ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
| | | |
| | |
| |
September 30, | | |
June 30, | |
| |
2022 | | |
2022 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 367,000 | | |
$ | 441,000 | |
Accounts receivable | |
| 18,000 | | |
| 1,000 | |
Inventory | |
| 48,000 | | |
| 48,000 | |
Prepaid expenses | |
| – | | |
| 38,000 | |
Total current assets | |
| 433,000 | | |
| 528,000 | |
| |
| | | |
| | |
Property and equipment, net | |
| 4,000 | | |
| 4,000 | |
Equity method investment | |
| 1,131,000 | | |
| 1,149,000 | |
Operating lease right of use asset, net | |
| 163,000 | | |
| 180,000 | |
Other assets | |
| 10,000 | | |
| 10,000 | |
Total assets | |
$ | 1,741,000 | | |
$ | 1,871,000 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 139,000 | | |
$ | 135,000 | |
Accrued payroll and payroll taxes due to officers | |
| 280,000 | | |
| 280,000 | |
Operating lease liability, current portion | |
| 63,000 | | |
| 63,000 | |
Advances from distributor | |
| 36,000 | | |
| 80,000 | |
Total current liabilities | |
| 518,000 | | |
| 558,000 | |
| |
| | | |
| | |
Notes payable, non-current | |
| 150,000 | | |
| 150,000 | |
Operating lease liability, non-current portion | |
| 110,000 | | |
| 127,000 | |
Total liabilities | |
| 778,000 | | |
| 835,000 | |
| |
| | | |
| | |
Commitments and contingencies | |
| – | | |
| – | |
| |
| | | |
| | |
Stockholders' equity: | |
| | | |
| | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and June 30, 2021, respectively | |
| – | | |
| – | |
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 276,698,831 shares issued and outstanding as of September 30, 2022 and June 30, 2022 | |
| 277,000 | | |
| 277,000 | |
Additional paid-in capital | |
| 26,005,000 | | |
| 26,005,000 | |
Accumulated deficit | |
| (25,319,000 | ) | |
| (25,246,000 | ) |
Total stockholders' equity | |
| 963,000 | | |
| 1,036,000 | |
Total liabilities and stockholders' equity | |
$ | 1,741,000 | | |
$ | 1,871,000 | |
See accompanying notes to the condensed consolidated
financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
| | | |
| | |
| |
For the Three Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Revenue | |
$ | 244,000 | | |
$ | 551,000 | |
Revenue – related party | |
| 17,000 | | |
| – | |
Total revenues | |
| 261,000 | | |
| 551,000 | |
Cost of revenue | |
| (50,000 | ) | |
| (23,000 | ) |
Gross profit | |
| 211,000 | | |
| 528,000 | |
| |
| | | |
| | |
General and administrative expenses | |
| 265,000 | | |
| 306,000 | |
| |
| | | |
| | |
Income (loss) from operations | |
| (54,000 | ) | |
| 222,000 | |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Gain on forgiveness of note payable | |
| – | | |
| 104,000 | |
Loss from equity method investment | |
| (18,000 | ) | |
| – | |
Interest expense | |
| (1,000 | ) | |
| (2,000 | ) |
Total other income (expense) | |
| (19,000 | ) | |
| 102,000 | |
| |
| | | |
| | |
Net (loss) income | |
$ | (73,000 | ) | |
$ | 324,000 | |
| |
| | | |
| | |
Net income per share, | |
| | | |
| | |
Basic and Diluted | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
| |
| | | |
| | |
Weighted average shares outstanding, | |
| | | |
| | |
Basic and Diluted | |
| 276,698,831 | | |
| 218,906,958 | |
See accompanying notes to the condensed consolidated
financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (Unaudited)
AS OF SEPTEMBER 30, 2022 AND 2021
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended September 30, 2022 (unaudited) | |
| |
Common Stock | | |
Additional Paid-in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance at June 30, 2022 | |
| 276,698,831 | | |
$ | 277,000 | | |
$ | 26,005,000 | | |
$ | (25,246,000 | ) | |
$ | 1,036,000 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (73,000 | ) | |
| (73,000 | ) |
Balance at September 30, 2022 | |
| 276,698,831 | | |
$ | 277,000 | | |
$ | 26,005,000 | | |
$ | (25,319,000 | ) | |
$ | 963,000 | |
| |
Three Months Ended September 30, 2021 (unaudited) | |
| |
Common Stock | | |
Additional Paid-in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance at June 30, 2021 | |
| 208,267,444 | | |
$ | 208,000 | | |
$ | 24,008,000 | | |
$ | (24,627,000 | ) | |
$ | (411,000 | ) |
Common stock issued for cash | |
| 12,071,785 | | |
| 12,000 | | |
| 773,000 | | |
| – | | |
| 785,000 | |
Net income | |
| – | | |
| – | | |
| – | | |
| 324,000 | | |
| 324,000 | |
Balance at September 30, 2021 | |
| 220,339,229 | | |
$ | 220,000 | | |
$ | 24,781,000 | | |
$ | (24,303,000 | ) | |
$ | 698,000 | |
See accompanying notes to the condensed consolidated
financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
| | | |
| | |
| |
Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Operating activities: | |
| | | |
| | |
Net income (loss) | |
$ | (73,000 | ) | |
$ | 324,000 | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
Loss from equity method investment | |
| 18,000 | | |
| 16,000 | |
Gain on forgiveness of note payable | |
| – | | |
| (104,000 | ) |
Effect of changes in: | |
| | | |
| | |
Accounts receivable | |
| (17,000 | ) | |
| (477,000 | ) |
Inventory | |
| – | | |
| 22,000 | |
Prepaid expenses | |
| 38,000 | | |
| – | |
Operating lease right-of-use assets | |
| 17,000 | | |
| – | |
Accounts payable and accrued expenses | |
| 4,000 | | |
| (13,000 | ) |
Advances/distributions from distributor | |
| (44,000 | ) | |
| 232,000 | |
Operating lease liability | |
| (17,000 | ) | |
| (16,000 | ) |
Net cash (used in) operating activities | |
| (74,000 | ) | |
| (16,000 | ) |
| |
| | | |
| | |
Cash flow from investing activities: | |
| | | |
| | |
Purchase of property and equipment | |
| – | | |
| (250,000 | ) |
Net cash used in investing activities | |
| – | | |
| (250,000 | ) |
| |
| | | |
| | |
Cash flow from financing activities: | |
| | | |
| | |
Proceeds from sale of common stock with warrants | |
| – | | |
| 785,000 | |
Net cash provided by financing activities | |
| – | | |
| 785,000 | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
| (74,000 | ) | |
| 519,000 | |
| |
| | | |
| | |
Cash and cash equivalents, beginning of period | |
| 441,000 | | |
| 1,363,000 | |
Cash and cash equivalents, end of period | |
$ | 367,000 | | |
$ | 1,882,000 | |
| |
| | | |
| | |
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)
Three months ended September 30, 2022 and 2021
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 three months ended September 30, 2022 are not indicative of the results that may be expected
for the fiscal year ending June 30, 2022. 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,
2022 filed on October 13, 2022. The condensed consolidated balance sheet as of September 30, 2022 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 three months ended September 30, 2022, the Company incurred a loss of $(73,000), used cash in operating activities of $74,000 and at September 30, 2022,
the Company had a working capital deficit of $85,000. 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, 2022, 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 September 30, 2022 we had cash and cash
equivalents on hand of $367,000 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
During the three months ended September 30, 2022,
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 September 30, 2022, 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.
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, deferred tax assets and 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”).
Revenue from the sale of the Company’s 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.
Revenue from the Company’s share of gross
profit to be earned from distributors, as defined, which the Company treated as variable consideration, was recognized using the most
likely amount method. Pursuant to the October 2021 agreement with Desmet, the Company is no longer entitled to share of gross profit.
Revenue from usage fees is recognized by the Company
based on actual usage by the customer.
The Company provides a limited warranty with every
set of reactors sold, typically 2 to 5 years. The Company has not experienced significant claims under its warranty policy, and management
determined no accrual for warranty reserve was necessary at September 30, 2022 or June 30, 2021.
Equity Method Investment
The Company accounts for investments in entities
in which the Company has significant influence over the entity’s financial and operating policies, but does not control, using the
equity method of accounting. The equity method investments are initially recorded at cost, and subsequently increased for capital contributions
and allocations of net income, and decreased for capital distributions and allocations of net loss. Equity in net income (loss) from the
equity method investment is allocated based on the Company’s economic interest. The Company assesses its investment in equity method
investments for recoverability, and if it is determined that a loss in value of the investment is other than temporary, the Company writes
down the investment to its fair value.
Management reviews the equity method investment
for impairment at least annually or whenever events or circumstances indicate a potential impairment and when circumstances indicate that
their carrying values may not be recoverable.
At September 30, 2022, management concluded that
there were no impairment indicators. If economic uncertainty increases and/or the global economy worsens, the Company's business, financial
condition and results of operations may be sufficiently impacted to result in future impairment charges in the short-term. Management
will continue to monitor the effects that macroeconomic conditions have on its business and operations, and will review impairment indicators
to the extent necessary in the upcoming months.
Loss Per Share
The Company’s computation of loss per share
(EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net 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 loss of the Company. In computing diluted EPS, the treasury stock method assumes
that outstanding options and warrants are exercised, and the proceeds are used to purchase common stock at the average market price and
there were no instruments that would result in issuance of additional shares during the period.
As of September 30, 2022, the Company had 1,250,000
stock options and 61,427,834 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.
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 September 30, 2022 and June 30, 2022, were due from EW (see Note 3).
Accounts Payable and Accrued Expenses –
one vendor accounted 100%, and 58% of accounts payable and accrued expenses as of September 30, 2022, respectively. One vendor accounted
88% and 67% of accounts payable and accrued expenses as of June 30, 2022.
Revenues – revenues during the three months
period ended September 30, 2022 and 2021, were 93% and 100% of revenues, respectively, were 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. |
On September 30, 2022 and June 30, 2022, 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 Financial Accounting Standards
Board (the "FASB") issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASU
2016-13”). 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 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 Desmet Ballestra Group
|
|
In October 2021, the Company executed a three-year agreement with Desmet Ballestra Group
(Desmet) that is a continuation of the October 2018 agreement for the sale of the Company’s reactors. In accordance with ASC 606,
the Company recognizes revenue from the sale of reactors at the time of shipment of the Nano reactor hardware as shipment is deemed to
be the Company’s only performance obligation and the Company had no more continuing obligation other than the reactor’s two-year
standard warranty. Desmet pays for such reactors on credit terms and the amount of a sale is recorded as a receivable upon acceptance
by Desmet. In addition, Desmet agreed to provide the Company monthly advances of $40,000 through October 1, 2024 to be applied against
future sales of reactors. |
|
|
|
|
|
This agreement replaced an earlier agreement which provided the Company
a share of gross profit from the sale of the reactors and also provided the Company monthly advances of $50,000 through October 1, 2021
that was applied against the Company’s gross profit share. |
During the three months ended September
30, 2022, the Company recorded total revenue from Desmet of $244,000
from reactor sales.
During the three months ended September
30, 2021, the Company recorded total revenue from Desmet of $551,000, made up of $483,000 from reactor sales and $68,000 from the Company’s
share of gross profit.
As of September 30, 2022, advances
received from Desmet related to future sales of reactors amounted to $36,000.
Note 3 - Investment in equity method investment
In 2019, the Company and Delaware Water Company,
LLC (Delaware) formed a limited liability company called Enviro WaterTek LLC (“Enviro”). Enviro is owned 50% by the Company
and 50% by Delaware, and the Company accounts for its investment in Enviro under the equity method. From 2019 to 2021, Enviro had no operations.
In September 2021, the Company and Delaware entered
into a separate agreement under Enviro for a specific project (referred to as “Ameredev”). Delaware has certain contracts
in place to provide recycled water to operators of certain active oil and gas wells. Under the agreement, the Company contributed $1.2
million that was used by Ameredev to increase the capacity of certain pipelines and water treatment facilities operated by Delaware. Pursuant
to the agreement, for each barrel of recycled water that Ameredev sells, Delaware will receive $0.10 per barrel, and the Company will
receive $0.05 per barrel (referred to as usage fees), with the balance of net income (loss) from Ameredev being allocated 70% to Delaware
and 30% to the Company. The Ameredev agreement will terminate the earlier of three years (unless extended by unanimous agreement of the
Board and Members of Ameredev) from the date of the agreement or by unanimous agreement of the Board and Members of Ameredev.
During the three months ended September 30, 2022,
the Company recorded total revenues from Ameredev of $17,000 from usage fees.
Also during the three months ended September
30, 2022, the Company recognized a loss of $18,000
to account for its 30% share in the net loss from the equity method
investment.
The following table summarizes the activity of
the Company’s equity method investment:
Investment in equity method investment | |
| | |
| |
September 30, 2022 | |
Balance at beginning of period | |
$ | 1,149,000 | |
Contributions to equity method investment | |
| – | |
Equity in earnings and losses of the equity method investment | |
| (18,000 | ) |
Balance at end of period | |
$ | 1,131,000 | |
A summarized balance sheet as of September 30,
2022, for Ameredev, and a summarized statement of operations for the three-months ended September 30, 2022, for Ameredev is presented
below:
Balance Sheet:
Equity Method Investments | |
| | |
| |
Amount | |
Cash | |
$ | 21,000 | |
Accounts receivable | |
| 128,000 | |
Property and equipment, net of depreciation | |
| 1,212,000 | |
Total assets | |
$ | 1,361,000 | |
| |
| | |
Partners equity | |
$ | 1,361,000 | |
Total liabilities and equity | |
$ | 1,361,000 | |
Income Statement:
| |
Amount | |
Revenue | |
$ | 24,000 | |
Usage fees paid to Cavitation and Delaware | |
| (52,000 | ) |
Operating expenses | |
| (30,000 | ) |
Net loss | |
$ | (58,000 | ) |
Note 4 – 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:
Lease cost tables | |
| | |
| |
Three Months Ended September 30, 2022 | |
| |
| |
Lease cost | |
| | |
Operating lease cost (included in general and administrative in the Company’s unaudited condensed statement of operations) | |
$ | 19,000 | |
| |
| | |
Other information | |
| | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | 19,000 | |
Weighted average remaining lease term – operating leases (in years) | |
| 2.3 | |
Average discount rate – operating leases | |
| 4% | |
The supplemental balance sheet information related
to leases for the period is as follows:
| |
At September 30, 2022 | |
| |
| |
Operating leases | |
| | |
Long-term right-of-use assets | |
$ | 163,000 | |
| |
| | |
Short-term operating lease liabilities | |
$ | 63,000 | |
Long-term operating lease liabilities | |
| 110,000 | |
Total operating lease liabilities | |
$ | 173,000 | |
Schedule of lease liability maturities | |
| | |
Period ending September 30 | |
Operating Lease | |
| |
| |
2023 (remaining 9 months) | |
$ | 62,000 | |
2024 | |
| 78,000 | |
2025 | |
| 47,000 | |
Total lease payments | |
| 187,000 | |
Less: Imputed interest/present value discount | |
| (14,000 | ) |
Present value of lease liabilities | |
$ | 173,000 | |
Note 5 – Related Party Transactions
Accrued Payroll and Payroll Taxes
In prior periods, the Company accrued salaries
and estimated payroll taxes due to current and former officers of the Company. As of September 30, 2022 and June 30, 2022, total accrued
payroll and payroll taxes-related parties amounted to $280,000,
respectively.
Note
6 – Notes Payable - EIDL
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 September 30, 2022 and June 30, 2022, the
outstanding balance of the note payable amounted to $150,000,
respectively.
Note 7 - Stockholders' Equity
Common Stock
Shares issued for cash
During the period ended September 30, 2021, the
Company sold 12,071,785
shares of common stock and warrants to purchase 12,071,785
shares of common stock in a private placement for $0.065 per unit, for net proceeds of $785,000.
The warrants have an exercise price of $0.09 per share, were fully vested upon issuance, and have a term of five years.
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 three months ended
September 30, 2022 is as follows:
Stock Option activity | |
| | | |
| | | |
| | |
| |
| | |
| | |
Weighted- | |
| |
| | |
| | |
Average | |
| |
| | |
Weighted- | | |
Remaining | |
| |
| | |
Average | | |
Contractual | |
| |
| | |
Exercise | | |
Life | |
| |
Options | | |
Price | | |
(Years) | |
| |
| | |
| | |
| |
Outstanding at June 30, 2022 | |
| 1,250,000 | | |
$ | 0.03 | | |
| 0.87 | |
- Granted | |
| – | | |
| – | | |
| – | |
- Forfeited | |
| – | | |
| – | | |
| – | |
- Exercised | |
| – | | |
| – | | |
| – | |
- Expired | |
| – | | |
| – | | |
| – | |
Outstanding at September 30, 2022 vested and exercisable | |
| 1,250,000 | | |
$ | 0.03 | | |
| 0.62 | |
There was no intrinsic value of the outstanding
options as of September 30, 2022 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 September 30, 2022.
| Schedule of options outstanding and exercisable | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
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 | | |
| 1,250,000 | | |
| 0.62 | | |
$ | 0.03 | | |
| 1,250,000 | | |
| 0.62 | |
Stock Warrants
A summary of the Company's warrant activity and
related information for the three months ended on September 30, 2022 is as follows:
Schedule of warrant activity | |
| | | |
| | | |
| | |
Warrants | |
| | |
Weighted- Average Exercise Price | | |
Weighted- Average Remaining Contractual Life (Years) | |
| |
| | |
| | |
| |
Outstanding at June 30, 2022 | |
| 61,427,834 | | |
$ | 0.09 | | |
| 2.81 | |
Granted | |
| – | | |
| – | | |
| – | |
Exercised | |
| – | | |
| – | | |
| – | |
Expired | |
| – | | |
| – | | |
| – | |
Outstanding at September 30, 2022 vested and exercisable | |
| 61,427,834 | | |
$ | 0.09 | | |
| 2.56 | |
There was no
intrinsic value of the outstanding warrants as of September 30, 2022 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 September
30, 2022.
|
Schedule of warrants outstanding and exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding |
|
|
Warrants Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
Average |
|
Exercise |
|
|
Number |
|
|
Remaining |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
Price |
|
|
of Shares |
|
|
Life (Years) |
|
|
Price |
|
|
of Shares |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 - 0.05 |
|
|
18,626,518 |
|
|
2.38 |
|
|
$ |
0.03 – 0.05 |
|
|
19,626,518 |
|
|
$ |
2.38 |
|
|
0.09 |
|
|
23,841,323 |
|
|
3.76 |
|
|
|
0.09 |
|
|
23,841,323 |
|
|
|
3.76 |
|
$ |
0.12 |
|
|
18,959,993 |
|
|
1.24 |
|
|
$ |
0.12 |
|
|
18,959,993 |
|
|
$ |
1.24 |
|
|
|
|
|
61,427,834 |
|
|
|
|
|
|
|
|
|
61,427,834 |
|
|
|
|
|
Note 8 - 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, 2018.
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 September 30, 2022 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 and EW.
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.
We have agreements to license our technology globally
through our strategic partners, Desmet Ballestra Group (Desmet) and Enviro Watertek, LLC (EW) and Alchemy Beverages, Inc (ABI). Desmet
have been providing monthly advances of $40,000 to be applied against future sales of reactors to Desmet. 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.
Inflation
Global inflation also increased during 2021 and
in 2022. The Russia and Ukraine conflict and other geopolitical conflicts, as well as related international response, have exacerbated
inflationary pressures, including causing increases in the price for goods and services and global supply chain disruptions, which have
resulted and may continue to result in shortages in food products, materials and services. Such shortages have resulted and may continue
to result in inflationary cost increases for labor, fuel, food products, materials and services, and could continue to cause costs to
increase as well as result in the scarcity of certain materials. We cannot predict any future trends in the rate of inflation or other
negative economic factors or associated increases in our operating costs and how that may impact our business. To the extent we and our
customers we service are unable to recover higher operating costs resulting from inflation or otherwise mitigate the impact of such costs
on our and their business, our revenues and gross profit could decrease, and our financial condition and results of operations could be
adversely affected.
Results of Operations
Results of Operations for the Three Months Ended September 30, 2022
Compared to the Three Months Ended September 30, 2021
The following is a comparison of our results of operations for the
three months ended September 30, 2022 and 2021.
| |
For the Three Months Ended | | |
| | |
| |
| |
September 30, | | |
| | |
| |
| |
2022 | | |
2021 | | |
$ Change | | |
% Change | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 244,000 | | |
$ | 551,000 | | |
$ | (307,000 | ) | |
| (56 | )% |
Revenue from related party | |
| 17,000 | | |
| – | | |
| 17,000 | | |
| (100 | )% |
Total revenues | |
| 261,000 | | |
| 551,000 | | |
| (209,000 | ) | |
| (53 | )% |
Cost of revenue | |
| (50,000 | ) | |
| (23,000 | ) | |
| (27,000 | ) | |
| 117% | |
Gross profit | |
| 211,000 | | |
| 528,000 | | |
| (317,000 | ) | |
| (60 | )% |
| |
| | | |
| | | |
| | | |
| | |
General and administrative expenses | |
| 265,000 | | |
| 306,000 | | |
| (41,000 | ) | |
| (13 | )% |
Income (loss) from operations | |
| (54,000 | ) | |
| 222,000 | | |
| (276,000 | ) | |
| (124 | )% |
Loss from equity method investment | |
| (18,000 | ) | |
| – | | |
| (18,000 | ) | |
| (100 | )% |
Gain on forgiveness of note payable | |
| – | | |
| 104,000 | | |
| (104,000 | ) | |
| (100 | )% |
Interest expense | |
| (1,000 | ) | |
| 2,000 | | |
| 1,000 | | |
| (50 | )% |
Net income (loss) | |
$ | (73,000 | ) | |
$ | 324,000 | | |
$ | (397,000 | ) | |
| (123 | )% |
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. Additionally, the Company generates revenues from its equity method investment.
During the three months ended September 30, 2022
we recorded $262,000 in revenue compared to $551,000 for months ended September 30, 2021. Revenues decreased since the Company did not
receive as many orders from Desmet, offset by sale of reactors to the equity method investment.
Cost of Revenue
During the three months ended September 30, 2022
and 2021, our cost of sales amounted to $50,000 and $23,000 respectively 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
September 30, 2022 amounted to $265,000 compared with $306,000 for the same period in 2021, a decrease of $41,000 or 13%. Decrease in
general and administrative expense due to decrease in professional expenses and payroll.
During the three months ended September 30, 2022
the Company recognized loss from equity method investment of $(18,000) compared to $102,000 for the three months ended September 30, 2021.
The other income for the three months ended September 30, 2021 was primarily made up of forgiveness of the PPP note payable of 104,000.
Liquidity and Capital Resource
During the three months ended September 30, 2022
the Company incurred a net loss of $73,000 and used cash from operations of $74,000 and had a working capital deficit of $85,000 as of
September 30, 2022. 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, 2022 financial statements, has expressed substantial doubt about the Company’s
ability to continue as a going concern.
As of September 30, 2022 we had cash and cash
equivalents on hand of $367,000 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) and Alchemy Beverages,
Inc. (ABI). Pursuant to our contract with Desmet, Desmet has been providing us monthly advances of $40,000 through October 1, 2024 to
be applied against from future reactor 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 used in operating activities during the
three months ended September 30, 2022 amounted to $74,000 compared to net cash used in operating activities of $16,000 for the same period
in fiscal 2021.
Funding for the operating activities was provided
primarily by sales of our systems to and advances received from Desmet.
Net cash used in investing activities during the
three months ended September 30, 2022 and 2021 were $0 and $250,00 respectively. In 2021, the Company purchased $250,000 of equipment.
Net cash provided by financing activities
during the three months ended September 30, 2022 and 2021 were $0 and $785,000, respectively. In 2021, the Company received proceeds
from the sale of common stock with warrants.
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, valuation and impairment analysis for equity method investment, 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.
Revenue from the sale of the Company’s 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 recognized
revenue from its share of gross profit to be earned from distributors, as defined, which we treated as variable consideration and recognized
using the most likely amount method.
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.