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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2020
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2020
|
|
|
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|
(unaudited)
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ASSETS
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Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
892,000
|
|
|
$
|
759,000
|
|
|
Account receivable
|
|
|
34,000
|
|
|
|
104,000
|
|
|
Inventory
|
|
|
67,000
|
|
|
|
47,000
|
|
|
Total current assets
|
|
|
993,000
|
|
|
|
910,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
188,000
|
|
|
|
76,000
|
|
|
Operating lease right-of-use asset, net
|
|
|
277,000
|
|
|
|
308,000
|
|
|
Other assets
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Total assets
|
|
$
|
1,468,000
|
|
|
$
|
1,304,000
|
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
|
|
|
|
|
|
|
|
|
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Accounts payable and accrued expenses
|
|
$
|
377,000
|
|
|
$
|
316,000
|
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
667,000
|
|
|
|
693,000
|
|
|
Related party payable
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Customer advances
|
|
|
506,000
|
|
|
|
368,000
|
|
|
Operating lease liability, current portion
|
|
|
55,000
|
|
|
|
54,000
|
|
|
Total current liabilities
|
|
|
1,606,000
|
|
|
|
1,432,000
|
|
|
|
|
|
|
|
|
|
|
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Operating lease liability, non-current
|
|
|
228,000
|
|
|
|
258,000
|
|
|
Notes payable, non-current
|
|
|
254,000
|
|
|
|
104,000
|
|
|
Total liabilities
|
|
|
2,088,000
|
|
|
|
1,794,000
|
|
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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, 2020 and June 30, 2020 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, 196,997,906 shares issued and outstanding as of December 31, 2020 and June 30, 2020, respectively
|
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197,000
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|
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|
197,000
|
|
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Additional paid-in capital
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|
23,291,000
|
|
|
|
23,291,000
|
|
|
Accumulated deficit
|
|
|
(24,108,000
|
)
|
|
|
(23,978,000
|
)
|
|
Total stockholders' deficit
|
|
|
(620,000
|
)
|
|
|
(490,000
|
)
|
|
Total liabilities and stockholders' deficit
|
|
$
|
1,468,000
|
|
|
$
|
1,304,000
|
|
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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2020
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2019
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2020
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2019
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Revenue
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$
|
72,000
|
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|
$
|
25,000
|
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$
|
489,000
|
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|
$
|
376,000
|
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Cost of revenue
|
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|
2,000
|
|
|
|
–
|
|
|
|
12,000
|
|
|
|
12,000
|
|
|
Gross profit
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|
70,000
|
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|
|
25,000
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|
477,000
|
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364,000
|
|
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Operating expenses:
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|
|
|
|
|
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|
|
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General and administrative expenses
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|
283,000
|
|
|
|
575,000
|
|
|
|
593,000
|
|
|
|
874,000
|
|
|
Research and development expenses
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5,000
|
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|
|
4,000
|
|
|
|
11,000
|
|
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|
6,000
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Total operating expenses
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|
288,000
|
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|
|
579,000
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|
604,000
|
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|
880,000
|
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|
|
|
|
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|
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|
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Loss from operations
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|
(218,000
|
)
|
|
|
(554,000
|
)
|
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|
(127,000
|
)
|
|
|
(516,000
|
)
|
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|
|
|
|
|
|
|
|
|
|
|
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Interest expense
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|
(3,000
|
)
|
|
|
–
|
|
|
|
(3,000
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
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|
|
|
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Net loss
|
|
$
|
(221,000
|
)
|
|
$
|
(554,000
|
)
|
|
$
|
(130,000
|
)
|
|
$
|
(516,000
|
)
|
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Net loss per share,
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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 STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)
Three Months Ended December 31, 2020
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|
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Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
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Deficit
|
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|
Total
|
|
|
Balance at September 30, 2020
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,291,000
|
|
|
$
|
(23,887,000
|
)
|
|
$
|
(399,000
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221,000
|
)
|
|
|
(221,000
|
)
|
|
Balance at December 31, 2020
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,291,000
|
|
|
$
|
(24,108,000
|
)
|
|
$
|
(620,000
|
)
|
Six Months Ended December 31, 2020
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance at June 30, 2020
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,291,000
|
|
|
$
|
(23,978,000
|
)
|
|
$
|
(490,000
|
)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,000
|
)
|
|
|
(130,000
|
)
|
|
Balance at December 31, 2020
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,291,000
|
|
|
$
|
(24,108,000
|
)
|
|
$
|
(620,000
|
)
|
Three Months Ended December 31, 2019
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
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-in
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
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
|
)
|
See accompanying notes to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
Six Months Ended
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(130,000
|
)
|
|
$
|
(516,000
|
)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13,000
|
|
|
|
19,000
|
|
|
Fair value of warrants issued for services
|
|
|
–
|
|
|
|
194,000
|
|
|
Amortization of operating lease right-of-use assets
|
|
|
31,000
|
|
|
|
30,000
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
70,000
|
|
|
|
224,000
|
|
|
Inventory
|
|
|
(20,000
|
)
|
|
|
(12,000
|
)
|
|
Accounts payable and accrued expenses
|
|
|
61,000
|
|
|
|
(56,000
|
)
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
(26,000
|
)
|
|
|
–
|
|
|
Customer advances
|
|
|
138,000
|
|
|
|
232,000
|
|
|
Operating lease liability
|
|
|
(29,000
|
)
|
|
|
(27,000
|
)
|
|
Net cash provided by operating activities
|
|
|
108,000
|
|
|
|
88,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Deposit for the purchase of property and equipment
|
|
|
(125,000
|
)
|
|
|
–
|
|
|
Net cash used in investing activities
|
|
|
(125,000
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of a note payable
|
|
|
150,000
|
|
|
|
–
|
|
|
Cash provided by financing activities
|
|
|
150,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
133,000
|
|
|
|
88,000
|
|
|
Cash, beginning of period
|
|
|
759,000
|
|
|
|
649,000
|
|
|
Cash, end of period
|
|
$
|
892,000
|
|
|
$
|
737,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
–
|
|
|
$
|
–
|
|
|
Cash paid for income taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
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, 2020 and 2019
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, 2020
are not indicative of the results that may be expected for the fiscal year ending June 30, 2021. 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, 2020 filed on October 13, 2020. The condensed consolidated
balance sheet as of June 30, 2020 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, 2020, the Company incurred a loss of $130,000 and at
December 31, 2020, the Company had a stockholders’ deficit of $620,000 and a working capital deficit of $613,000. 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, 2020,
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.
As of December, 31 2020 we had cash and
cash equivalents on hand of $892,000 and are not generating sufficient funds to cover operations. In addition to the cash on hand,
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, including the extension or renewal
of our existing global R and D, Marketing and Technology License Agreement with Desmet Ballestra Group (Desmet), agreement with
Alchemy Beverages, Inc (ABI), and agreement with Enviro Watertek, LLC (EWT).
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.
Covid-19
In March 2020, the World Health Organization
declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely
affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many
businesses. This outbreak could decrease spending, adversely affect demand for the Company’s products, and harm the Company’s
business and results of operations. During the six months ended December 31, 2020, the Company believes the COVID-19 pandemic did
not materially impact its operating results due to the nature of the Company’s business and its operations. The Company has
not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.
At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and
its effects on the Company’s business or results of operations, financial condition, or liquidity.
As of December 31, 2020, the Company has
been following the recommendations of local health authorities to minimize exposure risk for its employees, including the temporary
closure of its corporate office and having employees work remotely. Most vendors have transitioned to electronic submission of
invoices and payments.
Principles of Consolidation
The condensed 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.
Income Taxes
The Company follows the asset and liability
method of accounting for 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.
The Company recorded no provision for income
taxes during the three and six months ended December 31, 2020 and 2019 due to available Federal net operating loss (NOL) carryforwards
of approximately $9 million that are available to reduce taxable income.
Earnings Per Share
The Company’s computation of earnings
per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income 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 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, 2020 and 2019, the Company
had 11,000,000 stock options and 87,696,511 stock warrants outstanding (and out of the money) 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.
Concentrations
Cash - 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.
Accounts Receivable – accounts receivable
at December 31, 2020 and June 30, 2020, were all due from Desmet.
Accounts Payable and Accrued Expenses –
three vendors accounted 54%,11% and 10% of accounts payable and accrued expenses as of December 31, 2020. Two vendors accounted
64% and 14% of accounts payable and accrued expenses as of June 30, 2020 .
Revenues – revenues during the three
and six months period ended December 31, 2020, were all from Desmet (see Note 2). Revenues for the three months ended December
31, 2019 were all derived from EWT. During the six months ended December 31, 2019, 94% of recorded revenues, were derived from
Desmet.
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, 2020 and June 30, 2020,
the fair values of cash and cash equivalents, accounts receivable, inventory and accounts payable and accrued expenses approximate
their carrying values due to their short-term nature.
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 June 2016, the FASB issued ASU No. 2016-13, Credit
Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASU 2016-13 requires entities
to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain
types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses.
ASU 2016-13 is effective for the Company beginning January 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.
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 accordance with ASC 606, the Company recognizes the revenue from the sale of reactors at the time
of shipment of the Nano reactor hardware as such shipment is deemed to be the Company’s only performance obligation and the
Company has no more continuing obligation. Desmet 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 receives a share in gross
profit, as defined, from the sale of Desmet’s integrated neutralization system to its customers of which the reactors are
an integral component. Such amount is subject to adjustment based on certain factors including cost overruns. The Company has no
control with regards to the sale and installation of Nano Reactor® and CTi Nano Neutralization®
System, between Desmet and the end customer. In accordance with ASC 606, the Company has determined that the gross profit to
be earned from Desmet is variable consideration, and evaluates the amount of the potential payments and the likelihood that the
payments will be received using the most likely amount approach (subject to the variable consideration constraint). 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 Company considered these as variable revenue
constraints, and as such, the amount of gross profit share revenue recognized is limited to the actual amount of cash received
under the contract which the Company has determined is not refundable and probable that a significant revenue reversal would not
occur. Further, the Company has not been able to develop an expectation of the actual collection based on its historical experience.
During the three months ended December
31, 2020, the Company recorded sales of $36,000 from Nano Reactor® sales and $36,000 from gross profit share
for a total revenue of $72,000 from Desmet. There were no revenues recognized from Desmet for the three months ended December 31,
2019.
During the six months ended December 31,
2020, the Company recorded sales of $276,000 from Nano Reactor® sales and $213,000 from gross profit share
for a total revenue of $489,000 from Desmet. During the six months ended December 31, 2019, the Company recorded sales of $207,000
from Nano Reactor® sales and $144,000 from gross profit share for a total revenue of $351,000 from Desmet.
As of December 31, 2020 and June 30, 2020
and 2019, accounts receivable from Desmet related to the sale of Nano
Reactor® amounted to $34,000 and $104,000, respectively.
As of December 31, 2020 and June 30, 2020, advances
received from Desmet related to the Company’s share in gross profit amounted to $506,000 and $368,000, respectively. These
advances will only be recognized as revenues once the condition for revenue recognition have been met.
Enviro Watertek, LLC Agreement
In April 2019, we entered into a licensing
and service contract agreement with Enviro Watertek, LLC (“EWT”). This agreement covers our industrial treatment of
produced and frack water. Our agreement with EWT 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.
There was no sale of reactors or usage
fees earned during the three and six months ended December 31, 2020. 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 EWT in fiscal 2020.
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,
2020
|
|
|
Lease cost
|
|
|
|
|
|
Operating lease cost (included in general
and administrative in the Company’s unaudited condensed consolidated statements of operations)
|
|
$
|
37,000
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
35,000
|
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
3.6
|
|
|
Average discount rate – operating leases
|
|
|
4%
|
|
Maturity of the Company’s lease liabilities
are as follows:
|
|
|
At December 31,
2020
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
Long-term right-of-use assets
|
|
$
|
277,000
|
|
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
55,000
|
|
|
Long-term operating lease liabilities
|
|
|
228,000
|
|
|
Total operating lease liabilities
|
|
$
|
283,000
|
|
|
Year ending June 30
|
|
|
Operating Lease
|
|
|
|
|
|
|
|
|
2021(remaining 6 months)
|
|
|
$
|
36,000
|
|
|
2022
|
|
|
|
72,000
|
|
|
2023
|
|
|
|
75,000
|
|
|
2024
|
|
|
|
78,000
|
|
|
2025 and thereafter
|
|
|
|
47,000
|
|
|
Total lease payments
|
|
|
|
308,000
|
|
|
Less: Imputed interest/present value discount
|
|
|
|
(25,000
|
)
|
|
Present value of lease liabilities
|
|
|
$
|
283,000
|
|
Note 4 – Related Party Transactions
Accrued Payroll and Payroll Taxes
Due to Officers
In prior periods, the Company accrued salaries
and estimated payroll taxes due to current and former officers of the Company. As of December 31, 2020 and June 30, 2020, total
accrued payroll and payroll taxes-related parties amounted to $667,000 and $693,000, respectively.
Note 5 – Notes Payable
|
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
Note Payable - PPP
|
|
$
|
104,000
|
|
|
$
|
104,000
|
|
|
Note Payable - EIDL
|
|
|
150,000
|
|
|
|
–
|
|
|
Total
|
|
$
|
254,000
|
|
|
$
|
104,000
|
|
|
|
A.
|
On April 16, 2020, the Company received loan proceeds in the amount of $104,000 pursuant to the
Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”),
which was enacted on March 27, 2020. The note is scheduled to mature in April 2022 and has a 1% interest rate and is subject to
the terms and conditions applicable to loans administered by the Small Business Administration (SBA) under the CARES Act. The Company
applied ASC 470, Debt, to account for the PPP loan. The loan and accrued interest are forgivable as long as the Company
uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.
Forgiveness of the note is only available for principal that is used for the limited purposes that qualify for forgiveness under
SBA requirements, and that to obtain forgiveness, the Company must request it and must provide documentation in accordance with
the SBA requirements, and certify that the amounts the Company is requesting to be forgiven qualify under those requirements. The
Company also understands that it shall remain responsible under the note for any amounts not forgiven, and that interest payable
under the note will not be forgiven but that the SBA may pay the loan interest on forgiven amounts.
|
|
|
|
|
|
|
|
As of December 31, 2020
and June 30, 2020, the outstanding balance of the note payable amounted to $104,000. The Company is currently in the process of
applying for forgiveness of the entire PPP loan with respect to these qualifying expenses, however, the Company cannot assure that
such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part
or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment
would be recorded.
|
|
|
B.
|
In July 2020, the Company received a loan of $150,000 from the Small Business Association under
its Economic Injury Disaster Loan (EIDL) assistance program. The EIDL loan is payable over 30 years, bears interest at a rate of
3.75% per annum and secured by all tangible and intangible property of the Company. As of December 31, 2020, the outstanding balance
of the note payable amounted to $150,000.
|
Note 6 - Stockholders' Deficit
Stock Options
The Company has not adopted a formal stock
option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic
Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity during the
six months ended December 31, 2020 is as follows:
|
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
6.07
|
|
|
- Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
- Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
- Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
- Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding at December 31, 2020, vested and exercisable
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
5.57
|
|
There was no intrinsic value of the outstanding
options as of December 31, 2020 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, 2020.
|
|
|
|
|
|
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
|
|
|
|
5.57
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
5.57
|
|
Stock Warrants
A summary of the Company's warrant activity
and related information for the six months ended on December 31, 2020 is as follows:
|
Warrants
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
87,696,511
|
|
|
$
|
0.07
|
|
|
|
5.64
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020 vested and exercisable
|
|
|
87,696,511
|
|
|
$
|
0.07
|
|
|
|
5.14
|
|
There was no intrinsic value of the outstanding
warrants as of December 31, 2020 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, 2020.
|
|
|
|
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 - 0.05
|
|
|
|
68,736,518
|
|
|
|
7.3
|
|
|
$
|
0.03 - 0.05
|
|
|
|
68,736,518
|
|
|
|
7.3
|
|
|
$
|
0.12
|
|
|
|
18,959,993
|
|
|
|
2.9
|
|
|
$
|
0.12
|
|
|
|
18,959,993
|
|
|
|
2.9
|
|
|
|
|
|
|
|
87,696,511
|
|
|
|
|
|
|
|
|
|
|
|
87,696,511
|
|
|
|
|
|
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 Global Technology Manager both waived their rights to receive royalty payments that have accrued, or
that may accrue, on any gross revenue generated through December 31, 2020 and in the foreseeable future.
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,
2020, 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, EWT.
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 2021.
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.
We have agreements to license our technology
globally through our strategic partners, Desmet Ballestra Group (Desmet) and Enviro Watertek, LLC (EWT) and Alchemy Beverages,
Inc (ABI). Desmet have been providing monthly advances of $50,000. 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.
In March 2020 the World Health Organization
declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely
affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many
businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business
and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak
and its effects on our business or results of operations at this time.
Results of Operations
Results of Operations for the Three Months Ended December
31, 2020 Compared to the Three Months Ended December 31, 2019
The following is a comparison of our results of operations for
the three months ended December 31, 2020 and 2019.
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
72,000
|
|
|
$
|
25,000
|
|
|
$
|
47,000
|
|
|
|
188 %
|
|
|
Cost of revenue
|
|
|
2,000
|
|
|
|
–
|
|
|
|
2,000
|
|
|
|
100 %
|
|
|
Gross profit
|
|
|
70,000
|
|
|
|
25,000
|
|
|
|
45,000
|
|
|
|
180 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
283,000
|
|
|
|
575,000
|
|
|
|
(292,000
|
)
|
|
|
(51) %
|
|
|
Research and development expenses
|
|
|
5,000
|
|
|
|
4,000
|
|
|
|
1,000
|
|
|
|
25 %
|
|
|
Total operating expenses
|
|
|
288,000
|
|
|
|
579,000
|
|
|
|
(291,000
|
)
|
|
|
(50) %
|
|
|
Interest expense
|
|
|
3,000
|
|
|
|
–
|
|
|
|
3,000
|
|
|
|
100 %
|
|
|
Net loss
|
|
$
|
(221,000
|
)
|
|
$
|
(554,000
|
)
|
|
$
|
333,000
|
|
|
|
60 %
|
|
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, 2020, we recorded $36,000 in revenue from sale of reactors to our distributor Desmet pursuant to four purchase orders and corresponding
share in gross profit of 36,000 for a total of $72,000.
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.
Cost of Revenue
During the three months ended December
31, 2020, our cost of sales amounted to $2,000 and to $0 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, 2020 amounted to $283,000 compared with $575,000 for the same period in 2019, a decrease of $292,000 or 51%.
The decrease was mainly due to decrease in stock compensation expense of approximately $194,000 and payroll of $26,000.
Research and development (R&D) expenses
remain low and it is our intention to pursue R&D as our cash position improves.
Interest Expense
During the three months ended December
31, 2020, the Company recognized interest expense of $3,000 pursuant to the terms of our outstanding notes payable. There was no
interest expense recognized in prior period as there were no outstanding notes payable
Results of Operations for the Six Months Ended December 31,
2020 Compared to the Six Months Ended December 31, 2019
The following is a comparison of our results of operations for
the six months ended December 31, 2020 and 2019.
|
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
489,000
|
|
|
$
|
376,000
|
|
|
$
|
113,000
|
|
|
|
30 %
|
|
|
Cost of revenue
|
|
|
12,000
|
|
|
|
11,000
|
|
|
|
1,000
|
|
|
|
9 %
|
|
|
Gross profit
|
|
|
477,000
|
|
|
|
364,000
|
|
|
|
113,000
|
|
|
|
31 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
593,000
|
|
|
|
874,000
|
|
|
|
(281,000
|
)
|
|
|
(32) %
|
|
|
Research and development expenses
|
|
|
11,000
|
|
|
|
6,000
|
|
|
|
5,000
|
|
|
|
83 %
|
|
|
Total operating expenses
|
|
|
604,000
|
|
|
|
880,000
|
|
|
|
(276,000
|
)
|
|
|
(31) %
|
|
|
Interest expense
|
|
|
3,000
|
|
|
|
–
|
|
|
|
3,000
|
|
|
|
100 %
|
|
|
Net loss
|
|
$
|
(130,000
|
)
|
|
$
|
(516,000
|
)
|
|
$
|
386,000
|
|
|
|
75 %
|
|
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,
2020, the Company recognized revenues of $277,000 from sale of reactors and $212,000 from share in gross profit to Desmet for a
total revenues of $489,000
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.
Cost of Revenue
During the six months ended December 31,
2020, our cost of sales amounted to $12,000 and to $11,000 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, 2020 amounted to $604000 compared with $880,000 for the same period in 2019, a decrease of $276,000 or 31%. The decrease
was mainly due to decrease in stock compensation expense of approximately $194,000 and payroll of $52,000.
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,
2020 the Company incurred a net loss of $130,000, had a working capital deficiency of $613,000 and a stockholders' deficit of $620,000
as of December 31, 2020. 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, 2020 financial statements, has expressed substantial
doubt about the Company’s ability to continue as a going concern.
As of December 31, 2020, we had cash
and cash equivalents on hand of $892,000 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 (EWT), and Alchemy Beverages, Inc. (ABI). Desmet has been providing us monthly advances of
$50,000 and will continue through October 1, 2022 to be applied against gross profit share from future sales.
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, 2020 amounted to $108,000 compared to net cash used in operating activities of $88,000
for the same period in fiscal 2020.
Critical Accounting Policies
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 for allowance for
doubtful accounts, reserve for inventory obsolescence, impairment analysis for property and equipment, accrual of potential liabilities,
valuation allowance for deferred tax assets, and assumption 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.
Recently Issued Accounting Standards
See Note 1 of the Condensed Consolidated
Financial Statements for a discussion of recently issued accounting standards.