ITEM 1 - Condensed Consolidated Financial
Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31,
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June 30,
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2016
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2016
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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399,430
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$
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657,396
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Inventory
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162,129
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153,811
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Total current assets
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561,559
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811,207
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Property and equipment, net
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107,839
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122,641
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Patents, net
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9,620
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16,336
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Other assets
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9,500
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9,500
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Total assets
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$
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688,518
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$
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959,684
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
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Accounts payable and accrued expenses
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$
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158,468
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$
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171,029
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Accrued payroll and payroll taxes due to officers
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994,033
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994,033
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Related party payable
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1,147
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1,147
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Advances from distributor, net
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688,123
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436,250
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Total current liabilities
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1,841,771
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1,602,459
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Commitments and contingencies
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Stockholders' deficit:
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Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2016 and June 30, 2016, respectively
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-
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-
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Common stock, $0.001 par value, 1,000,000,000 shares authorized, 193,997,906 shares issued and outstanding as of December 31, 2016 and June 30, 2016, respectively
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193,998
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193,998
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Additional paid-in capital
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22,062,888
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22,062,888
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Accumulated deficit
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(23,410,139
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)
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(22,899,661
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)
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Total stockholders' deficit
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(1,153,253
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)
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(642,775
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)
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Total liabilities and stockholders' deficit
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$
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688,518
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$
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959,684
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See accompanying
notes, which are an integral part of these consolidated financial statements
CAVITATION TECHNOLOGIES,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
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For the Six Months Ended
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December 31,
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December 31,
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2016
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2015
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2016
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2015
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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Revenue
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$
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35,000
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$
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144,388
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$
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120,000
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$
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640,667
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Cost of revenue
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7,912
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21,781
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15,824
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66,290
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Gross profit
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27,088
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122,607
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104,176
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574,377
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General and administrative expenses
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287,493
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333,674
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606,974
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622,327
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Research and development expenses
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1,351
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2,321
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7,680
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14,829
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Total operating expenses
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288,844
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335,995
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614,654
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637,156
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Net Loss
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$
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(261,756
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)
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$
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(213,388
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)
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$
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(510,478
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)
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$
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(62,779
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)
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Net Loss per share,
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Basic and Diluted
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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Weighted average shares outstanding,
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Basic and Diluted
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193,997,906
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193,997,906
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193,997,906
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193,997,906
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES,
INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)
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Series A Preferred
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Common Stock
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Additional Paid-
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Accumulated
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Shares
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Amount
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Shares
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Amount
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in Capital
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Deficit
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Total
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Balance at June 30, 2016
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-
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$
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-
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193,997,906
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$
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193,998
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$
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22,062,888
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(22,899,661
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)
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(642,775
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)
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Net Loss
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(510,478
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)
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(510,478
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)
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Balance at December 31, 2016
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-
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$
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-
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193,997,906
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$
|
193,998
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|
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$
|
22,062,888
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$
|
(23,410,139
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)
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|
$
|
(1,153,253
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)
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Six Months Ended December 31,
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2016
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2015
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(unaudited)
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(unaudited)
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Operating activities:
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Net loss
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$
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(510,478
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)
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$
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(62,779
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)
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Adjustments
to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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21,518
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30,992
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Effect of changes in:
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Inventory
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(8,318
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)
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(20,386
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)
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Accounts payable and accrued expenses
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(12,561
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)
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76,095
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Advances from distributor
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371,873
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-
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Reduction in distributor advances from recognition of revenues
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(120,000
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)
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(640,667
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)
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Net cash used in operating activities
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(257,966
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)
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(616,745
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)
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Investing activities:
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Purchase of property and equipment
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-
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(61,565
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)
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Net cash used in investing activities
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-
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(61,565
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)
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Net decrease in cash
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(257,966
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)
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(678,310
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)
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Cash, beginning of period
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657,396
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1,478,565
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Cash, end of period
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$
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399,430
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$
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800,255
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$
|
-
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|
$
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-
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|
Cash paid for income taxes
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$
|
1,600
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|
|
$
|
1,600
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|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended December 31, 2016 and 2015
Note 1 - Organization and Basis of Presentation
Basis of Presentation
The accompanying condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") as promulgated
in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and regulations of
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange
Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary
(consisting of normal recurring adjustments) for a fair presentation. Operating results for the six months ended December 31, 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, wastewater treatment, biodiesel, algae oil extraction,
and alcoholic beverage enhancement.
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 six months ended December 31, 2016, the Company incurred a net loss of
$510,478 and utilized $257,966 in operations. As of December 31, 2016, the Company had a working capital deficiency of $1,280,212
and a stockholders' deficit of $1,153,253. 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.
Management's plan is to generate income
from operations by continuing to market our technology and products 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 revenues pursuant to a
January 2016 agreement. This new agreement replaces the agreement dated on May 12, 2012 that ended on May 12, 2015. During the
six months ended December 31, 2016, the Company received advances from Desmet totaling $200,000.
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 following table presents information
about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis
as of December 31, 2016 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
The three levels of the fair value hierarchy are as follows:
|
·
|
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 December 31, 2016 and June 30, 2016,
the fair values of cash and cash equivalents, inventory and accounts payable and accrued expenses approximate their carrying values
due to their short-term nature.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in 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 May 2012 agreement with our distributor,
the profit share was fixed and determinable at the time of shipment, and as such, recorded upon shipment and acceptance of the
reactors by the distributor. Pursuant to the January 2016 agreement with our distributor, the profit share is not fixed at the
time of delivery, and as such, revenue will be recognized when the profit shares is fixed and determinable, which will generally
be upon delivery of the
NANO Neutralization System
by the distributor to its customer.
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 December 31, 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 six months ended December 31,
2016 and 2015, we recorded amortization expense of $6,716 and $11,344, respectively relating to our capitalized patent costs.
As of December 31, 2016 and June 30, 2016
the Company had remaining unamortized patent costs of $9,620 and $16,336 respectively.
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 our impairment tests, management believes there is no impairment of
its intangibles and long-lived assets as of December 31, 2016 and June 30, 2016. 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 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.
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.
Warranty Policy
The Company provides a limited warranty
with every set of reactors sold, typically two years. The Company has not experienced significant claims under its warranty policy,
and management determined no accrual for warranty reserve was necessary at December 31, 2016.
Dependence on Desmet Ballestra
Our revenue is almost entirely dependent
on Desmet Ballestra who is our exclusive distribution agent with regard to the
CTi Nano Neutralization® System
for edible
oils. During fiscal 2016, our revenue was derived from Desmet sales efforts (see Note 3).
Basic Loss Per Share
The Company computes the loss per common
share using ASC 260,
Earnings per Share
. The net loss per common share, both basic and diluted, is computed based
on the weighted average number of shares outstanding for the period. The diluted loss per common share is computed by
dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive
common shares were issued.
As of December 31, 2016, the Company had
11,685,852 stock options and 64,326,509 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 a
financial institution at times may exceed federally insured limits. As of December 31, 2016, and June 30, 2016, before adjustments
for outstanding checks and deposits in transit, the Company had approximately $399,000 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 six months
ended December 31, 2016 of $120,000 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.
As of June 30, 2016, total outstanding
advances from Desmet amounted to $500,000. In addition, the Company also recorded accounts receivable from Desmet of $63,750 from
the sale of reactors. For financial reporting purposes, the Company deducted this amount from the advance payments received which
resulted in a net balance of $436,250.
During the six months ended December 31,
2016, the Company recognized revenue of $120,000 related to the shipment and acceptance of reactors to Desmet. In addition, the
Company also received advances payments amounting to $200,000 and collection of accounts receivable of $171,873.
As of December 31, 2016, total outstanding
advances from Desmet amounted to $700,000. In addition, the Company also recorded accounts receivable from Desmet of $11,877 from
the sale of reactors. For financial reporting purposes, the Company deducted this amount from the advance payments received which
resulted in a net balance of $688,123.
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 December 31, 2016 and June 30, 2016:
|
|
December 31,
|
|
|
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
|
|
|
(344,007
|
)
|
|
|
(329,205
|
)
|
Property & Equipment, net
|
|
$
|
107,839
|
|
|
$
|
122,641
|
|
Depreciation expense for the six months
ended December 31, 2016 and 2015 amounted to $14,802 and $19,648, respectively.
Note 5 - Accrued Payroll and Payroll
Taxes
As of December 31, 2016 and June 30, 2016,
the Company had accrued salaries to current and former officers of the Company amounting to $916,864. In addition, the Company
also accrued the estimated payroll taxes due to this unpaid payroll of $77,169. The accrued payroll is unsecured and is due upon
demand.
Note 6 - Stockholders' Deficit
Stock Options
A summary of the stock option activity
for the six months ended December 31, 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 December 31, 2016
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
4.77
|
|
Exercisable and vested at December 31, 2016
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
4.77
|
|
The intrinsic value of the outstanding
options was $94,600 as of December 31, 2016. The following table summarizes additional information concerning options outstanding
and exercisable at December 31, 2016.
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Exercise
|
|
|
|
Number
|
|
|
|
Remaining
|
|
|
|
Exercise
|
|
|
Price
|
|
|
|
of Shares
|
|
|
|
Life (Years)
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
5.46
|
|
|
|
0.03
|
|
$
|
0.33
|
|
|
|
174,022
|
|
|
|
1.60
|
|
|
|
0.33
|
|
|
0.67
|
|
|
|
511,830
|
|
|
|
1.50
|
|
|
|
0.67
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, all stock options
were vested and exercisable.
Warrants
A summary of the Company's warrant activity
for the six months ended on December 31, 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 December 31, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
4.58
|
|
Vested and exercisable at December 31, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
4.58
|
|
As of December 31, 2016, all
warrants granted were vested and exercisable. The intrinsic value of the outstanding warrants was $0 as of December 31, 2016. The
following table summarizes additional information concerning warrants outstanding and exercisable at December 31, 2016.
|
|
|
Warrants Outstanding
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.04 - 0.07
|
|
|
|
43,999,851
|
|
|
|
5.44
|
|
|
$
|
0.05
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
|
2.75
|
|
|
$
|
0.12
|
|
|
|
|
|
|
64,326,510
|
|
|
|
|
|
|
|
|
|
Note 7 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary
entered into Patent Assignment Agreements with two parties, our President and Technology Development Supervisor, where certain
devices and methods involved in the hydrodynamic cavitation processes invented by the President and the Technology Development
Supervisor have been assigned to the Subsidiary. In exchange, the Subsidiary agreed to pay a royalty of 5% of gross
revenues to each of the President and Technology Development Supervisor for licensing of the technology and leasing of the related
equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from
its subsidiary. The Company's President and Technology Development Supervisor both waived their rights to receive royalty
payments that have accrued, or that may accrue, on any gross revenue generated through December 31, 2016.
On April 30, 2008 and as amended on November
22, 2010, our wholly owned subsidiary entered into an employment agreement with our former Director of Chemical and Analytical
Department (the "Inventor") to 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 December 31,
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.
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 scheduled to begin sometime 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.
Note 8 - Income Taxes
As of December 31, 2016, the Company had
Federal and State net operating loss (NOL) carry forwards available to offset future taxable income of approximately $8.4 million
and $8.3 million, respectively. These carry forwards will begin to expire in the years ending June 30, 2027 and June 30, 2017,
respectively, subject to statutory limitations, including change in ownership.
Authoritative guidance issued by the ASC
Topic 740 –
Income Taxes
requires that a valuation allowance be established when it is more likely than not that all
or a portion of deferred tax assets will not be realized. Due to the restrictions imposed by Internal Revenue Code Section 382
regarding substantial changes in ownership of companies with loss carry forwards, the utilization of the Company’s NOL is
limited to $1.8 million per year as a result of recent cumulative changes in stock ownership. NOL’s of $8.4 million, which
were incurred subsequent to the latest change in control, are not subject to the $1.8 million per year limitation. As a result
of the limitations related to Internal Revenue Code Section 382 and the Company’s lack of history of profitable operations,
the Company recorded a 100% valuation allowance against its net deferred tax assets as of December 31, 2016 and June 30, 2016.
In assessing the realize-ability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. The Company has existing limitations on
its available federal NOL due to its previous changes in ownership under Internal Revenue Service Section 382 guidelines. These
restrictions limit the amount of NOL the Company can utilize over the next several years.
Note 9 - Subsequent Events
The
Company granted employees and a consultant warrants to purchase a total of 9.8 million shares of the Company’s common stock.
The warrants vest in five years, exercisable at $0.03 per share and will expire in 10 years. The Company estimated the fair
value of the warrants to be $387,000 and will be expensed based upon its vesting. The average assumptions the Company used
as inputs to the Black-Scholes pricing model included stock price of $0.04 per share, dividend yield of zero, a risk-free interest
rate of 2.31%, expected term of 8.75 years and an expected volatility of 162%. In addition, the Company also granted a member
of the Board of Directors 200,000 shares of common stock with a fair value of $8,000 for services.
ITEM 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction
with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing
of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. ("CTi"), a Nevada corporation,
was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly technology based systems
that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae
oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our systems are designed
to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development
firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized proprietary
technology that can be used for processing of industrial fluids. CTi's patented
Nano Reactor®
is the critical components
of
the CTi Nano Neutralization®
System which is commercially proven to reduce operating costs and increase yields in
processing oils and fats. CTi has two issued patents relating to our Nano
Reactor®
systems and has filed several national
and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production,
waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the six months ended December 31, 2016, we recorded revenue
of $120,000, net loss of $510,478 and used cash in operations of $257,966.
Management's Plan
We are engaged in merchandising our Neutralization System, which
is designed to help refine vegetable oils such as soybean, canola, sunflower and grapeseed. Our near term goal is to
continue to merchandise our systems through our partner, Desmet Ballestra. During the six months ended December 31, 2016, we recorded
revenues of $120,000 and incurred a net loss of $510,478. As of December 31, 2016, the Company had a working capital deficiency
of $1,280,212 and a stockholders' deficit of $1,153,253. The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation of the Company as a going concern.
As of December 31, 2016, we had
cash and cash equivalents on hand of $399,430 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 market our technology and products globally through our strategic
partner, 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 six months ended December 31, 2016, the Company received $200,000 advances from
Desmet.
In addition to these advances, we anticipate
that we will need additional funding, and we will attempt to raise additional debt and/or equity financing to fund operations and
to provide additional working capital. However, there is no assurance that such agreement with Desmet will be successful and such
financing will be consummated or obtained in sufficient amounts necessary to meet our needs, or that we will be able to meet our
future contractual obligations. Should management fail to obtain such financing, we may curtail operations. The accompanying condensed
consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. As
a result of the aforementioned factors, our independent auditors, in their report on our audited financial statements for the fiscal
year ended June 30, 2016, expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
CTi's critical accounting policies and estimates are included
in its Annual Report on Form 10-K for the year ended June 30, 2016, and did not change for the six months ended December 31, 2016.
Results of Operations
Results of Operations for the Three Months Ended December
31, 2016 Compared to the Three Months Ended December 31, 2015
The following is a comparison of our results of operations for
the three months ended December 31, 2016 and 2015.
|
|
For the Quarter Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
35,000
|
|
|
$
|
144,388
|
|
|
$
|
(109,388
|
)
|
|
|
0.0
|
%
|
Cost of revenue
|
|
|
7,912
|
|
|
|
21,781
|
|
|
|
(13,869
|
)
|
|
|
0.0
|
%
|
Gross profit
|
|
|
27,088
|
|
|
|
122,607
|
|
|
|
(95,519
|
)
|
|
|
0.0
|
%
|
General and administrative expenses
|
|
|
287,493
|
|
|
|
333,674
|
|
|
|
(46,181
|
)
|
|
|
-13.8
|
%
|
Research and development expenses
|
|
|
1,351
|
|
|
|
2,321
|
|
|
|
(970
|
)
|
|
|
-41.8
|
%
|
Total operating expenses
|
|
|
288,844
|
|
|
|
335,995
|
|
|
|
(47,151
|
)
|
|
|
-14.0
|
%
|
Net Loss
|
|
$
|
(261,756
|
)
|
|
$
|
(213,388
|
)
|
|
|
(48,368
|
)
|
|
|
22.7
|
%
|
Revenue
We recorded $35,000 in revenue in the second quarter of fiscal
2017, as opposed to $144,388 in the same period of fiscal 2016. In fiscal 2017, we shipped reactors to one Desmet customer in the
US. In fiscal 2016, we shipped reactors to two Desmet customers in Japan and India.
During the three months ended December 31, 2016, our cost of
sales amounted to $7,912, as opposed to $21,781 in the three months ended December 31, 2015, which was the result of the revenue
transactions described above.
Operating Expenses
General and administrative expenses for the three months ended
December 31, 2016 amounted to $287,493 compared with $333,674 for the same period in fiscal 2016, a decrease of $46,181, or 14%.
In both periods, the major expense component was employees’ compensation. In the second quarter of fiscal 2016, total compensation
amounted to $131,423 or 39% of total costs compared with $121,618 or 42% of total costs in the second quarter of fiscal 2017.
During the second quarter of 2017, the other major components
of general and administrative expenses were professional service fees related to accounting, and legal services which amounted
to $40,475 or 14% of total operating expenses, travel expenses of $11,344 and various insurance premiums totaling $30,555. The
same professional service expenses in the second quarter of fiscal 2016 amounted to $35,249 or 10.5% of total operating expenses,
travel expenses of $9,904 and various insurance premiums totaling $24,526.
Research and development (R&D) expenses
remained relatively low as we continued to rely on Desmet Ballestra for support in R&D. It is our intention to pursue R&D
as our cash position permits.
Results of Operations for the Six Months Ended December 31,
2016 Compared to the Six Months Ended December 31, 2015
The following is a comparison of our results of operations for
the six months ended December 31, 2016 and 2015.
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
120,000
|
|
|
$
|
640,667
|
|
|
$
|
(520,667
|
)
|
|
|
0.0
|
%
|
Cost of revenue
|
|
|
15,824
|
|
|
|
66,290
|
|
|
|
(50,466
|
)
|
|
|
0.0
|
%
|
Gross profit
|
|
|
104,176
|
|
|
|
574,377
|
|
|
|
(470,201
|
)
|
|
|
0.0
|
%
|
General and administrative expenses
|
|
|
606,974
|
|
|
|
622,327
|
|
|
|
(15,355
|
)
|
|
|
-2.5
|
%
|
Research and development expenses
|
|
|
7,680
|
|
|
|
14,829
|
|
|
|
(7,149
|
)
|
|
|
-48.2
|
%
|
Total operating expenses
|
|
|
614,654
|
|
|
|
637,156
|
|
|
|
(22,503
|
)
|
|
|
-3.5
|
%
|
Net Loss
|
|
$
|
(510,478
|
)
|
|
$
|
(62,779
|
)
|
|
|
(447,699
|
)
|
|
|
713.1
|
%
|
Revenue
We recorded revenue of $120,000 in the
six months ended December 31, 2016 for the reactors shipped to Desmet customers in the US. During the six months ended December
31, 2015, we recorded revenue of $640,667 which consisted primarily of
NANO Neutralization System
reactor sold to Desmet
customers in United States, India and Japan. Included in the 2016 revenues are share in gross profit/margin of approximately $353,000
from the sale of reactors to Desmet. There were no similar revenues recorded in 2017.
Cost of Revenue
During the six months ended December 31,
2016, our cost of sales amounted to $15,824, and during the six months ended December 31, 2015, our cost of sales amounted to $66,290,
both of which were the result of the revenue transactions described above.
Operating Expenses
Operating expenses for the six months
ended December 31, 2016 amounted to $606,974 compared with $622,327 for the same period in 2015, a decrease of $15,355, or 2.5%.
The primary expenditures during the first
half of fiscal 2017 were approximately $98,567 for professional service fees such as accounting, legal and SEC related services,
$14,508 in service and consulting fees, $19,019 in marketing and travel expenses, $55,321 in insurance expenses and $259,307 in
salaries and salary related expenses. The primary expenditures during the first half of fiscal 2016 were approximately $82,568
for professional service fees such as accounting legal and SEC related services, $26,502 in service and consulting fees, $40,452
in marketing and travel expenses, $48,796 in insurance expenses and $292,168 in salaries and salary related expenses.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements
have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as
a going concern. During the six months ended December 31, 2016, we incurred a net loss of $510,478. As of December
31, 2016, we had a working capital deficiency of $1,280,212 and a stockholders' deficit of $1,153,253. Furthermore, we have
been dependent on most 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. 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 us to continue
as a going concern.
Management's plan is to generate income from operations by
marketing our technology and products globally through our strategic partner, the Desmet Ballestra Group (Desmet). In January
2016, we signed a marketing and research and development agreement with Desmet which include among others, a monthly advance of
$50,000 that will be applied to future sales. We will need additional funding, and we will attempt to raise additional debt and/or
equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing
will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, or that the Company will be able
to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
At December 31, 2016, we had cash on hand in the amount of $399,430.
In addition to the funds on hand, we will require additional funds to continue to operate our business. This includes expenses
we will incur in connection with costs to manufacture and ship our products; costs to design and implement an effective system
of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic
reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual commitments for
salaries to our executive officers. In light of our financial commitments over the next several months and its liquidity constraints,
we have implemented cost reduction measures in all areas of operations. We intend to review these measures on an ongoing basis
and make additional decisions as may be required.
Cash Flow
Net cash used in operating activities during the six months
ended December 31, 2016 amounted to $257,966, compared to net cash used of $616,745 for the same period in fiscal 2016. Funding
for the operating activities was provided by $200,000 in advances from our distributor and proceeds from sale of reactors and collection
of accounts receivable totaling $171,873 in the first six months of fiscal 2017. For the first half of fiscal 2017, we paid $259,307
in employees' compensation, $143,596 in professional services fees, $55,321 in various insurance premiums, and $150,365 in fixed
operating costs and other obligations. For the first six months of fiscal 2016, we paid approximately $292,000 in compensation,
approximately $268,000 in fixed operating costs, $68,576 in professional services fees and $48,796 in various insurance premiums.
Net cash used in investing activities during the six months
ended December 31, 2015 amounted to $61,565 for the acquisition of machineries. There were no such activities in the fiscal 2017.
There were no financing activities in neither the fiscal 2016
nor the fiscal 2015.