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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2019
|
|
|
2019
|
|
|
|
|
|
(unaudited)
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|
|
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|
ASSETS
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|
|
|
|
|
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Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
737,000
|
|
|
$
|
649,000
|
|
|
Account receivable
|
|
|
16,000
|
|
|
|
240,000
|
|
|
Inventory
|
|
|
69,000
|
|
|
|
57,000
|
|
|
Total current assets
|
|
|
822,000
|
|
|
|
946,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
46,000
|
|
|
|
65,000
|
|
|
Operating lease right-of-use asset, net
|
|
|
338,000
|
|
|
|
–
|
|
|
Other assets
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Total assets
|
|
$
|
1,216,000
|
|
|
$
|
1,021,000
|
|
|
|
|
|
|
|
|
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|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
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|
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|
|
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Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
131,000
|
|
|
$
|
187,000
|
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
892,000
|
|
|
|
892,000
|
|
|
Related party payable
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Customer advances
|
|
|
992,000
|
|
|
|
760,000
|
|
|
Operating lease liability, current portion
|
|
|
53,000
|
|
|
|
–
|
|
|
Total current liabilities
|
|
|
2,069,000
|
|
|
|
1,840,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability, net of current portion
|
|
|
288,000
|
|
|
|
–
|
|
|
Total liabilities
|
|
|
2,357,000
|
|
|
|
1,840,000
|
|
|
|
|
|
|
|
|
|
|
|
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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, 2019 and June 30, 2019 respectively
|
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–
|
|
|
|
–
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Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 shares issued and outstanding as of December 31, 2019 and June 30, 2019, respectively
|
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|
197,000
|
|
|
|
197,000
|
|
|
Additional paid-in capital
|
|
|
23,284,000
|
|
|
|
23,090,000
|
|
|
Accumulated deficit
|
|
|
(24,622,000
|
)
|
|
|
(24,106,000
|
)
|
|
Total stockholders' deficit
|
|
|
(1,141,000
|
)
|
|
|
(819,000
|
)
|
|
Total liabilities and stockholders' deficit
|
|
$
|
1,216,000
|
|
|
$
|
1,021,000
|
|
See accompanying notes to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
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For the Six Months Ended
|
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December 31,
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December 31,
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|
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2019
|
|
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2018
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2019
|
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2018
|
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|
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(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
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|
Revenue
|
|
$
|
25,000
|
|
|
$
|
353,000
|
|
|
$
|
376,000
|
|
|
$
|
408,000
|
|
|
Cost of revenue
|
|
|
–
|
|
|
|
2,000
|
|
|
|
12,000
|
|
|
|
7,000
|
|
|
Gross profit
|
|
|
25,000
|
|
|
|
351,000
|
|
|
|
364,000
|
|
|
|
401,000
|
|
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|
|
|
|
|
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|
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Operating expenses:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
575,000
|
|
|
|
785,000
|
|
|
|
874,000
|
|
|
|
1,089,000
|
|
|
Research and development expenses
|
|
|
4,000
|
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
8,000
|
|
|
Total operating expenses
|
|
|
579,000
|
|
|
|
791,000
|
|
|
|
880,000
|
|
|
|
1,097,000
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
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Net loss
|
|
$
|
(554,000
|
)
|
|
$
|
(440,000
|
)
|
|
$
|
(516,000
|
)
|
|
$
|
(696,000
|
)
|
|
|
|
|
|
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|
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Net Loss per share,
|
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|
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|
|
|
|
|
|
|
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|
|
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|
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Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
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|
|
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|
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Weighted average number of common shares outstanding, Basic and
Diluted
|
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|
196,997,906
|
|
|
|
196,997,906
|
|
|
|
196,997,906
|
|
|
|
196,997,906
|
|
See accompanying notes to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)
Three Months Ended December 31, 2019
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Common Stock
|
|
|
Additional Paid-
|
|
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Accumulated
|
|
|
|
|
|
|
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Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance at September 30, 2019
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,090,000
|
|
|
$
|
(24,068,000
|
)
|
|
$
|
(781,000
|
)
|
|
Fair value of warrants granted for services
|
|
|
–
|
|
|
|
–
|
|
|
|
194,000
|
|
|
|
|
|
|
|
194,000
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(554,000
|
)
|
|
|
(554,000
|
)
|
|
Balance at December 31, 2019
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,284,000
|
|
|
$
|
(24,622,000
|
)
|
|
$
|
(1,141,000
|
)
|
Six Months Ended December 31, 2019
|
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at June 30, 2019
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,090,000
|
|
|
$
|
(24,106,000
|
)
|
|
$
|
(819,000
|
)
|
|
Fair value of warrants granted for services
|
|
|
–
|
|
|
|
–
|
|
|
|
194,000
|
|
|
|
|
|
|
|
194,000
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(516,000
|
)
|
|
|
(516,000
|
)
|
|
Balance at December 31, 2019
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,284,000
|
|
|
$
|
(24,622,000
|
)
|
|
$
|
(1,141,000
|
)
|
Three Months Ended December 31, 2018
|
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance at September 30, 2018
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
22,641,000
|
|
|
$
|
(23,639,000
|
)
|
|
$
|
(801,000
|
)
|
|
Fair value of warrants granted for services
|
|
|
|
|
|
|
|
|
|
|
115,000
|
|
|
|
|
|
|
|
115,000
|
|
|
Fair value of modified warrants
|
|
|
|
|
|
|
|
|
|
|
334,000
|
|
|
|
|
|
|
|
334,000
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(440,000
|
)
|
|
|
(440,000
|
)
|
|
Balance at December 31, 2018
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,090,000
|
|
|
$
|
(24,079,000
|
)
|
|
$
|
(792,000
|
)
|
Six Months Ended December 31, 2018
|
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance at June 30, 2018
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
22,641,000
|
|
|
$
|
(23,383,000
|
)
|
|
$
|
(545, 000
|
)
|
|
Fair value of warrants granted for services
|
|
|
–
|
|
|
|
–
|
|
|
|
115,000
|
|
|
|
|
|
|
|
115,000
|
|
|
Fair value of modified warrants
|
|
|
|
|
|
|
|
|
|
|
334,000
|
|
|
|
|
|
|
|
334,000
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(696,000
|
)
|
|
|
(696,000
|
)
|
|
Balance at December 31, 2018
|
|
|
197,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,090,000
|
|
|
$
|
(24,079,000
|
)
|
|
$
|
(792,000
|
)
|
See accompanying notes to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(516,000
|
)
|
|
$
|
(696,000
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,000
|
|
|
|
21,000
|
|
|
Fair value of warrants issued for services
|
|
|
194,000
|
|
|
|
115,000
|
|
|
Fair value of modified warrants
|
|
|
–
|
|
|
|
334,000
|
|
|
Amortization of operating lease right-of-use assets
|
|
|
30,000
|
|
|
|
–
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
224,000
|
|
|
|
(124,000
|
)
|
|
Inventory
|
|
|
(12,000
|
)
|
|
|
7,000
|
|
|
Accounts payable and accrued expenses
|
|
|
(56,000
|
)
|
|
|
(38,000
|
)
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
–
|
|
|
|
–
|
|
|
Customer advances
|
|
|
232,000
|
|
|
|
150,000
|
|
|
Operating lease liability
|
|
|
(27,000
|
)
|
|
|
–
|
|
|
Net cash provided by (used in) operating activities
|
|
|
88,000
|
|
|
|
(231,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
–
|
|
|
|
(15,000
|
)
|
|
Net cash used in investing activities
|
|
|
–
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
88,000
|
|
|
|
(246,000
|
)
|
|
Cash, beginning of period
|
|
|
649,000
|
|
|
|
945,000
|
|
|
Cash, end of period
|
|
$
|
737,000
|
|
|
$
|
699,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
–
|
|
|
$
|
–
|
|
|
Cash paid for income taxes
|
|
$
|
–
|
|
|
$
|
1,600
|
|
See accompanying notes to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of and for the six months ended December 31, 2019 and 2018
Note 1 - Organization and Summary of Significant Accounting
Policies
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.
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, 2019
are not indicative of the results that may be expected for the fiscal year ending June 30, 2020. 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, 2019 filed on October 15, 2019. The condensed consolidated
balance sheet as of June 30, 2019 has been derived from the audited financial statements included in the Form 10-K for that year.
Going Concern
The accompanying condensed
consolidated financial statements have been prepared in conformity with generally accepted accounting principles which
contemplates continuation of the Company as a going concern. During the six months ended December 31, 2019, the
Company incurred a loss of $516,000 and at December 31, 2019, the Company had a stockholders’ deficit of $1,141,000 and
a working capital deficit of $1,247,000. These factors, among others, raise substantial doubt about the Company's ability to
continue as a going concern. In addition, our independent registered public accounting firm, in their report on our audited
financial statements for the fiscal year ended June 30, 2019, raised substantial doubt about the Company’s ability to
continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments that
might be necessary if the Company is unable to continue as a going concern.
Management’s plan is to generate
income from operations by continuing to license its technology globally. Currently, we have a Research and Development (R&D)
Marketing and Technology License agreements with two customers, Desmet Ballestra Group NV (Desmet) and GEA
Westfalia AG (GEA), in which Desmet and GEA provide monthly advances to be applied to future gross profit revenues. Desmet
provides advance of $50,000 per month through October 2021, and GEA provides advances to the Company of $25,000 per month through
January 2020. The Company is currently in negotiations with GEA as the corresponding agreement is scheduled to expire in March
2020.
We may also attempt to raise additional
debt and/or equity financing to fund operations and 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.
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.
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 allowance for
bad debts, reserve for inventory obsolescence, impairment analysis for fixed assets, accrual of potential liabilities, the valuation
allowance for deferred tax assets, and assumptions 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
The Company follows the guidance of Accounting
Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires
entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements
with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price,
(4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation
is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration
it is entitled to in exchange for the services it transfers to its clients.
Revenue from sale of our Nano Reactors
is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these
contracts and we have no continuing obligation to the customer.
The Company also recognizes revenue from
its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using
the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most
likely amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the
amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company
has determined is not refundable and that a significant future reversal of cumulative revenue under the contract will not occur.
In addition, the Company also recognizes
revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
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. At June 30, 2019 and December 31, 2019, the Company did not provide any reserve
for uncollectible accounts receivable.
Lease
Prior to July 1, 2019, start of our fiscal
year, the Company accounted for leases under Accounting Standards Codification (“ASC”) 840, Accounting for Leases.
Effective July 1, 2019, the Company adopted the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to
recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective
approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date
of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. Leases
with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease
components of its office lease as a single lease component. Lease expense is recognized on a straight-line basis over the lease
term. The adoption of ASC 842 on July 1, 2019 resulted in the initial recognition of operating lease right-of-use assets of $368,000,
lease liabilities for operating leases of $368,000, and a zero cumulative-effect adjustment to accumulated deficit (see Note 3).
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 and non-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. 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.
Fair Value Measurement
FASB Accounting Standards Codification
("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of
a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy
are as follows:
|
|
·
|
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
·
|
Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
|
·
|
Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
At December 31, 2019 and June 30, 2019,
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.
Concentrations
Cash is deposited in one financial institution.
The balances held at this financial institution at times may be in excess of Federal Deposit Insurance Corporation (“FDIC”)
insurance limits of up to $250,000.
The Company’s revenue was mainly
derived from sales of its Nano Reactor® and Nano Neutralization® System to Desmet and reactor usage fee
from Enviro Watertek, LLC (“EW”). During the three months ended December 31, 2019 and 2018, 100% of recorded revenues,
were derived from EW and Desmet, respectively (see Note 2). During the six months ended December 31, 2019 and 2018, 94% and 100%
of recorded revenues, respectively, were derived from Desmet (see Note 2)
At December 31, 2019, 100% of accounts
receivable was due from EW. At June 30, 2019, 100% of accounts receivable was due from Desmet.
As of December 31, 2019, three vendors
accounted for 57%, 26% and 11%, respectively, of accounts payable. As of June 30, 2019, three vendors and/or professional consultants
accounted for 49%, 33% and 11%, respectively, of accounts payable.
Earnings (Loss) Per Share
The Company’s computation of earnings
(loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss)
available to common stockholders by the weighted average number of common shares during the period. Shares of restricted stock
subject to vesting are included in basic weighted average common shares outstanding from the time they vest. Diluted EPS reflects
the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss)
of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised,
and the proceeds are used to purchase common stock at the average market price and there were no instruments that would result
in issuance of additional shares during the period.
As of December 31, 2019, the Company had
11,000,000 stock options and 87,696,511 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.
Segments
The Company operates in one segment, its
nano reactor technology business. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s
chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results
to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based
on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to
report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds
material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting”
due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement,
manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment
Reporting” can be found in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In September 2016, the FASB issued ASU
2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which replaces the incurred-loss impairment methodology
and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables.
Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited
to the amount by which fair value is below amortized cost. ASU 2016-13 is effective for the Company beginning July 1, 2023 and
early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements
will be material to its financial position, results of operations and cash flows.
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future
consolidated financial statements.
Note 2 – Contracts with Customers
Desmet Ballestra Agreement
In October 2018, we signed a three-year
global R and D, Marketing and Technology License Agreement with Desmet Ballestra Group NV (Desmet) for the sale and licensing of
our reactors. This agreement is a continuation of an original agreement we signed with Desmet in 2012, and amended in 2016. As
part of the October 2018 agreement, Desmet agreed to provide us monthly advances of $50,000 through October 1, 2022 to be applied
against gross profit share from future sales.
During the three and six months ended December
31, 2019, the Company recorded sales of $207,000 from reactor sales and $144,000 from the Company’s share of gross profit
for a total revenue of $351,000 from Desmet.
During the six months ended December 31,
2018, the Company recorded sales of $85,000 from reactor sales to Desmet and the Company’s share of gross profit of $323,000
for a total revenue of $408,000 from Desmet. During the three months ended December 31, 2018, the Company recorded sales of $30,000
from reactor sales to Desmet and the Company’s share of gross profit of $323,000 for a total revenue of $353,000 from Desmet.
At June 30, 2019, advances from Desmet
totaled $33,000. During the six months ended December 31, 2019, the Company received advances of $250,000, of which, $144,000 was
recorded as revenues. As of December 31, 2019, advances from Desmet totaled $139,000.
GEA Westfalia Agreement
In
January 2017 we entered into a global technology license, R&D and marketing agreement with GEA Westfalia AG (GEA) with respect
to our patented Nano Reactor™ technology, processes and applications. Under the agreement, GEA has been granted a worldwide
exclusive license to integrate our patented technology into water treatment application, milk and juice pasteurization, and certain
food related processes. The license agreement between us and GEA has a three-year term and provides for the payment of $300,000
per year in advanced license fees or share in gross margin or profit to us.
As
of December 31, 2019, outstanding advances from GEA to be applied to share in gross profit in future period amounted to $853,000.
There were no reactor sales or share of gross profit revenue recognized during the periods ended December 31, 2019 and
2018.
The agreement with GEA is scheduled to
expire in March 2020. The Company is currently in negotiations with GEA to renew the agreement.
Enviro Watertek, LLC Agreement
In April 2019, we entered into a licensing
and service contract agreement with Enviro Watertek, LLC (“EW”). This agreement covers our industrial treatment of
produced and frack water. Our agreement with EW provides for sales of Nano Reactors® plus recurring revenue stream based on
processing frack water volumes and utilization over a 15 year term but can be terminated by either party every anniversary.
During the three and six months ended December
31, 2019, the Company recorded revenues of $25,000 from the usage of reactors previously sold to EW in fiscal 2019. There was no
sale of reactors during the three and six months ended December 31, 2019 and 2018.
Disaggregation of Revenues
The following table provides information
about disaggregated revenue based on revenue by service lines:
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Revenues from sale of reactors
|
|
$
|
207,000
|
|
|
$
|
85,000
|
|
|
Revenue from share of gross profit
|
|
|
144,000
|
|
|
|
323,000
|
|
|
Revenue from usage fees
|
|
|
25,000
|
|
|
|
–
|
|
|
Total
|
|
$
|
376,000
|
|
|
$
|
408,000
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Revenues from sale of reactors
|
|
$
|
–
|
|
|
$
|
30,000
|
|
|
Revenue from share of gross profit
|
|
|
–
|
|
|
|
323,000
|
|
|
Revenue from usage fees
|
|
|
25,000
|
|
|
|
–
|
|
|
Total
|
|
$
|
25,000
|
|
|
$
|
353,000
|
|
Advances from distributors
Our contracts include advances from distributors.
For contracts where the performance obligation is not completed, advances are recorded for any payments received in advance of
the performance obligation.
Changes in advances from distributors were
as follows at December 31, 2019 and 2018:
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Advances from distributors, beginning of period
|
|
$
|
760,000
|
|
|
$
|
427,000
|
|
|
New contract liabilities
|
|
|
376,000
|
|
|
|
150,000
|
|
|
Performance obligations satisfied
|
|
|
(144,000
|
)
|
|
|
–
|
|
|
Advances from distributors, end of period
|
|
$
|
992,000
|
|
|
$
|
577,000
|
|
Note 3 – Operating Lease
The Company leases certain warehouse and
corporate office space under operating lease agreement. We determine if an arrangement is a lease at inception. Lease assets are
presented as operating lease right-of-use assets and the related liabilities are presented as lease liabilities in our consolidated
balance sheets.
Operating lease right-of-use (“ROU”)
assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU
assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make
lease payments arising from the lease. Generally, the implicit rate of interest in lease arrangements is not readily determinable
and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s
incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating
lease ROU asset includes any lease payments made and excludes lease incentives.
The components of lease expense and supplemental
cash flow information related to leases for the period are as follows:
|
|
|
Six Months Ended
December 31, 2019
|
|
|
|
|
|
|
|
Lease cost
|
|
|
|
|
|
Operating lease cost (included in general and administrative in the Company’s unaudited condensed statement of operations)
|
|
$
|
37,000
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
34,000
|
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
5.08
|
|
|
Average discount rate – operating leases
|
|
|
4%
|
|
The supplemental balance sheet information
related to leases for the period is as follows:
|
|
|
At December 31, 2019
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
Long-term right-of-use assets
|
|
$
|
338,000
|
|
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
53,000
|
|
|
Long-term operating lease liabilities
|
|
|
288,000
|
|
|
Total operating lease liabilities
|
|
$
|
341,000
|
|
|
Year ending June 30
|
|
|
Operating Lease
|
|
|
|
|
|
|
|
|
2020 (remaining 6 months)
|
|
|
$
|
35,000
|
|
|
2021
|
|
|
|
71,000
|
|
|
2022
|
|
|
|
72,000
|
|
|
2023
|
|
|
|
75,000
|
|
|
2024
|
|
|
|
78,000
|
|
|
2025 and thereafter
|
|
|
|
47,000
|
|
|
Total lease payments
|
|
|
|
378,000
|
|
|
Less: Imputed interest/present value discount
|
|
|
|
(37,000
|
)
|
|
Present value of lease liabilities
|
|
|
$
|
341,000
|
|
Note 4 - Stockholders' Deficit
Stock Options
The Company has not adopted a formal stock
option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic
Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity during the
six months ended December 31, 2019 is as follows:
|
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
3.36
|
|
|
- Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
- Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
- Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
- Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding at December 31, 2019, vested and exercisable
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
2.86
|
|
There was no intrinsic value of the outstanding
options as of December 31, 2019 as the exercise price of these options were greater than the market price. The following table
summarizes additional information concerning options outstanding and exercisable at December 31, 2019.
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Exercise
Price
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
2.86
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
2.86
|
|
Stock Warrants
A summary of the Company's warrant activity
and related information for the six months ended on December 31, 2019 is as follows:
|
Warrants
|
|
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
79,263,176
|
|
|
$
|
0.08
|
|
|
|
4.36
|
|
|
Granted
|
|
|
9,800,000
|
|
|
|
0.03
|
|
|
|
–
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,366,665
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019 vested and exercisable
|
|
|
87,696,511
|
|
|
$
|
0.07
|
|
|
|
4.09
|
|
During the six months ended December 31,
2019 the Company granted employees warrants to purchase 9,800,000 shares of common stock for services rendered. The warrants are
fully vested, exercisable at $0.03 per share, and will expire in ten years. Total fair value of these warrants amounted to $194,000
based upon a Black-Scholes Option Pricing model using the following weighted-average assumptions:
|
|
|
December 31, 2019
|
|
|
Risk-free interest rate
|
|
|
1.72%
|
|
|
Expected term (years)
|
|
|
5
|
|
|
Expected volatility
|
|
|
250%
|
|
|
Expected dividend yield
|
|
|
0%
|
|
The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the award; the expected
term represents the weighted-average period of time the awards granted are expected to be outstanding giving consideration to vesting
schedules, contractual terms, and historical participant exercise behavior; the expected volatility is based upon historical volatility
of the Company’s Common Stock; and the expected dividend yield is based on the fact that the Company has not paid dividends
in the past and does not expect to pay dividends in the future.
There was no intrinsic value of the outstanding
warrants as of December 31, 2019 as the exercise price of these warrants were greater than the market price. The following table
summarizes additional information concerning warrants outstanding and exercisable at December 31, 2019.
|
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03 - 0.08
|
|
|
|
68,103,184
|
|
|
|
4.88
|
|
|
$
|
0.03 - 0.08
|
|
|
|
68,103,184
|
|
|
$
|
4.88
|
|
|
$
|
0.12
|
|
|
|
19,593,327
|
|
|
|
4.00
|
|
|
$
|
0.12
|
|
|
|
19,593,327
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
87,696,511
|
|
|
|
|
|
|
|
|
|
|
|
87,696,511
|
|
|
|
|
|
Note 5 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, the Company 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, 2019.
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,
2019, no patents have been granted in which this person is the legally named inventor.
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.
We are engaged in manufacturing our Nano-Reactors,
which are designed to help refine vegetable oils, biodiesel transesterification and treatment of produced and frack water. Our
near-term goal is to continue to sell our systems through our partners, Desmet Ballestra, EW and GEA.
During the past several years we have developed
a number of new applications utilizing the core principal of our technology. Our low pressure non-reactors (LPN) can be utilized
in multiple industries that process large volumes of fluids and we anticipate accelerated commercial sales in our fiscal 2020.
Further, we have miniaturized our non-reactors to be utilized in various consumer oriented products, such as, processing and enhancing
spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil.
Desmet and GEA had provided monthly advances
of $50,000 and $25,000 respectively, meanwhile, we have just started receiving revenue from EW, however, we anticipate that we
may need additional funding, and may attempt to raise additional debt and/or equity financing to fund operations and additional
working capital. However, there is no assurance that we will be successful in obtaining such financing or obtained sufficient amounts
necessary to meet our business needs, or that we will be able to meet our future contractual obligations.
Critical Accounting Policies
Revenue Recognition
The Company follows the guidance of Accounting
Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires
entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements
with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price,
(4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation
is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration
it is entitled to in exchange for the services it transfers to its clients.
Revenue from sale of our Nano Reactors
is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these
contracts and we have no continuing obligation to the customer.
The Company also recognizes revenue from
its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using
the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most
likely amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the
amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company
has determined is not refundable and that a significant future reversal of cumulative revenue under the contract will not occur.
In addition, the Company also recognizes
revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
Share-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees and non-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. 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.
Recently Issued Accounting Standards
See Note 1 of the Condensed Consolidated
Financial Statements for a discussion of recently issued accounting standards.
Results of Operations
Results of Operations for the Three Months Ended December
31, 2019 Compared to the Three Months Ended December 31, 2018
The following is a comparison of our results of operations for
the three months ended December 31, 2019 and 2018.
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
25,000
|
|
|
$
|
353,000
|
|
|
$
|
(328,000
|
)
|
|
|
-93%
|
|
|
Cost of revenue
|
|
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
100%
|
|
|
Gross profit
|
|
|
25,000
|
|
|
|
351,000
|
|
|
|
(326,000
|
)
|
|
|
-93%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
575,000
|
|
|
|
785,000
|
|
|
|
210,000
|
|
|
|
27%
|
|
|
Research and development expenses
|
|
|
4,000
|
|
|
|
6,000
|
|
|
|
2,000
|
|
|
|
33%
|
|
|
Total operating expenses
|
|
|
579,000
|
|
|
|
791,000
|
|
|
|
212,000
|
|
|
|
27%
|
|
|
Net loss
|
|
$
|
(554,000
|
)
|
|
$
|
(440,000
|
)
|
|
$
|
(114,000
|
)
|
|
|
26%
|
|
Revenue
The Company generates revenues from the
sale of the Nano Reactor® to customers/distributor as well as share in gross profit from the sale of such reactors by
our distributors to their customers.
During the three months ended December
31, 2019, the Company recognized usage fees revenues of $25,000 from Enviro Watertek, LLC. There was no reactors sold or
gross profit recognized.
During the three months ended December
31, 2018 we recorded $353,000 in revenue from sale of reactors to our distributor Desmet pursuant to four purchase orders and corresponding
share in gross profit.
Cost of Revenue
During the three months ended December
31, 2019, our cost of sales amounted to $0 and to $2,000 during the same period in prior year, which was the result of the revenue
transactions described above.
Operating Expenses
Operating expenses for the three months
ended December 31, 2019 amounted to $577,000 compared with $791,000 for the same period in 2018, a decrease of $210,000 or 27%.
The decrease was mainly due to decrease in stock compensation expense of approximately $250,000.
Research and development (R&D) expenses
remain low and it is our intention to pursue R&D as our cash position improves.
Results of Operations for the Six Months Ended December 31,
2019 Compared to the Six Months Ended December 31, 2018
The following is a comparison of our results of operations for
the six months ended December 31, 2019 and 2018.
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
376,000
|
|
|
$
|
408,000
|
|
|
$
|
(32,000
|
)
|
|
|
-8%
|
|
|
Cost of revenue
|
|
|
12,000
|
|
|
|
7,000
|
|
|
|
5,000
|
|
|
|
71%
|
|
|
Gross profit
|
|
|
364,000
|
|
|
|
401,000
|
|
|
|
(37,000
|
)
|
|
|
-9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
874,000
|
|
|
|
1.089,000
|
|
|
|
(215,000
|
)
|
|
|
-20%
|
|
|
Research and development expenses
|
|
|
6,000
|
|
|
|
8,000
|
|
|
|
(2,000
|
)
|
|
|
–
|
|
|
Total operating expenses
|
|
|
880,000
|
|
|
|
1.097,000
|
|
|
|
(217,000
|
)
|
|
|
-20%
|
|
|
Net loss
|
|
$
|
(516,000
|
)
|
|
$
|
(696,000
|
)
|
|
$
|
(181,000
|
)
|
|
|
-26%
|
|
Revenue
The Company generates revenues from the
sale of the Nano Reactor® to customers/distributor as well as share in gross profit from the sale of such reactors by
our distributors to their customers.
During the six months ended December 31,
2019 the Company recognized revenues of $351,000 from reactor sales to Desmet and usage fee of $25,000 from Enviro Watertek for
the use of reactors for a total revenues of $376,000.
During the six months ended December 31,
2018, the Company recognized revenues of $85,000 from sale of reactors and $323,000 from share in gross profit to Desmet for a
total revenues of $408,000
Cost of Revenue
During the six months ended December 31,
2019, our cost of sales amounted to $12,000 and to $7,000 during the same period in prior year, which was the result of the revenue
transactions described above.
Operating Expenses
Operating expenses for the six months ended
December 31, 2019 amounted to $874,000 compared with $1,089,000 for the same period in 2018, a decrease of $218,000 or 20%. The
decrease was mainly due to decrease in stock compensation expense of approximately $250,000.
Research and development (R&D) expenses
remained low and it is our intention to pursue R&D as our cash position permits.
Liquidity and Capital Resource
During the six months ended December 31,
2019 the Company incurred a net loss of $516,000, and at December 31, 2019 had a working capital deficiency of $1,247,000 and a
stockholders' deficit of $1,141,000. These factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s
independent registered public accounting firm, in its report on the Company’s June 30, 2019 financial statements, has expressed
substantial doubt about the Company’s ability to continue as a going concern.
As of December 31, 2019, we had cash and
cash equivalents on hand of $737,000 and are not generating sufficient revenues to fund operations. In addition, management believes
we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by
continuing to license our technology globally through our strategic partners, Desmet Ballestra Group (Desmet), Enviro Watertek
(EW), GEA Westfalia, AG (GEA), and Alchemy Beverages, Inc. (ABI). Desmet has been providing us monthly advances of $50,000 through
October 1, 2022 to be applied against gross profit share from future sales. GEA has been providing us monthly advances of $25,000
through January 2020, to be applied against gross profit share from future sales. In June 2019, we entered into two licensing agreements
with ABI and anticipate to start receiving certain royalties payments and revenue stream from ABI during fiscal 2019.
We may also attempt to raise additional
debt and/or equity financing to fund operations and 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.
Cash Flow
Net cash generated from operating activities
during the six months ended December 31, 2019 amounted to $88,000 compared to net cash used in operating activities of $231,000
for the same period in fiscal 2018.