ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
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June 30,
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2017
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|
2017
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|
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(unaudited)
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(as adjusted)
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|
ASSETS
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Current assets:
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|
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|
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Cash and cash equivalents
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$
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568,278
|
|
|
$
|
548,585
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|
Accounts receivable
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|
|
240,000
|
|
|
|
85,000
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|
Inventory, net
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|
|
124,396
|
|
|
|
143,136
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Total current assets
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|
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932,674
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|
|
|
776,721
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|
|
|
|
|
|
|
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Property and equipment, net
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131,770
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|
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140,606
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Other assets
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|
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9,756
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|
|
|
12,404
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Total assets
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$
|
1,074,200
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|
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$
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929,731
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities:
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|
|
|
|
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Accounts payable and accrued expenses
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|
$
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335,769
|
|
|
$
|
245,452
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Accrued payroll and payroll taxes due to officers
|
|
|
994,033
|
|
|
|
994,033
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Related party payable
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|
|
1,147
|
|
|
|
1,147
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Deferred revenue
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|
|
180,226
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|
|
|
-
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Total current liabilities
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1,511,175
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|
|
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1,240,632
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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 September 30, 2017 and June 30, 2017, respectively
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|
|
-
|
|
|
|
-
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Common stock, $0.001 par value, 1,000,000,000 shares authorized, 197,197,906 and 196,797,906 shares issued and outstanding as of September 30, 2017 and June 30, 2017, respectively
|
|
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197,198
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|
|
|
196,798
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Additional paid-in capital
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|
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22,640,688
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|
|
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22,625,088
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|
Accumulated deficit
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|
|
(23,274,861
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)
|
|
|
(23,132,787
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)
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Total stockholders’ deficit
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|
|
(436,975
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)
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|
|
(310,901
|
)
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Total liabilities and stockholders’ deficit
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$
|
1,074,200
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|
|
$
|
929,731
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|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (unaudited)
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For the Three Months Ended
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September 30,
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2017
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2016
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Revenue
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$
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340,000
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$
|
85,000
|
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Cost of revenue
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|
18,740
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|
|
|
7,912
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|
Gross profit
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|
|
321,260
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|
77,088
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|
|
|
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|
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|
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General and administrative expenses
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|
|
460,478
|
|
|
|
317,515
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|
Research and development expenses
|
|
|
2,856
|
|
|
|
6,329
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|
Total operating expenses
|
|
|
463,334
|
|
|
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323,844
|
|
|
|
|
|
|
|
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Net loss
|
|
$
|
(142,074
|
)
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$
|
(246,756
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)
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|
|
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|
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Net loss per share,
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|
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Basic and Diluted
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$
|
(0.00
|
)
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$
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(0.00
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)
|
|
|
|
|
|
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Weighted average shares outstanding,
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|
|
|
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Basic and diluted
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197,193,558
|
|
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193,997,906
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|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
Condensed Consolidated Statements of
Changes in Stockholders’ Deficit (unaudited)
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Series
A
Preferred
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Common
Stock
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Additional
Paid-
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Accumulated
|
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Shares
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Amount
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Shares
|
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Amount
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in
Capital
|
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Deficit
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Total
|
|
Balance at June 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
196,797,906
|
|
|
$
|
196,798
|
|
|
$
|
22,625,088
|
|
|
$
|
(23,966,606
|
)
|
|
|
(1,144,720
|
)
|
Adjustment at June 30, 2017 upon adoption of
ASC 606
|
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-
|
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|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
833,819
|
|
|
|
833,819
|
|
Balance at June 30, 2017 (as adjusted)
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|
|
-
|
|
|
|
-
|
|
|
|
196,797,906
|
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|
|
196,798
|
|
|
|
22,625,088
|
|
|
|
(23,132,787
|
)
|
|
|
(310,901
|
)
|
Common stock issued to consultants
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|
|
|
|
|
|
|
|
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400,000
|
|
|
|
400
|
|
|
|
15,600
|
|
|
|
|
|
|
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16,000
|
|
Net Loss
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|
|
|
|
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|
|
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|
|
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(142,074
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)
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(142,074
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)
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Balance at September 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
197,197,906
|
|
|
$
|
197,198
|
|
|
$
|
22,640,688
|
|
|
$
|
(23,274,861
|
)
|
|
$
|
(436,975
|
)
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (unaudited)
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Three Months Ended September 30,
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2017
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|
|
2016
|
|
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|
|
|
|
|
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Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(142,074
|
)
|
|
$
|
(246,756
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,484
|
|
|
|
11,767
|
|
Accounts receivable
|
|
|
(155,000
|
)
|
|
|
-
|
|
Common stock issued to consultants
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|
|
16,000
|
|
|
|
-
|
|
Effect of changes in:
|
|
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Inventory
|
|
|
18,740
|
|
|
|
1,367
|
|
Accounts payable and accrued expenses
|
|
|
90,317
|
|
|
|
(16,987
|
)
|
Advances from distributor
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180,226
|
|
|
|
100,000
|
|
Reduction in advances due to realization of revenues from distributor
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-
|
|
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(63,750
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)
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Net cash provided by (used in) operating activities
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|
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19,693
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|
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(214,359
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)
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|
|
|
|
|
|
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Net change in cash
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|
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19,693
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|
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(214,359
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)
|
Cash, beginning of period
|
|
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548,585
|
|
|
|
657,396
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|
Cash, end of period
|
|
$
|
568,278
|
|
|
$
|
443,037
|
|
|
|
|
|
|
|
|
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Supplemental disclosures of cash flow information:
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|
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|
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Cash paid for interest
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|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
1,600
|
|
|
$
|
1,600
|
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended September 30, 2017 and 2016
Note 1 - Organization and Basis of Presentation
Basis of Presentation
The accompanying condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated
in the United States of America (“U.S.”) and with instructions to Form 10-Q pursuant to the rules and regulations of
Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and Article 8-03 of Regulation S-X under the Exchange
Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary
(consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September 30,
2017 are not indicative of the results that may be expected for the fiscal year ending June 30, 2018. 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, 2017 filed on November 3, 2017. The condensed consolidated
balance sheet as of June 30, 2017 has been derived from the audited financial statements included in the Form 10-K for that year.
Cavitation Technologies, Inc. (referred
to herein, unless otherwise indicated, as “the Company,” “CTi,” “we,” “us,” and “our”)
is a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented, and commercialized
proprietary technology that may be used in liquid processing applications. CTi’s patented
Nano Reactor®
is the critical
component of CTi
Nano Neutralization® System
which is commercially proven to reduce operating costs and increase yields
in refining vegetable oils. CTi has two patented systems and has filed several national and international patents to employ its
proprietary technology in applications including, vegetable oil refining, waste water treatment, biodiesel, algae oil extraction,
and alcoholic beverage enhancement.
In July 1, 2017, the Company adopted the
new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”)
to all contracts using the full retrospective method resulting in a change to previously reported balance sheet and statement of
stockholders’ deficit. There was no change in previously reported statement of operations for the 3 months ended September
30, 2016 (see further discussion in Note 3).
Management’s Plan Regarding Going Concern
The accompanying condensed consolidated
financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation
of the Company as a going concern. During the three months ended September 30, 2017, the Company incurred a net loss
of $142,074 and as of September 30, 2017, the Company had a working capital deficiency of $578,501 and a stockholders’ deficit
of $436,975. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
In addition, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2017
expressed substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial
statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.
As of September 30, 2017, we had cash and
cash equivalents on hand of $568,278 and are not generating sufficient funds to cover operations. In addition to the funds on hand,
Management believes we will require additional funds to continue to operate our business. Management’s plan is to generate income
from operations by continuing to license our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet).
Desmet has agreed to provide us monthly advances of $50,000 through August 2018 to be applied against gross profit share from future
sales pursuant to a January 2016 agreement. During the three months ended September 30, 2017, the Company received $100,000 advances
from Desmet. The Company also received $180,226 during the same period in advances towards gross profit share from future sales
from its new strategic partner, GEA Westfalia Group AG (GEA). GEA has agreed to provide us monthly advances of $25,000 less applicable
taxes through January 2020, to be applied against gross profit share from future sales pursuant to a January 2017 agreement.
We will also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that
such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, that the Company will
be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management
fail to obtain such financing, the Company may curtail its operations.
Note 2 - Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include
the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions
and balances have been eliminated in consolidation.
Fair Value Measurement
FASB Accounting Standards Codification
(“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of
a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The 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 September 30, 2017 and June 30, 2017,
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.
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 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.
Share-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting
period. The Company accounts for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative
guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over
the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the
non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the
measurement date.
The fair value of the Company’s common
stock options and warrants grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation
expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The
assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Dependence on Desmet Ballestra
Our revenue is entirely dependent on Desmet
Ballestra who is our exclusive distribution agent with regard to the
CTi Nano Neutralization® System
for edible oils.
During the period ended September 30, 2017, 100% of our revenue was derived from Desmet sales efforts (see Note 4).
Basic Loss Per Share
The Company’s computation of earnings
(loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss)
available to common stockholders by the weighted average number of common shares during the period. Shares of restricted stock
subject to vesting are included in basic weighted average common shares outstanding from the time they vest. Diluted EPS reflects
the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss)
of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised
and the proceeds are used to purchase common stock at the average market price and there were no instruments that would result
in issuance of additional shares during the period.
As of September 30, 2017, the Company had
11,685,852 stock options and 75,926,510 stock warrants outstanding to purchase shares of common stock that were not included in
the diluted net loss per common share because their effect would be anti-dilutive.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 eliminated
transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach
for determining revenue recognition. ASU 2014-09 required that companies recognize revenue based on the value of transferred goods
or services as they occur in the contract. The ASU also required additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to obtain or fulfill a contract. ASU 201-09 became part of Accounting Standards Codification (ASC)
as Topic 606: Revenue from Contracts with Customers or ASC 606. We have adopted these changes using the full retrospective method
by presenting as if the new revenue standard had been applied to all prior period financial statements presented herein (see Note
3).
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process
of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future
consolidated financial statements.
Business and Credit Concentrations
The Company’s cash balances in financial
institutions at times may exceed federally insured limits. As of September 30, 2017, and June 30, 2017, before adjustments for
outstanding checks and deposits in transit, the Company had approximately $568,278 and $548,585, respectively, deposited in one
financial institution. The deposits are federally insured up to $250,000. The Company believes that no significant concentration
of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability
of this financial institution.
All recorded revenues during the three
months ended September 30, 2017 of $340,000 were attributable to one customer (see Note 4).
Note 3 - Adoption of ASC 606,
Revenue from Contracts with Customers
The Company has developed, patented, and
commercialized proprietary technology called
Nano Reactor®
that may be used in liquid processing applications. 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.
Through June 30, 2017, revenue from the
sale of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. We are also entitled to a gross profit share
from our distributor from the sale of the reactors to their customers. Such gross profit share was not fixed at the time of delivery,
and as such, revenue was recognized when the profit share was fixed and determinable, which was generally be upon delivery and
installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts. Sales revenue from the sale of our Nano Reactors continues to be recognized when products are shipped from our manufacturing
facilities. The Company now recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware in accordance
to ASC 606 as such shipment is deemed to be the only performance obligation and the Company has no more continuing obligation to
our distributor. In addition, the Company has no control with regards to the sale and installation of Nano Neutralization System,
between our distributor and the end customer.
The Company has determined that the gross
profit to be earned from its distributor as a variable consideration that requires estimation in determining the transaction price,
and as such all or a portion can be recognized 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 a
variable revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual
amount of cash received under the contract which the Company has determined as not refundable and preclude any probable of future
revenue reversal. Further, Company has been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements
of ASC 606, the Company adopted the full retrospective method. Under the full retrospective method, the Company is required to
retrospectively apply the new revenue standard to all period presented as if the new revenue standards had been applied to all
prior period.
The effect of the changes made to our previously
reported consolidated June 30, 2017 balance sheet for the adoption of ASC 606, were as follows:
Balance Sheet
|
|
Balance at June 30,
2017
|
|
|
Adjustments Due to ASC
606
|
|
|
Adjusted
balance at June 30, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
548,585
|
|
|
|
|
|
|
$
|
548,585
|
|
Accounts receivable
|
|
|
-
|
|
|
$
|
85,000
|
(A)
|
|
|
85,000
|
|
Inventory, net
|
|
|
143,136
|
|
|
|
|
|
|
|
143,136
|
|
Property and equipment, net
|
|
|
140,606
|
|
|
|
|
|
|
|
140,606
|
|
Other assets
|
|
|
12,404
|
|
|
|
|
|
|
|
12,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
245,452
|
|
|
|
|
|
|
|
245,452
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
994,033
|
|
|
|
|
|
|
|
994,033
|
|
Related party payable
|
|
|
1,147
|
|
|
|
|
|
|
|
1,147
|
|
Advances from distributor, net
|
|
|
748,819
|
|
|
|
(748,819
|
)(A)(B)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Preferred stock
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Common stock
|
|
|
196,798
|
|
|
|
|
|
|
|
196,798
|
|
Additional paid-in-capital
|
|
|
22,625,088
|
|
|
|
|
|
|
|
22,625,088
|
|
Accumulated deficit
|
|
|
(23,966,606
|
)
|
|
|
833,819
|
(B)
|
|
|
(23,132,787
|
)
|
A – To record accounts receivable
as of June 30, 2017 from the sale of nano reactors to a distributor. For financial reporting purposes, this amount was deducted
from the outstanding advances totaling $833,819 as of June 30, 2017, also received from the same distributor.
B – To record gross profit revenues
amounting to $833,819 in accordance with the new revenue standards.
There were no changes to the
previously reported statement of operations and cash flows for the three months ended September 30, 2016 as the gross
profit share of $833,819 was incurred during the third quarter of fiscal 2017.
Note 4 - Agreements with Distributors
Desmet Ballestra Agreement
On January 22, 2016, the Company signed
a three-year agreement with Desmet effective August 1, 2015 for the sale and marketing of the Company’s Nano reactor system.
As part of the agreement, Desmet will provide, under certain conditions, limited monthly advance payments of $50,000 against future
gross profit share to CTi through August 2018. The agreement may be terminated in case the Company loses ownership of patents and
patent applications being used in the
NANO Neutralization System.
The Company recognizes revenue from sale
of reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet other than the reactor’s
two-year standard warranty. In addition, Desmet 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 margin or profit from the sale of Desmet’s
integrated neutralization system to its customer of which the reactors are an integral component, however, such amount is subject
to adjustment based on certain factors including costs over run. The Company recognizes the gross profit at the time of shipment
of the Nano reactor hardware in accordance to ASC 606 as such shipment is deemed to be the only performance obligation and the
Company has no more continuing obligation to Desmet. In addition, the Company has no control with regards to the sale and installation
of Nano Neutralization System, between our distributor and the end customer. The Company has determined that the gross profit to
be earned from Desmet as a variable consideration that requires estimation in determining the transaction price, and as such all
or a portion can be recognized using the most likely amount approach (subject to the variable consideration constraint). Estimates
are available from Desmet 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 a variable revenue constraint
that required consideration. Thus, the amount of revenue recognized is being limited to the actual amount of cash received under
the contract which the Company has determined as not refundable and preclude any probable of future revenue reversal. Further,
Company has been able to develop an expectation of the actual collection based on its historical experience.
During the three months ended September
30, 2017, the Company recognized revenue of $240,000 related to the shipment and acceptance of reactors to Desmet and share in
gross profit of $100,000 for total revenues of $340,000. As of September 30, 2017, the Company also recorded receivable from Desmet
in the aggregate of $240,000 from the sale of reactors.
GEA Westfalia Agreement
In
January 2017 we entered into a global technology license, R&D and marketing agreement with respect to our patented Nano Reactor™
technology, processes and applications. Under the agreement, GEA has been granted certain worldwide exclusive license to integrate
our patented technology into water treatment application, milk and juice pasteurization, and certain food related processes. The
license agreement between us and GEA has a three-year term and provides for the payment of $300,000 per year in advanced license
fees or share in gross profit to us. As of September 30, 2017, the Company received $180,226 in advances from GEA and has recorded
such amount as deferred revenue as the reactors have not been delivered.
GEA
Westfalia Separator manufactures filtration and equipment such as separators, clarifiers, decanters and membrane filtration systems.
This equipment is used for the purification of suspensions, the separation of fluid mixtures with simultaneous removal of solids,
extraction and concentration or removal of liquids from solids. The technological dominance of the company is based on over one
hundred fifteen years of innovation, first-class engineering solutions and comprehensive processing capabilities. The company
was founded in 1893 in Oelde, Germany, and since 1994 has been a part of the
GEA Group AG
and is a business unit
within the GEA Mechanical Equipment segment. In 1950, Westfalia Separator established US and Canadian corporations to serve as
sales and marketing arms to compete in the North American market for centrifuges.
Note 5 - Property and Equipment
Property and equipment consisted of the
following as of September 30, 2017 and June 30, 2017:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,475
|
|
|
$
|
2,475
|
|
Furniture
|
|
|
26,837
|
|
|
|
26,837
|
|
Office equipment
|
|
|
1,499
|
|
|
|
1,499
|
|
Equipment
|
|
|
68,380
|
|
|
|
68,380
|
|
Systems
|
|
|
408,155
|
|
|
|
408,155
|
|
|
|
|
507,346
|
|
|
|
507,346
|
|
Less: accumulated depreciation and amortization
|
|
|
(375,576
|
)
|
|
|
(366,740
|
)
|
Property & Equipment, net
|
|
$
|
131,770
|
|
|
$
|
140,606
|
|
Depreciation expense for the three months
ended September 30, 2017 and 2016 amounted to $8,836 and $8,409, respectively which was recorded as part of General and Administrative
Expenses in the accompanying Statement of Operations.
Note 6 - Accrued Payroll and Payroll
Taxes
As of September 30, 2017 and June 30, 2017,
the Company had accrued unpaid salaries due to current and former officers of the Company and the corresponding estimated payroll
taxes in the aggregate of $994,033.
Note 7 - 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
three months ended September 30, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2017
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
4.02
|
|
Exercisable and vested at September 30, 2017
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
4.02
|
|
There was no intrinsic value of the outstanding
options as of September 30, 2017 as the exercise price of these options were greater than the market price at September 30, 2017.
The following table summarizes additional
information concerning options outstanding and exercisable at September 30, 2017.
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
11,000,000
|
|
|
|
4.71
|
|
|
|
0.03
|
|
|
|
11,000,000
|
|
|
|
4.71
|
|
$
|
0.33
|
|
|
|
174,022
|
|
|
|
0.70
|
|
|
|
0.33
|
|
|
|
174,022
|
|
|
|
0.70
|
|
|
0.67
|
|
|
|
511,830
|
|
|
|
0.78
|
|
|
|
0.67
|
|
|
|
511,830
|
|
|
|
0.78
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
Warrants
A summary of the Company’s warrant activity
and related information for the three months ended on September 30, 2017 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2017
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
4.56
|
|
Vested and exercisable at September 30, 2017
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
4.56
|
|
As of September 30, 2017, all warrants
granted were vested. There was no intrinsic value of the outstanding warrants as of September 30, 2017 as the exercise price of
these warrants were greater than the market price at September 30, 2017. The following table summarizes additional information
concerning warrants outstanding and exercisable at September 30, 2017.
|
|
|
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 - 0.07
|
|
|
|
55,599,851
|
|
|
|
6.50
|
|
|
$
|
0.05
|
|
|
|
55,599,851
|
|
|
$
|
0.05
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
|
3.00
|
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
$
|
0.12
|
|
|
|
|
|
|
75,926,510
|
|
|
|
|
|
|
|
|
|
|
|
75,926,510
|
|
|
|
|
|
Note 8 - Commitments and Contingencies
Litigation
The Company may
be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income
tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes
that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with
the contingency are expensed as incurred.
In August 2014, a former employee and former
Director (Plaintiff) filed an administrative Complaint for approximately $179,000 in unpaid wages, plus penalties and interest,
with the California Labor Commissioner’s Office (CLCO). In January 2016, the CLCO ruled in favor of the Company and
dismissed the case. As a result of this ruling, the Company’s obligation to the former employee and former Director only
amounted to approximately $134,000 which was already accrued in prior periods and included as part of Accrued Payroll and payroll
taxes due to officers in the accompanying balance sheet.
In February 2016, the former employee and
former Director appealed this ruling to the Los Angeles County Superior Court. In addition to defending itself, the Company
also has filed a cross-complaint against the former employee and former Director for breach of contract and breach of fiduciary
duty as a Director.
In
October 2017, the Company settled the lawsuit with the Plaintiff for $30,000. Upon payment of the settlement amount, the Complaint
and Cross-complaint between the Company and the Plaintiff was dismissed with prejudice. As a result, the Company will record
a gain of $101,000 in October 2017 to extinguish the remaining accrual upon payment of the settled amount of $30,000.
ITEM 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction
with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing
of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. (“CTi”),
a Nevada corporation, was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly
technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels,
water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our
systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process
and product development firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized
proprietary technology that can be used for processing of industrial fluids. CTi’s patented
Nano Reactor®
is the critical
components of
the CTi Nano Neutralization®
System which is commercially proven to reduce operating costs and increase
yields in processing oils and fats. CTi has two issued patents relating to our Nano
Reactor®
systems and has filed several
national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel
production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the three months ended September
30, 2017, we recorded revenue of $340,000, net loss of $142,074 and cash provided from operations of $19,693.
In July 1, 2017, the Company adopted
the new accounting standard ASC 606, Revenue from Contracts with Customers (ASC 606) and all the related amendments
(“new revenue standard”) to all contracts using the full retrospective method resulting in a change to previously
reported balance sheet and statement of stockholders’ deficit. There was no change in previously reported statement of
operations and cash flows for the 3 months ended September 30, 2016. As a result, all amounts in prior periods have been
adjusted in the accompanying discussion as if ASC 606 was adopted as of the earliest period presented. See further discussion
at Note 3 in the accompanying financial statements.
Management’s Plan
We are engaged in merchandising our Neutralization
System which is designed to help refine vegetable oils such as soybean, canola, sunflower and rapeseed. Our near-term
goal is to continue to merchandise our systems through our partners, Desmet Ballestra Group (Desmet) and GEA Westfalia (GEA). During
the three months ended September 30, 2017, we recorded revenues of $340,000 and incurred a net loss of $142,074. As of September
30, 2017, the Company had a working capital deficiency of $578,501 and a stockholders’ deficit of $436,975. The accompanying
financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation
of the Company as a going concern.
As of September 30, 2017, we had cash and
cash equivalents on hand of $568,278 and are not generating sufficient funds to cover operations. In addition to the funds 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, Desmet and GEA. Desmet has agreed
to provide us monthly advances of $50,000 through August 2018 to be applied against future gross profit share pursuant to a January
of 2016 agreement, and GEA has agreed to provide us monthly advances of $25,000 net of taxes through January 2020, to be applied
against future license fee or gross profit share pursuant to a January 2017 agreement. During the three months ended September
30, 2017, the Company received $100,000 from Desmet and $180,226 from GEA.
In addition to these advances, we anticipate
that we may need additional funding, and we may attempt to raise additional debt and/or equity financing to fund operations and
to provide additional working capital. However, there is no assurance that we will be successful and such financing will be consummated
or obtained in sufficient amounts necessary to meet our needs, or that we will be able to meet our future contractual obligations.
Should management fail to obtain such financing, we may curtail operations. The accompanying condensed consolidated financial statements
do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from our inability to continue as a going concern. As a result of the aforementioned
factors, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2017,
expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
CTi’s critical accounting policies and
estimates are included in its Annual Report on Form 10-K for the year ended June 30, 2017, and did not change for the three months
ended September 30, 2017 except for the adoption of ASC 606, Revenue from Contracts with Customers and all the related amendments
to all contracts (see Note 3 of the accompanying financial statements).
Results of Operations
The following is a comparison of our results of operations for
the three months ended September 30, 2017 and 2016.
|
|
For the Quarter Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
340,000
|
|
|
$
|
85,000
|
|
|
$
|
255,000
|
|
|
|
300.0
|
%
|
Cost of revenue
|
|
|
18,740
|
|
|
|
7,912
|
|
|
|
10,828
|
|
|
|
136.9
|
%
|
Gross profit
|
|
|
321,260
|
|
|
|
77,088
|
|
|
|
244,172
|
|
|
|
316.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
460,478
|
|
|
|
317,515
|
|
|
|
142,963
|
|
|
|
45.0
|
%
|
Research and development expenses
|
|
|
2,856
|
|
|
|
6,329
|
|
|
|
(3,473
|
)
|
|
|
-54.9
|
%
|
Total operating expenses
|
|
|
463,334
|
|
|
|
323,844
|
|
|
|
139,490
|
|
|
|
43.1
|
%
|
Net loss
|
|
|
(142,074
|
)
|
|
|
(246,756
|
)
|
|
|
104,682
|
|
|
|
-42.4
|
%
|
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.
Through June 30, 2017, revenue from the
sale of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. We are also entitled to a gross profit share
from our distributor from the sale of the reactors to their customers. Such gross profit share was not fixed at the time of delivery,
and as such, revenue was recognized when the profit share was fixed and determinable, which was generally be upon delivery and
installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts. Sales revenue from the sale of our Nano Reactors continues to be recognized when products are shipped from our manufacturing
facilities. The Company now recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware in accordance
to ASC 606 as such shipment is deemed to be the only performance obligation and the Company has no more continuing obligation to
our distributor. In addition, the Company has no control with regards to the sale and installation of Nano Neutralization System,
between our distributor and the end customer.
The Company has determined that the gross
profit to be earned from its distributor as a variable consideration that requires estimation in determining the transaction price,
and as such all or a portion can be recognized 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 a
variable revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual
amount of cash received under the contract which the Company has determined as not refundable and preclude any probable of future
revenue reversal. Further, Company has been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements
of ASC 606, the Company adopted the full retrospective method. Under the full retrospective method, the Company is required to
retrospectively apply the new revenue standard to all period presented as if the new revenue standards had been applied to all
prior period. There were no changes to the previously reported results of operations for the three months ended September 30, 2016.
We recorded $340,000 in revenue in the
first three months September 30, 2017 pursuant to two purchase orders from our distributor and $85,000 in revenue in the three
months ended September 30, 2016 pursuant to one purchase order from our distributor. Included in the recorded revenue for the three-month
ended September 30, 2017 was a share in gross margin from the sale of reactor system to Desmet amounting to $100,000. There was
no similar gross profit revenue recorded in 2016.
Cost of Revenue
During the three months ended September
30, 2017, our cost of sales amounted to $18,740, and to $7,912 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, 2017 amounted to $463,334 compared with $323,844 for the same period in 2016, an increase of $136,889, or 43%.
In the first quarter of fiscal 2018, compensation amounted to $164,917 or 37% of total costs compared with $137,689 or 43% of total
costs in the first quarter of fiscal 2017.
The other major component of operating
expense was professional service fees related to accounting, and legal services which amounted to $149,477 or 34% of total operating
expenses versus professional service fees related to accounting, and legal services which amounted to $56,507 or 17% in fiscal
2017.
Research and development (R&D) expenses
remained relatively low as we continued to rely on Desmet Ballestra for support in R&D. It is our intention to pursue R&D
as our cash position permits.
Liquidity and Capital Resources
The accompanying condensed consolidated
financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation
of the Company as a going concern. As of September 30, 2017, the Company had a working capital deficiency of $578,501
and a stockholders’ deficit of $436,975. Furthermore, we have been dependent on most of our funding from a technology agreement
with a distributor. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our
independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2017 expressed substantial
doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification
of liabilities that may result from an inability of us to continue as a going concern.
Management’s plan is to generate income
from operations by licensing our technology globally through our strategic partners, the Desmet Ballestra Group (Desmet) and GEA
Westfalia (GEA). In January 2016, we signed a marketing and research and development agreement with Desmet which include among
others, a monthly advance of $50,000 through August 2018 that will be applied to gross profit share from future sales. In January
2017, we signed a similar marketing and research and development agreement with GEA which include among others, a monthly advance
of $25,000 through January 2020, that will be applied to gross profit share from future sales. We will need additional funding,
and we will attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital.
However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the
Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain
such financing, the Company may curtail its operations.
At September 30, 2017, we had cash on hand
in the amount of $568,278. In addition to the funds on hand, we will require additional funds to continue to operate our business.
This includes expenses we will incur in connection with costs to manufacture and ship our products; costs to design and implement
an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company
by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual
commitments for salaries to our executive officers. In light of our financial commitments over the next several months and its
liquidity constraints, we have implemented cost reduction measures in all areas of operations. We intend to review these measures
on an ongoing basis and make additional decisions as may be required.
Cash Flow
Net cash provided by operating activities
during the three months ended September 30, 2017 amounted to $19,693 compared with cash used in operations of $214,359 for the
three months ended September 30, 2016. Funding for the operating activities was provided by cash reserves and advances from distributors.
For the first quarter of fiscal 2018, we paid $164,917 in employees’ compensation, $149,477 in professional services fees, $28,604
in various insurance premiums, and approximately $101,000 in fixed operating costs and other obligations. In the first quarter
of 2017, we paid $137,639 in employees’ compensation, $56,507 in professional services fees, $24,766 in various insurance premiums,
and approximately $100,000 in fixed operating costs and other obligations.
For the three months periods ended September
30, 2017 and 2016 there were no investing activities.
For the three months periods ended September
30, 2017 and 2016 there were no financing activities.