
|
$
|
489,255
|
|
Cost of revenue
|
|
|
121,505
|
|
|
|
73,253
|
|
Gross profit
|
|
|
1,676,712
|
|
|
|
416,002
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,214,561
|
|
|
|
1,772,618
|
|
Research and development expenses
|
|
|
29,371
|
|
|
|
22,310
|
|
Total operating expenses
|
|
|
1,243,932
|
|
|
|
1,794,928
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
432,780
|
|
|
$
|
(1,378,926
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share,
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding,
|
|
|
|
|
|
|
|
|
Basic
|
|
|
193,997,906
|
|
|
|
183,378,917
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
194,352,745
|
|
|
|
183,378,917
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
|
|
Series A Preferred
|
|
|
Common Stock
|
|
|
Additional
Paid-
|
|
|
Common
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Issuable
|
|
|
Deficit
|
|
|
Total
|
|
Balance at June 30, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
177,906,365
|
|
|
$
|
177,906
|
|
|
$
|
20,580,952
|
|
|
$
|
812,633
|
|
|
$
|
(21,953,515
|
)
|
|
$
|
(382,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of shares of common stock issued for services
|
|
|
|
|
|
|
|
|
|
|
1,068,000
|
|
|
|
1,068
|
|
|
|
63,012
|
|
|
|
|
|
|
|
|
|
|
|
64,080
|
|
Common stock issued for cash
|
|
|
|
|
|
|
|
|
|
|
5,193,328
|
|
|
|
5,193
|
|
|
|
370,305
|
|
|
|
|
|
|
|
|
|
|
|
375,498
|
|
Common stock issued for cancelled options
|
|
|
|
|
|
|
|
|
|
|
800,858
|
|
|
|
801
|
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
|
442
|
|
Fair value of vested warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,375
|
|
|
|
|
|
|
|
|
|
|
|
245,375
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,378,926
|
)
|
|
|
(1,378,926
|
)
|
Balance at June 30, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
184,968,551
|
|
|
|
184,968
|
|
|
|
21,259,285
|
|
|
|
812,633
|
|
|
|
(23,332,441
|
)
|
|
|
(1,075,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
9,029,355
|
|
|
|
9,030
|
|
|
|
803,603
|
|
|
|
(812,633
|
)
|
|
|
|
|
|
|
-
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432,780
|
|
|
|
432,780
|
|
Balance at June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
193,997,906
|
|
|
$
|
193,998
|
|
|
$
|
22,062,888
|
|
|
$
|
-
|
|
|
$
|
(22,899,661
|
)
|
|
$
|
(642,775
|
)
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
Years Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
432,780
|
|
|
$
|
(1,378,926
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
60,126
|
|
|
|
89,780
|
|
Fair value of common stock issued for services
|
|
|
-
|
|
|
|
64,080
|
|
Fair value of vested warrants
|
|
|
-
|
|
|
|
245,375
|
|
Allowance for inventory obsolescence
|
|
|
18,792
|
|
|
|
22,852
|
|
Fair value of common stock issued for cancelled options
|
|
|
-
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(37,004
|
)
|
|
|
(41,807
|
)
|
Accounts payable and accrued expenses
|
|
|
(27,657
|
)
|
|
|
25,576
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
(22,190
|
)
|
|
|
(13,808
|
)
|
Advances from distributor
|
|
|
436,250
|
|
|
|
1,375,000
|
|
Reduction in advances due to realization of revenues from distributor
|
|
|
(1,620,701
|
)
|
|
|
(489,255
|
)
|
Net cash used in operating activities
|
|
|
(759,604
|
)
|
|
|
(100,691
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(61,565
|
)
|
|
|
(22,750
|
)
|
Net cash used in investing activities
|
|
|
(61,565
|
)
|
|
|
(22,750
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
375,498
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
375,498
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(821,169
|
)
|
|
|
252,057
|
|
Cash, beginning of period
|
|
|
1,478,565
|
|
|
|
1,226,508
|
|
Cash, end of period
|
|
$
|
657,396
|
|
|
$
|
1,478,565
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016 AND 2015
Note 1 - Organization
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 has commercially been shown to reduce operating costs
and increase yields in refining vegetable oils. We have three US and one international patented systems, as well as eight US approved
patents for various processes, and have filed another fifteen US and international patents to employ our proprietary technology
in applications including vegetable and oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
In addition, we have commercialized our
CTi Nano Neutralization® System
in the refining process of certain vegetable oils which has proven to reduce costs and
increase yields for our customers.
Note 2 - Basis of Presentation and Going Concern
Going Concern
The accompanying 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 year ended June 30, 2016, the Company utilized $759,604 of cash in operations.
As of June 30, 2016, the Company had a working capital deficiency of $791,252 and a stockholders’ deficit of $642,775. The
Company has also been dependent on certain aspects of its funding from a technology agreement with a distributor. These factors,
among others, raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.
Management’s plan is to generate income from operations by continuing to license its technology globally through our strategic
partner with the Desmet Ballestra Group (Desmet). Pursuant to a R&D, Marketing and Technology License agreement with Desmet
that was signed in January 2016, Desmet has provided the Company with monthly advances of $50,000 which started in January of 2016
and will continue through August 2018 but can be terminated on each August 1 under certain circumstances. These advances are expected
to be applied against future sales to Desmet. During the year ended June 30, 2016 advances received from Desmet amounted to $500,000.
The Company will also attempt to raise
additional debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that
such financing will be available in the future 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 3 - 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.
In addition to defining fair value, the
standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The
hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable
in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input
that is significant to the fair value measurement in its entirety. These levels are:
Level 1 - inputs are based upon unadjusted
quoted prices for identical instruments traded in active markets.
Level 2 - inputs are based upon significant
observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or
can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - inputs are generally unobservable
and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow
models, and similar techniques.
As of June 30, 2016, the carrying value
of certain accounts such as inventory, accounts payable, accrued expenses and accrued payroll approximates their fair value due
to the short-term nature of such instruments.
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 reserves for
inventory obsolescence, valuing our stock options, stock warrants and common stock issued for services, among other items. Actual
results could differ from these estimates.
Revenue Recognition
Revenue from the sale of the Company’s
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 its distributor from the sale of the reactors. Pursuant to the May 2012 agreement with its 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 the Company’s 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.
Cash
The Company considers highly liquid investments
with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates
market value.
The Company maintains its cash with one
domestic financial institution. From time to time, cash balance in this domestic bank may exceed federally insured limits provided
by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000. As of June 30, 2016 and 2015, before adjustments
for outstanding checks and deposits in transit, the Company had approximately $657,000 and $1,489,000, respectively, on deposit
with one bank. The Company believes that no significant concentration of credit risk exists with respect to this cash balances
because of its assessment of the creditworthiness and financial viability of this financial institution.
Accounts Receivable
The Company evaluates the collectability
of our trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of
past due trade accounts receivable outstanding.
Inventory
Inventory, net of an allowance for excess
quantities and obsolescence, is stated at the lower of cost or market. Cost is determined on a specific item basis. Inventory is
composed of finished goods and represents costs incurred to manufacture the Company’s
Nano Reactor®
systems.
Property and Equipment
Property and equipment is presented at
cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of
the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs
and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are
removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements
of operations.
Property and equipment are recorded at
cost and depreciated using the straight-line method over the following estimated useful lives.
Leasehold improvements
|
|
Shorter of life of asset or lease
|
Furniture
|
|
5-7 Years
|
Office equipment
|
|
5 Years
|
Lab equipment
|
|
4 Years
|
Skid systems (demo units)
|
|
4 Years
|
Management assesses the carrying value
of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the
asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized
to write down the asset to its estimated fair value. For the years ended June 30, 2016 and 2015, the Company did not recognize
any impairment for its property and equipment.
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 2013, 2012 and 2011. As of June
30, 2016, the Company has a total of 25 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 year ended June 30, 2016, the
Company recognized patent amortization expense of $20,830. As of June 30, 2016, total capitalized patent costs amounted to $129,363
and accumulated amortization of $113,027 or a net balance of $16,336.
During the year ended June 30, 2015, the
Company recognized patent amortization expense of $30,307. As of June 30, 2015, total capitalized patent costs amounted to $129,363
and accumulated amortization of $92,127 or a net balance of $37,166.
At June 30, 2016, future estimated patent
amortization costs are as follows:
Year Ended
|
|
|
|
June 30,
|
|
Amount
|
|
|
|
|
|
2017
|
|
|
13,501
|
|
2018
|
|
|
2,835
|
|
Total
|
|
$
|
16,336
|
|
Impairment of Intangible and Long-Lived
Assets
In accordance with ASC 350-30,
General
Intangibles Other than Goodwill
, the Company evaluates amortizable intangibles and long-lived assets for impairment whenever
events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances
exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over
their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying
amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded
in the period in which the determination is made. Based on the Company annual impairment tests, management believes there is no
impairment of its intangibles and long-lived assets as of June 30, 2016 and 2015. There can be no assurance, however, that market
conditions will not change or demand for the Company’s products under development will continue. Either of these could result
in future impairment of intangibles and long-lived assets.
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 option and warrant grants 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.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740-10,
Income Taxes
. The Company recognizes deferred tax assets and liabilities to reflect
the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable
to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company
classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties
assessed or paid.
The Company measures and records uncertain
tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective
date may be recognized or continue to be recognized.
Advertising Costs
Advertising costs (including marketing
expense) incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $45,241 and $23,285
for the years ended June 30, 2016 and 2015 respectively and was reported as part of General and administrative expenses in the
accompanying Consolidated Statements of Operations.
Research and Development Costs
Research and development expenses relate
primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are
expensed as incurred. Total research and development costs recorded during the years ended June 30, 2016 and 2015 amounted to $29,371
and $22,310, respectively.
Warranty Policy
The Company provides a limited warranty
with every set of reactors sold, typically 2 to 5 years. The Company has not experienced significant claims under its warranty
policy, and management determined no accrual for warranty reserve was necessary at June 30, 2016 and 2015.
Net Income (Loss) Per Share
The Company’s computation of earnings
per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income available to common stockholders
divided by the weighted average common shares outstanding for the period. Diluted income per share 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 income of the Company as if
they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income per
share, 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. Options and warrants may have a dilutive effect under the treasury
stock method only when the average market price of the common stock during the period exceeds the exercise price of the options
and warrants. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
The following table sets forth the computation
of basic and diluted income (loss) per common share.
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
432,780
|
|
|
$
|
(1,378,926
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic
|
|
|
193,997,906
|
|
|
|
183,378,917
|
|
Dilutive effect of outstanding stock options
|
|
|
354,839
|
|
|
|
-
|
|
Weighted average shares – diluted
|
|
|
194,352,745
|
|
|
|
183,378,917
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
There were no adjustments to net income
(loss) required for purposes of computing diluted earnings per share. At June 30, 2016 and 2015, the Company excluded the outstanding
securities summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of its diluted
earnings per share, as their effect would have been antidilutive.
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Options
|
|
|
12,241,153
|
|
|
|
12,810,957
|
|
Warrants
|
|
|
64,326,510
|
|
|
|
68,259,843
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 is
a comprehensive revenue recognition standard that will supersede nearly all existing 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 interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in
annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition
to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process
of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In August 2014, the FASB issued Accounting
Standards Update No. 2014-15,
Disclosure of Uncertainties about an 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. ASU
2014-15 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 are 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. ASU 2014-15 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 the adoption of ASU 2014-15 on the Company’s financial statements and disclosures.
In February 2016, the FASB issued Accounting
Standards Update 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.
Dependence on Desmet Ballestra
The Company’s revenue is entirely
dependent on Desmet Ballestra who is its exclusive distribution agent with regard to the
CTi Nano Neutralization® System
for edible oils. During the year ended June 30, 2016 and 2015, 100% of the Company’s revenue was derived from Desmet (see
Note 4).
Note 4 - Agreement 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 non-refundable
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.
During the years ended June 30, 2016 and
2015, the Company recorded revenues of $1,620,701 and $489,255 pursuant to the 2012 agreement and as of June 30, 2015, $1,620,701
of advance payments were received.
As of June 30, 2016, the Company had no
further obligations to Desmet under this agreement.
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 systems to sold status during the
period of June 1 to May 31. The agreement may also be terminated in case the Company were to lose its rights under the patents
and patent applications being used in the Company’s
CTi 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 year ended June 30, 2016, the
Company recorded revenues of $177,516 and received $500,000 of advance payments pursuant to the 2016 agreement. As of June 30,
2016, $63,750 of the recorded revenues was not yet collected, as such, for financial reporting purposes, the Company deducted this
amount from the advance payments received which resulted in a net balance of $436,250 in advances from distributor, net as of that
date.
Note 5 - Property and Equipment
Property and equipment consists of the
following as of June 30, 2016 and June 30, 2015:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
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
|
|
|
|
291,090
|
|
|
|
|
451,846
|
|
|
|
390,281
|
|
Less: accumulated depreciation and amortization
|
|
|
(329,205
|
)
|
|
|
(289,909
|
)
|
Property & Equipment, net
|
|
$
|
122,641
|
|
|
$
|
100,372
|
|
Depreciation expense for the years ended
June 30, 2016 and 2015 amounted to $39,296 and $59,473, respectively and was reported as part of General and administrative expenses
in the accompanying Consolidated Statements of Operations.
Note 6 - Accrued Payroll and Payroll Taxes to Officers and
former officers
As of June 30, 2016 and 2015, the Company
had accrued unpaid salaries to officers and former officers amounting to $994,033 and $1,016,223, respectively.
Note 7 - Stockholders’ Deficit
Common Stock
Year ended June 30, 2016
On September 25, 2015, the Company issued
9,029,255 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, such amounts were reclassified
to additional paid in capital upon their issuance during the year ended June 30, 2016.
Year ended June 30, 2015
In October 2014, the Company issued 1,068,000
shares of common stock valued at $64,080 as payment to a service provider. These shares were valued at fair value at the date of
issuance.
In July 2014 the Company issued 5,193,328
shares of common stock to various entities and individuals in exchange for cash proceeds of $375,498, net of commissions of $14,359.
In addition, the Company also granted these entities and individuals five year, fully vested warrants to purchase 5,193,328 shares
of common stock at $0.12 per share. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.
The shares were not offered via general solicitation to the public.
In June 2015, we issued an aggregate of
800,858 shares of common stock to a consultant in exchange for the cancellation of 800,858 fully vested stock options that were
granted in December 2012. As a result, the Company recognized compensation cost of $442 to account for the incremental difference
in fair value of the 800,858 shares of common stock and the fair value of the cancelled 800,858 stock options.
Preferred Stock
On March 17, 2009, the Company filed
an Amended and Restated Articles of Incorporation and created two new series of preferred stock, the first of which
is designated Series A Preferred Stock and the second of which is designated as Series B Preferred Stock. The total number
of shares of Common Stock which this corporation has authority to issue is 1,000,000,000 shares of Common Stock and 10,000,000
shares of Preferred Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated
as Series B Preferred Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the
Board of Directors. Each share of Common Stock and Preferred Stock has a par value of $0.001. As of June 30, 2016 and 2015, there
are no shares of Series A or Series B Preferred Stock issued and outstanding.
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 June
30, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2014
|
|
|
13,611,815
|
|
|
$
|
0.44
|
|
|
|
6.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Forfeited/Replaced
|
|
|
(800,858
|
)
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2015
|
|
|
12,810,957
|
|
|
$
|
0.44
|
|
|
|
5.35
|
|
- Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Forfeited/Replaced
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
(214,965
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2016
|
|
|
12,595,992
|
|
|
$
|
0.44
|
|
|
|
4.96
|
|
In June 2015, the Company cancelled fully
vested stock options to purchase 800,858 shares of common stock that were granted to a consultant in prior periods. In exchange
for the cancellation, the Company issued to the consultant 800,858 shares of common stock.
As of June 30, 2016 and 2015, all outstanding
options were fully vested and exercisable. The intrinsic value of the outstanding options as of June 30, 2016 was $0. The following
table summarizes additional information concerning options outstanding and exercisable at June 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
|
|
|
|
11,174,021
|
|
|
|
5.45
|
|
|
|
0.03
|
|
|
|
11,174,021
|
|
|
|
5.45
|
|
|
0.33
|
|
|
|
350,677
|
|
|
|
1.10
|
|
|
|
0.33
|
|
|
|
350,677
|
|
|
|
1.10
|
|
|
0.67
|
|
|
|
1,071,294
|
|
|
|
1.10
|
|
|
|
0.67
|
|
|
|
1,071,294
|
|
|
|
1.10
|
|
|
|
|
|
|
12,595,992
|
|
|
|
|
|
|
|
|
|
|
|
12,595,992
|
|
|
|
|
|
Warrants
A summary of the Company’s warrant activity and related
information from as of June 30, 2016 and 2015 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
63,066,514
|
|
|
$
|
0.06
|
|
|
|
6.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,193,329
|
|
|
$
|
0.12
|
|
|
|
5.00
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
|
68,259,843
|
|
|
$
|
0.07
|
|
|
|
5.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(3,933,333
|
)
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
5.09
|
|
In July 2014, the Company issued warrants
to purchase 5,193,329 shares of common stock to the purchasers of our common stock offering. The warrants are exercisable at $0.12
per share, vesting immediately and expiring in 5 years from the grant date.
During the year ended June 30, 2015, the
Company recognized compensation expense of $245,375 to account for the fair value of vested warrants granted to a consultant and
a member of our Board of Directors.
As of June 30, 2016 and 2015, all outstanding
warrants were fully vested and exercisable. The intrinsic value of the outstanding warrants as of June 30, 2016 and 2015 was $0
and $651,999, respectively. The following table summarizes additional information concerning warrants outstanding and exercisable
at June 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
|
|
|
|
5.94
|
|
|
$
|
0.05
|
|
|
|
43,999,851
|
|
|
$
|
0.05
|
|
|
0.12
|
|
|
|
20,326,659
|
|
|
|
3.25
|
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
$
|
0.12
|
|
|
|
|
|
|
64,326,510
|
|
|
|
|
|
|
|
|
|
|
|
64,326,510
|
|
|
|
|
|
The table below represents the assumptions
used in valuing the stock options and warrants granted in fiscal 2016 and 2015:
|
|
Year Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
-
|
|
|
|
3 - 10
|
|
Stock price volatility
|
|
|
-
|
|
|
|
183% - 191
|
%
|
Risk free interest rate
|
|
|
-
|
|
|
|
2.75% - 3.21
|
%
|
Expected dividends
|
|
|
-
|
|
|
|
None
|
|
Forfeiture rate
|
|
|
-
|
|
|
|
0
|
%
|
The assumptions used in the Black Scholes
models referred to above are based upon the following data: (1) the contractual life of the underlying non-employee options
is the expected life. The expected life of the employee option is estimated by considering the contractual term of the option,
the vesting period of the option, the employees’ expected exercise behavior and the post-vesting employee turnover rate.
(2) The expected stock price volatility was based upon the Company’s historical stock price over the expected term of
the option. (3) The risk free interest rate is based on published U.S. Treasury Department interest rates for the expected terms
of the underlying options. (4) The expected dividend yield was based on the fact that the Company has not paid dividends to common
shareholders in the past and does not expect to pay dividends to common shareholders in the future. (5) The expected forfeiture
rate is based on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current
grantees.
Note 10 - Income Taxes
Total income tax expense differed from
the amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax expense as a result of the
NOL carry forward. Therefore, the Company’s effective tax rate is 0.0%. The Company files income tax returns in the United
States (“Federal”) and California (“State”) jurisdictions. The Company is subject to Federal and State
income tax examinations by tax authorities for all years since its inception.
At June 30, 2016, the Company had Federal
and State net operating loss carry forwards available to offset future taxable income of approximately $8.7 million. These carry
forwards will begin to expire in the year ending June 30, 2017 through 2023, subject to IRS limitations, including change in ownership.
The Company periodically evaluates the
likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the deferred tax assets by a valuation
allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. The Company
considers many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative
earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available
to us for tax reporting purposes, and other relevant factors.
At June 30, 2016, based on the weight of
available evidence, including cumulative losses in recent years and expectations of future taxable income, the Company determined
that it was more likely than not that its deferred tax assets of approximately $4.4 million would not be realized. Accordingly,
the Company has recorded a valuation allowance for 100% of its cumulative deferred tax assets. The components of our deferred tax
assets are as follows.
|
|
June 30,
|
|
|
|
2016
|
|
Net Operating loss carryforwards
|
|
$
|
3,585,000
|
|
Stock compensation expense
|
|
|
725,000
|
|
Amortization of Patents
|
|
|
58,000
|
|
Reserve for Obsolete Inventory
|
|
|
68,000
|
|
Total net deferred tax assets
|
|
|
4,436,000
|
|
Less valuation discount
|
|
|
(4,436,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
A reconciliation of the difference between
the expense and income taxes as the statutory US federal income tax are as follows:
|
|
June 30,
|
|
|
|
2016
|
|
Computed tax provision (benefit) at federal statutory rate (34%)
|
|
$
|
(254,000
|
)
|
State income taxes (7%), net of federal benefit
|
|
|
(52,000
|
)
|
Valuation allowance
|
|
|
306,000
|
|
Income tax provision
|
|
$
|
-
|
|
As a result of the implementation of certain
provisions of ASC 740-10, the Company performed an analysis of its previous tax filings and determined that there were no positions
taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of June 30, 2016.
Future changes in the unrecognized tax
benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company
estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify
income tax penalties and interest, if any, as part of interest and other expenses in its consolidated statements of operations.
There is no interest or penalties accrued as of June 30, 2016.
The following summarizes the open tax years
for each major jurisdiction:
Jurisdiction
|
|
Open Tax Years
|
|
|
|
Federal
|
|
2011 - 2015
|
California
|
|
2010 - 2015
|
The Company’s net operating loss
carry forwards are subject to IRS examination until they are utilized and such tax years are closed.
Note 11 - Commitments and Contingencies
Lease Agreement
The Company leases approximately 5,000
square feet of office and warehouse space under a non-cancellable lease agreement through February 1, 2018. Monthly payments
are approximately $5,000 per month. The Company has a security deposit of $9,500 associated with this lease. Future minimum lease
payments under our non-cancelable operating lease through February 2018 is as follows:
Year End
|
|
Amount
|
|
June 30, 2017
|
|
$
|
60,000
|
|
June 30, 2018
|
|
|
35,000
|
|
Total
|
|
$
|
95,000
|
|
Total rent expense was $53,359 and $61,236
for the years ended June 30, 2016 and 2015 and was reported as part of General and administrative expenses in the accompanying
Consolidated Statements of Operations,
Royalty Agreements
On July 1, 2008, the Company’s wholly
owned subsidiary entered into Patent Assignment Agreements with two parties, its President as well as its former Chief Executive
Officer (CEO) and current Technology Senior Manager, where certain devices and methods involved in the hydrodynamic cavitation
processes invented by the President and former CEO/ current Technology Senior Manager have been assigned to the Company. In
exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the President and former CEO/ current Technology
Senior Manager for licensing of the technology and leasing of the related equipment embodying the technology. These agreements
were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company’s former CEO/ current Technology
Senior Manager and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any
gross revenue generated through June 30, 2016.
On April 30, 2008 (as amended November
22, 2010), the Company’s wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical
Department (the “Inventor”) providing that the Inventor shall receive an amount equal to 5% of actual gross royalties
received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor
was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent
year. As of June 30, 2016, no patents have been granted in which this person is the 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.
|
a.
|
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.
|
b.
|
The
Company has several patents issued by the US Patent Office with regards to the use and efficacy of its Nano Reactors. In August
2015, a competitor, Arisdyne System filed a complaint challenging the patentability of certain claims of the Company’s Patent
No. 8,911,808 B2 or Patent 808. Patent 808 is currently being used in the reactors purchased by the Company’s distributor,
Desmet. In January 2016, the Company and Arisdyne System terminated the complaint with no monetary compensation paid.
|