ITEM 7. 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
We are a Nevada corporation originally
incorporated under the name Bio Energy, Inc. On January 29, 2007, we incorporated a wholly owned subsidiary, Hydrodynamic Technology,
Inc. as a California corporation.
We have developed, patented, and commercialized
proprietary technology that can be used for processing of various industrial and consumer-oriented fluids. Our patented Nano
Reactor® is the critical components of the CTi Nano Neutralization® System which has been shown to reduce operating
costs and increase yields in processing oils and fats. CTi holds and applied for numerous patents covering technology and various
processes in US and Internationally, covering vegetable and crude oil refining, processed and frac water treatment, algae oil extraction,
and alcoholic beverage enhancement. During our Fiscal 2020, we have developed additional technologies and products, such as, low
pressure nano reactor (LPN™). LPN™
is designed to become a highly efficient mixer and homogenizer. We believe that LPN™
has a great commercial utilization opportunity by providing efficient and cost-effective solution in multiple fluid processing
industries. LPN™ has a number of advantages over current mechanically
operated mixers and homogenizers. Industrial application of our technology in produced and frac water treatment system, LPN™
along with our proprietary chemical formulations have depicted measurable and quantifiable advantages over industry standard processes
and equipment. Additionally, our miniature low pressure nano reactor MLPN has become an integral part of Barmuze®, a
small home appliance device for enhancing taste and extracting unwanted impurities typically present in alcoholic beverages.
During the year ended June 30, 2020, we
recorded revenues of $1,663,000 and net income of $128,000, respectively.
Management’s Plan of Operation
We are continuously engaged in manufacturing
of our Nano Reactor® and Nano Neutralization® Systems which are designed to help refine vegetable oils such
as soybean, canola and rapeseed. Additionally, we have developed LPN™’s
that provide commercial opportunity in industrial water treatment, enhancement of alcoholic beverages, and MLPN being utilized
in a consumer small home appliance.
During the year ended June 30, 2020, we
recognized net income of $128,000 and generated net cash from operations of $56,000. However, as of June 30, 2020, we have a working
capital deficiency of $522,000 and a stockholders’ deficit of $490,000.
Management’s plan is to generate
income from operations by licensing our technology globally through Desmet Ballestra Group (Desmet), agreements with EnviroWaterTek
and Alchemy Beverages, Inc. In October 2018, we signed a three-year global R and D, Marketing and Technology License Agreement
with Desmet for the sale and licensing of our Nano Reactor® and Nano Neutralization® Systems. This agreement
is a continuation of the original agreement we signed with Desmet in May 2012. As part of the agreement, Desmet is also obligated
to provide us with monthly advances of $50,000 to be applied against our share in gross profit from the sale of reactors. During
the year ended June 30, 2020, advances received from Desmet amounted to $600,000, of which $266,000 was recorded as revenues. These
funds service operational expenses on monthly basis.
In January 2017, we signed a three-year
global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications.
This agreement provided us with $25,000 monthly advances to be applied against future license fees or our share in
gross profit from the sale of reactors. The agreement with GEA expired in December 2019, and during the term of the agreement,
the Company did not sell any reactors to GEA. Accordingly, for the year ending June 30, 2020, the Company recognized $877,000
of non-refundable payments received in 2017 to 2019 as revenue.
In April 2019, the Company entered into
a licensing and service contract agreement with Enviro Watertek, LLC (“EW”). This agreement covers the Company’s
industrial treatment process for produced and frack water. The Company’s Low Pressure Nano Reactor (LPN™), was specifically developed to be integrated into frack water treatment system along with proprietary chemical formulations, and
has depicted measurable and quantifiable advantages over industry standard processes and equipment. The agreement with EW provides
for sales on Nano Reactors® plus recurring revenue stream based on processing frack water volumes and utilization or usage
fees. Our agreement with EW is for a period of 15 years but can be terminated by either party every anniversary. During the year
ended June 30, 2020, we recorded revenues of $38,000 from the sale of reactors and usage fees.
In June 2018, we agreed to license Cameo
USA LLC, to Alchemy Beverages Inc. (“ABI”). In addition, we have agreed to provide certain licensing rights related
to our miniature low pressure nano-reactor (MLPN) to be used in developing and manufacturing of small home appliances to enhance
alcoholic beverages. In consideration for these ABI has agreed to issue 19.9% of ABI’s outstanding common shares to us (limited
to 20 million shares of ABI). ABI is a private company and in the business of producing and selling alcoholic beverages, equipment,
and home appliances. Since the start of the agreement up to June 30, 2020, there was no
revenue recognized with regards to our agreement with Alchemy Beverages, Inc.
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 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 its operations.
Critical Accounting Policies and Revenue
Recognition
Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities
and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those we consider
most critical in preparing its consolidated financial statements. The following is a review of the accounting policies and estimates
that include significant judgments made by management using information available at the time the estimates are made. However,
these estimates could change materially if different information or assumptions were used instead.
Note 1 of the accompanying consolidated
financial statements includes a summary of significant accounting policies, estimates, and methods used in the preparation of our
financial statements. Accounting estimates are an integral part of the preparation of financial statements and are based on judgments
by management using its knowledge and experience about the past and current events and assumptions regarding future events, all
of which we consider to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain
and that affect the carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts
of expenses during the reporting period.
Revenue Recognition
The Company follows the guidance of Accounting
Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires
entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements
with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price,
(4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation
is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration
it is entitled to in exchange for the services it transfers to its clients
Revenue from sale of our Nano Reactor®
and LPN™ is recognized when products are shipped from our manufacturing
facilities as this is our sole performance obligation under these contracts and we have no continuing obligation to the customer.
The Company also recognizes revenue from
its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using
the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most
likely amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the
amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company
has determined is not refundable and that a significant future reversal of cumulative revenue under the contract will not occur.
In addition, the Company also recognizes
revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer and when collectability
is reasonably assured.
Lease
The Company accounts for leases under
the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to recognize a right-of-use asset and a lease
liability for virtually all leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The
Company accounts for the lease and non-lease components of its office lease as a single lease component. Lease expense is recognized
on a straight-line basis over the lease term.
Share-Based Compensation
The Company accounts for share-based awards
to employees and nonemployees and consultants in accordance with the provisions of ASC 718, Compensation-Stock Compensation. Stock-based
compensation cost is measured at fair value on the grant date and that fair value is recognized as expense over the requisite service,
or vesting, period.
The Company values its equity awards using
the Black-Scholes option pricing model, and accounts for forfeitures when they occur. Use of the Black-Scholes option pricing
model requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate.
The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable
entities since the Company's common stock has limited trading history and limited observable volatility of its own. The expected
term of the options is estimated by using the simplified method to estimate expected term. The risk-free interest rate is estimated
using comparable published federal funds rates.
Recent Accounting Pronouncements
See Note 1 of the financial statements
for discussion of recent accounting pronouncements.
Results of Operations
Below is summary comparing fiscal 2020
and fiscal 2019.
|
|
For the Years Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,663,000
|
|
|
$
|
1,090,000
|
|
|
$
|
573,000
|
|
|
|
53
|
%
|
Cost of revenue
|
|
|
(40,000
|
)
|
|
|
(69,000
|
)
|
|
|
(29,000
|
)
|
|
|
(43)
|
%
|
Gross profit
|
|
|
1,623,000
|
|
|
|
1,021,000
|
|
|
|
602,000
|
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,469,000
|
|
|
|
1,719,000
|
|
|
|
(250,000
|
)
|
|
|
(15)
|
%
|
Research and development expenses
|
|
|
18,000
|
|
|
|
25,000
|
|
|
|
(7,000
|
)
|
|
|
–
|
%
|
Total operating expenses
|
|
|
1,487,000
|
|
|
|
1,744,000
|
|
|
|
(257,000
|
)
|
|
|
(14)
|
%
|
Income (loss) from Operations
|
|
|
136,000
|
|
|
|
(723,000
|
)
|
|
|
859,000
|
|
|
|
118
|
%
|
Loss on transfer of accrued payroll
|
|
|
(8,000
|
)
|
|
|
–
|
|
|
|
8,000
|
|
|
|
100
|
%
|
Net Income (Loss)
|
|
$
|
128,000
|
|
|
$
|
(723,000
|
)
|
|
$
|
851,000
|
|
|
|
118
|
%
|
Revenue
During the year ended June 30, 2020 revenue
increased by 53% to $1,663,000 and was derived from the sale of our Nano Reactor® and CTi Nano Neutralization Systems
to Desmet of $427,000 and corresponding share in gross profit in the aggregate of $266,000. In addition, the Company also
recorded an aggregate revenue of $40,000 from the sale of LPN™ reactors and
usage fees to Enviro Watertek, LLC. Also, we recorded revenue of $887,000 to account for fees received pursuant to our
agreement with GEA that expired in December 2019.
During the year ended June 30, 2019, we
recorded revenue of $1,090,000, which was derived from the sale of our Nano Reactor® and CTi Nano Neutralization
Systems through Desmet Ballestra, consisting of $533,000 for $517,000 and corresponding share in gross profit of $517,000.
Additionally, we have recorded $40,000 from the sale of our LPN™ reactors
to EW.
Operating Expenses
Operating expenses for fiscal 2020 amounted
to $1,487,000 versus $1,744,000 in fiscal 2019, a decrease of $257,000 or 15%. The decrease in operating expenses was attributed
to lower legal fees, office expenses and stock compensation expense compared to fiscal 2019. Non-cash expense items such as amortization
and depreciation expense of $39,000, primarily amounted to a small proportion of operating expenses, with major expense categories
being salaries and payroll taxes of approximately $686,000, legal and professional fees of approximately $119,000 and $154,000
for travel, insurance and marketing services combined. Research and development (R&D) expense was $18,000 compared to $25,000
the same as in the year ended June 30, 2019.
Operating expenses for fiscal 2019 amounted
to $1,744,000. Non-cash expense items such as amortization and depreciation expense of $41,000 among others, amounted to a small
proportion of operating expenses, with major expense categories being salaries and payroll taxes of approximately $699,000, legal
and professional fees of approximately $97,000, various insurance policies, travel and marketing services amounting to $167,000.
Loss on transfer of accrued payroll
In fiscal 2020, $196,000 due to a former
officer was acquired from the former officer by an unrelated party. The former officer, the unrelated party, and the Company agreed
that the amount of the accrued payroll $204,000, and the Company recorded a loss on the transfer of the liability of $8,000. There
was no similar expense in fiscal 2019.
Net Income (Loss)
Our reported net income in fiscal 2020
was $128,000 compared to net loss in fiscal 2019 of $723,000.
Liquidity and Capital Resources
Our cash balance at June 30, 2020 increased
to $759,000 compared to $649,000 at June 30, 2019. For the year ended June 30, 2020, cash provided by operating activities was
$56,000, cash used in investing activities was $50,000, and cash provided by financing activities was $104,000. For the year ended
June 30, 2019, net cash used in operations was $280,000, cash used in investing activities was $16,000, and there was no cash generated
from financing activities.
As of June 30, 2020, we had a stockholders’
deficit of $490,000, and a working capital deficiency of $522,000. These conditions, among others, raise substantial doubt
about our 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 our June 30, 2020 financial statements, has
raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements
do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable to continue
as a going concern.
Management’s plan is to generate
income from operations by continuing to license its technology globally. Currently, we have a R&D, Marketing and Technology
License agreement with Desmet signed in October 2018, in which Desmet provides advances to the Company of $50,000 per month through
October 2021 be applied to future gross profit revenues. Additionally, we anticipate to generate revenues from our agreements with
EW and ABI.
We may also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing
will be available in the future or obtained in sufficient amounts necessary to meet our needs, that we will be able to achieve
profitable operations or that we will be able to meet our future contractual obligations. Should management fail to obtain such
financing, we may curtail its operations.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Stockholders and Board of Directors
Cavitation Technologies, Inc.
Chatsworth, CA
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Cavitation Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2020 and 2019, the
related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended,
and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019,
and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has a working capital deficiency and stockholders’ deficit at June 30, 2020. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor
since 2013.
/s/ Weinberg & Company, P.A.
Weinberg & Company, P.A.
Los Angeles, California
October 13, 2020
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2020
|
|
June 30,
2019
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
759,000
|
|
|
$
|
649,000
|
|
Accounts receivable, net of allowance for
doubtful accounts of $5,000 and $0, respectively
|
|
|
104,000
|
|
|
|
240,000
|
|
Inventory
|
|
|
47,000
|
|
|
|
57,000
|
|
Total current assets
|
|
|
910,000
|
|
|
|
946,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
76,000
|
|
|
|
65,000
|
|
Right-of-use assets, net of accumulated amortization of $60,000
|
|
|
308,000
|
|
|
|
–
|
|
Other assets
|
|
|
10,000
|
|
|
|
10,000
|
|
Total assets
|
|
$
|
1,304,000
|
|
|
$
|
1,021,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
316,000
|
|
|
$
|
187,000
|
|
Accrued payroll and payroll taxes-related parties
|
|
|
693,000
|
|
|
|
892,000
|
|
Related party payable
|
|
|
1,000
|
|
|
|
1,000
|
|
Operating lease liability, current portion
|
|
|
54,000
|
|
|
|
–
|
|
Advances from distributors
|
|
|
368,000
|
|
|
|
760,000
|
|
Total current liabilities
|
|
|
1,432,000
|
|
|
|
1,840,000
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability, non-current portion
|
|
|
258,000
|
|
|
|
–
|
|
Note payable, non-current
|
|
|
104,000
|
|
|
|
–
|
|
Total liabilities
|
|
|
1,794,000
|
|
|
|
1,840,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2020 and 2019, respectively
|
|
|
–
|
|
|
|
–
|
|
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 shares issued and outstanding as of June 30, 2020 and 2019, respectively
|
|
|
197,000
|
|
|
|
197,000
|
|
Additional paid-in capital
|
|
|
23,291,000
|
|
|
|
23,090,000
|
|
Accumulated deficit
|
|
|
(23,978,000
|
)
|
|
|
(24,106,000
|
)
|
Total stockholders' deficit
|
|
|
(490,000
|
)
|
|
|
(819,000
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
1,304,000
|
|
|
$
|
1,021,000
|
|
See accompanying notes to the consolidated
financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For
the Years Ended
|
|
|
June 30,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Revenue
|
|
$
|
1,663,000
|
|
|
$
|
1,090,000
|
|
Cost of revenue
|
|
|
(40,000
|
)
|
|
|
(69,000
|
)
|
Gross profit
|
|
|
1,623,000
|
|
|
|
1,021,000
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,469,000
|
|
|
|
1,719,000
|
|
Research and development expenses
|
|
|
18,000
|
|
|
|
25,000
|
|
Total operating expenses
|
|
|
1,487,000
|
|
|
|
1,744,000
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
136,000
|
|
|
|
(723,000
|
)
|
|
|
|
|
|
|
|
|
|
Loss on transfer of accrued payroll
|
|
|
(8,000
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
128,000
|
|
|
|
(723,000
|
)
|
Provision for income taxes
|
|
|
–
|
|
|
|
–
|
|
Net income (loss)
|
|
$
|
128,000
|
|
|
$
|
(723,000
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, Basic and Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, Basic and diluted
|
|
|
196,997,906
|
|
|
|
196,997,906
|
|
See accompanying notes to the consolidated
financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
YEARS ENDED JUNE 30, 2020 AND 2019
|
|
Common
Stock
|
|
Additional
Paid-
|
|
Accumulated
|
|
|
|
|
Shares
|
|
Amount
|
|
in
Capital
|
|
Deficit
|
|
Total
|
Balance at June 30, 2018
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
22,641,000
|
|
|
$
|
(23,383,000
|
)
|
|
$
|
(545,000
|
)
|
Fair value of warrants granted for services
|
|
|
–
|
|
|
|
–
|
|
|
|
115,000
|
|
|
|
–
|
|
|
|
115,000
|
|
Fair value of amended warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
334,000
|
|
|
|
–
|
|
|
|
334,000
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(723,000
|
)
|
|
|
(723,000
|
)
|
Balance at June 30, 2019
|
|
|
196,997,906
|
|
|
|
197,000
|
|
|
|
23,090,000
|
|
|
|
(24,106,000
|
)
|
|
|
(819,000
|
)
|
Fair value of warrants granted for services
|
|
|
–
|
|
|
|
–
|
|
|
|
194,000
|
|
|
|
–
|
|
|
|
194,000
|
|
Fair value of amended options and warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
7,000
|
|
|
|
–
|
|
|
|
7,000
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
128,000
|
|
|
|
128,000
|
|
Balance at June 30, 2020
|
|
|
196,997,906
|
|
|
$
|
197,000
|
|
|
$
|
23,291,000
|
|
|
$
|
(23,978,000
|
)
|
|
$
|
(490,000
|
)
|
See accompanying notes to the consolidated
financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
128,000
|
|
|
$
|
(723,000
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
39,000
|
|
|
|
41,000
|
|
Fair value of warrants granted for services
|
|
|
194,000
|
|
|
|
115,000
|
|
Fair value of amended options and warrants
|
|
|
7,000
|
|
|
|
334,000
|
|
Amortization of operating lease right-of-use assets
|
|
|
60,000
|
|
|
|
–
|
|
Loss on transfer of accrued payroll
|
|
|
8,000
|
|
|
|
–
|
|
Allowance for bad debts
|
|
|
5,000
|
|
|
|
–
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
131,000
|
|
|
|
(240,000
|
)
|
Inventory
|
|
|
10,000
|
|
|
|
(23,000
|
)
|
Accounts payable and accrued expenses
|
|
|
(75,000
|
)
|
|
|
(120,000
|
)
|
Accrued payroll and payroll taxes due to officers
|
|
|
(3,000
|
)
|
|
|
3,000
|
|
Advances from distributors
|
|
|
(392,000
|
)
|
|
|
333,000
|
|
Operating lease liability
|
|
|
(56,000
|
)
|
|
|
–
|
|
Net cash provided by (used in) operating activities
|
|
|
56,000
|
|
|
|
(280,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(50,000
|
)
|
|
|
(16,000
|
)
|
Net cash used in investing activities
|
|
|
(50,000
|
)
|
|
|
(16,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
104,000
|
|
|
|
–
|
|
Net cash provided by financing activities
|
|
|
104,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
110,000
|
|
|
|
(296,000
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
649,000
|
|
|
|
945,000
|
|
Cash and cash equivalents, end of period
|
|
$
|
759,000
|
|
|
$
|
649,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
–
|
|
|
$
|
–
|
|
Cash paid for income taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
Supplemental disclosures on non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Transfer of accrued payroll to accounts payable and accrued expenses
|
|
$
|
204,000
|
|
|
$
|
–
|
|
Initial recognition of operating lease right-of-use assets and operating lease obligations upon adoption of ASC Topic 842
|
|
$
|
368,000
|
|
|
$
|
–
|
|
See accompanying notes to the consolidated
financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2020 AND 2019
Note 1 – Organization and Summary of Significant Accounting
Policies
Cavitation Technologies, Inc. (“the
Company,” “CTi,” “we,” “us,” and “our”) is a Nevada corporation originally
incorporated in January 2007 under the name Bio Energy, Inc. The Company has developed, patented, and commercialized proprietary
technology that may be used in liquid processing applications.
Going Concern
The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, at June 30,
2020, the Company had a stockholders’ deficit of $490,000 and a working capital deficiency of $522,000. These factors, among
others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that may result from an inability of the Company to continue as a going concern.
At June 30, 2020, the Company had cash
in the amount of $759,000. The Company’s ability to continue as a going concern is dependent upon its ability to continue
to implement its business plan. Currently, management’s plan is to increase revenues by continuing to license its technology
globally. While the Company believes in the viability of its strategy to increase revenues, there can be no assurances to that
effect. Currently, we have a R&D, Marketing and Technology License agreement with Desmet in which Desmet provides advances
to the Company of $50,000 per month through October 2021.
The Company may also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing
will be available in the future or obtained in sufficient amounts necessary to meet the Company’s needs, that the Company
will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should
management fail to obtain such financing, the Company may curtail its operations.
COVID-19
In March 2020, the World Health Organization
declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely
affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many
businesses. This outbreak could decrease spending, adversely affect demand for the Company’s products, and harm the Company’s
business and results of operations. During the year ended June 30, 2020, the Company believes the COVID-19 pandemic did not materially
impact its operating results due to the nature of the Company’s business and its operations. The Company has not observed
any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time,
it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects
on the Company’s business or results of operations, financial condition, or liquidity.
As of June 30, 2020, the Company has been
following the recommendations of local health authorities to minimize exposure risk for its employees, including the temporary
closure of its corporate office and having employees work remotely. Most vendors have transitioned to electronic submission of
invoices and payments.
Principles of Consolidation
The consolidated financial statements include
the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Intercompany transactions
and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date, and reported amounts of revenue and expenses during the reporting period. Significant estimates include estimates for allowance
for doubtful accounts, reserves for inventory obsolescence, assumptions used in valuing our stock options, stock warrants and
common stock issued for services, the valuation allowance for our deferred tax asset, and the accrual of potential liabilities.
Actual results could differ from these estimates.
Revenue Recognition
The Company follows the guidance of
Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model
that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the
contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3)
determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5)
recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts
when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it
transfers to its clients.
Revenue from sale of our Nano Reactors
is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these
contracts and we have no continuing obligation to the customer.
The Company also recognizes revenue from
its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using
the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most
likely amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the
amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company
has determined is not refundable and that a significant future reversal of cumulative revenue under the contract will not occur.
In addition, the Company also recognizes
revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
Cash and Cash Equivalents
The Company considers highly liquid investments
with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates
market value.
The Company maintains its cash with one
domestic financial institution. From time to time, cash balances in this domestic bank may exceed federally insured limits provided
by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000.
As of June 30, 2020, and 2019, Company
had deposits in excess of federally insured limit with one bank. The Company believes that no significant concentration of credit
risk exists with respect to this cash balances because of its assessment of the creditworthiness and financial viability of this
financial institution.
Accounts Receivable
The Company evaluates the collectability
of our trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of
past due trade accounts receivable outstanding.
As of June 30, 2020, the Company recorded
an allowance for doubtful accounts of $5,000. There was no allowance for doubtful accounts recorded as of June 30, 2019.
Inventory
Inventory is stated at the lower of cost
or net realizable value. Cost is determined on a specific item basis. Inventory is composed of finished goods and represents costs
incurred to manufacture the Company’s Nano Reactor® systems and LPN™.
There was no recorded allowance for excess
quantities and obsolescence as of June 30, 2020 and 2019.
Property and Equipment
Property and equipment is presented at
cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of
the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs
and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are
removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements
of operations.
Property and equipment are recorded at
cost and depreciated using the straight-line method over the following estimated useful lives.
Leasehold improvements
|
|
Shorter of life of asset or lease term
|
Furniture
|
|
5-7 Years
|
Office equipment
|
|
5 Years
|
Lab equipment
|
|
4 Years
|
Skid systems
|
|
4 Years
|
Management assesses the carrying value
of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the
asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized
to write down the asset to its estimated fair value.
For the years ended June 30, 2020 and
2019, the Company did not recognize any impairment for its property and equipment.
Income Taxes
The Company follows the asset and liability
method of accounting for income taxes. The Company recognizes deferred tax assets and liabilities to reflect the estimated
future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events
that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
Leases
Prior to July 1, 2019, the Company accounted
for leases under Accounting Standards Codification (“ASC”) 840, Accounting for Leases. Effective July 1, 2019, the
Company adopted the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to recognize a right-of-use asset
and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result,
the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not
been updated and continue to be reported under the accounting standards in effect for those periods. Leases with an initial term
of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its
office lease as a single lease component. Lease expense is recognized on a straight-line basis over the lease term. The adoption
of ASC 842 on July 1, 2019 resulted in the initial recognition of operating lease right-of-use assets of $368,000, lease liabilities
for operating leases of $368,000, and a zero cumulative-effect adjustment to accumulated deficit (see Note 3).
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.
In addition to defining fair value,
the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs.
The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable
in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input
that is significant to the fair value measurement in its entirety. These levels are:
Level 1 - inputs are based upon unadjusted
quoted prices for identical instruments traded in active markets.
Level 2 - inputs are based upon significant
observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or
can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - inputs are generally unobservable
and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow
models, and similar techniques.
As of June 30, 2020, and 2019, the carrying
value of certain accounts such as accounts receivable, inventory, accounts payable, accrued expenses and accrued payroll approximates
their fair value due to the short-term nature of such instruments.
Share-Based Compensation
The Company accounts for share-based awards
to employees and nonemployees and consultants in accordance with the provisions of ASC 718, Compensation-Stock Compensation. Stock-based
compensation cost is measured at fair value on the grant date and that fair value is recognized as expense over the requisite service,
or vesting, period.
In periods through June 30, 2019, the Company
accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50,
Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair
value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final
fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair
value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.
On July 1, 2019, the Company adopted ASU
2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07
simplifies the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based
payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a
result, nonemployee share-based transactions are measured by estimating the fair value of the equity instruments at the grant date,
taking into consideration the probability of satisfying performance conditions. The adoption of ASU 2018-07 did not have a material
impact on the Company’s financial statements for the year ended June 30, 2020 or the previously reported financial statements.
The Company values its equity awards using
the Black-Scholes option pricing model, and accounts for forfeitures when they occur. Use of the Black-Scholes option pricing model
requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate. The Company
estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable entities since
the Company's common stock has limited trading history and limited observable volatility of its own. The expected term of the options
is estimated by using the simplified method to estimate expected term. The risk-free interest rate is estimated using comparable
published federal funds rates.
Advertising Costs
Advertising costs, including marketing
expense, incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $20,000 and $16,000
for the years ended June 30, 2020 and 2019 respectively and was reported as part of General and administrative expenses in the
accompanying Consolidated Statements of Operations.
Research and Development Costs
Research and development expenses relate
primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are
expensed as incurred. Total research and development costs recorded during the years ended June 30, 2020 and 2019 amounted to $18,000
and $25,000, respectively.
Warranty Policy
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 June 30, 2020 and 2019.
Net Income (Loss) Per Share
The Company’s computation of net
income (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available
to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income (loss) per
share 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
income of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing
diluted income per share, the treasury stock method assumes that outstanding options and warrants were exercised and the proceeds
are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect
under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price
of the options and warrants. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share
or decrease loss per share) are excluded from the calculation of diluted EPS.
The following table sets forth the computation
of basic and diluted loss per common share.
|
|
June
30,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Net income (loss)
|
|
$
|
128,000
|
|
|
$
|
(723,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic
|
|
|
196,997,906
|
|
|
|
197,997,906
|
|
Dilutive effect of outstanding stock options and warrants
|
|
|
–
|
|
|
|
–
|
|
Weighted average shares – diluted
|
|
|
196,997,906
|
|
|
|
197,997,906
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
There were no adjustments to net loss required
for purposes of computing diluted earnings per share. At June 30, 2020 and 2019, the Company excluded the outstanding securities
summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of its diluted earnings
per share, as their effect would have been anti-dilutive.
|
|
June 30, 2020
|
|
June 30, 2019
|
Options
|
|
|
11,000,000
|
|
|
|
11,000,000
|
|
Warrants
|
|
|
87,696,511
|
|
|
|
79,263,176
|
|
Concentrations
During the year ended June 30, 2020 we
recorded revenues of 53% from GEA, 45% Desmet and 2% EW, compared to 97% of recorded revenues from Desmet an 3% EW in Fiscal 2019.
from (see Note 2).
At June 30, 2020, 100% of accounts receivable
were due from Desmet.
Segment
As of June 30, 2020, the Company operated
one reportable business segment. 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, who reviews operating results to make decisions about
allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach
to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide
disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports
revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer
base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution
processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can
be found in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Credit
Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASU 2016-13 requires entities
to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain
types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses.
ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe
the potential impact of the new guidance and related codification improvements will be material to its financial position, results
of operations and cash flows.
In August 2020, the FASB issued ASU No.
2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own
Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models
for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded
conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments
that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely
related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative
accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in
capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity
to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective July 1, 2024, for the Company. Early
adoption is permitted, but no earlier than July 1, 2021, including interim periods within that year. Management is currently evaluating
the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06
will have a significant impact on the Company.
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future
consolidated financial statements.
Note 2 – Contracts with Customers
Desmet Ballestra Agreement
In October 2018, we signed a three-year
global R and D, Marketing and Technology License Agreement with Desmet for the sale and licensing of our reactors. This agreement
is a continuation of an original agreement we signed with Desmet in fiscal 2012 and amended in fiscal 2016. As part of the October
2018 agreement, Desmet agreed to provide us monthly advances of $50,000 through October 1, 2021 to be applied against our gross
profit share from future sales.
The Company recognizes revenue from sale
of reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet other than the reactor’s
two-year standard warranty. In accordance with ASC 606, the Company recognizes the revenue from the sale of reactors at the time
of shipment of the Nano reactor hardware as such shipment is deemed to be the Company’s only performance obligation and the
Company has no more continuing obligation. Desmet pays for such reactors on credit terms and the amount of the sale is recorded
as a receivable upon acceptance by Desmet.
The Company also receives a share in gross
profit, as defined, from the sale of Desmet’s integrated neutralization system to its customers of which the reactors are
an integral component. Such amount is subject to adjustment based on certain factors including cost overruns. The Company has no
control with regards to the sale and installation of Nano Reactor® and CTi Nano Neutralization® System, between
Desmet and the end customer. In accordance with ASC 606, the Company has determined that the gross profit to be earned from Desmet
is variable consideration, and evaluates the amount of the potential payments and the likelihood that the payments will be received
using the most likely amount approach (subject to the variable consideration constraint). Estimates are available from our distributor
which are considered in the determination of the most likely amount. However, given the lack of control over the sale to the end
customer and the lack of history of prior sales, the Company considered these as variable revenue constraints, and as such, the
amount of revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined
is not refundable and probable that a significant revenue reversal would not occur. Further, Company has been able to develop an
expectation of the actual collection based on its historical experience.
During the year ended June 30, 2020, the
Company recorded sales of $483,000 from Nano Reactor® sales and $266,000 from gross profit share for a total revenue
of $749,000 from Desmet.
During the year ended June 30, 2019, the
Company recorded sales of $533,000 from Nano Reactor® sales and $517,000 from gross profit share for a total revenue
of $1,050,000.
As of June 30, 2020 and 2019, advances
received from Desmet related to the Company’s share in gross profit amounted to $367,000 and $33,000, respectively. These
advances will only be recognized as revenues once the condition for revenue recognition have been met.
GEA Westfalia Agreement
In
January 2017 the Company entered into a global technology license, R&D and marketing agreement with GEA Westfalia (GEA). Under
the agreement, GEA was granted a worldwide exclusive license to integrate our patented technology into water treatment application,
milk and juice pasteurization, and certain food related processes. The agreement with GEA was for three years, and provided for
non-refundable payments of $300,000 per year that were to be applied to future license fees, or the Company’s share of gross
profit from the sale of GEA’s system to its customers. From January 2017 through December 2019, the Company received total
non-refundable payments of $877,000 from GEA. For the years ending June 30, 2017 through June 30, 2019, the Company accounted
for these payments as advances from distributors in the consolidated balance sheet as they represent deferred profit sharing revenue
in anticipation of future sales of the Company’s reactors to GEA. The agreement with GEA expired in December 2019 and during
the term of the agreement, the Company did not sell any reactors to GEA. The Company determined that its performance obligation
to provide reactors to GEA had expired based on terms of the agreement. Accordingly, for
the year ending June 30, 2020, the Company recognized the $877,000 of non-refundable payments received in 2017 to 2019 as revenue.
Enviro Watertek, LLC Agreement
In April 2019, the Company entered into
a licensing and service contract agreement with Enviro Watertek, LLC (“EW”). This agreement covers the Company’s
industrial treatment process for produced and frack water. The Company’s Low Pressure Nano Reactor (LPN™), was specifically developed to be integrated into frack water treatment system along with proprietary chemical formulations, and
has depicted measurable and quantifiable advantages over industry standard processes and equipment. The agreement with EW provides
for sales on Nano Reactors® plus recurring revenue stream based on processing frack water volumes and utilization or usage
fees. Our agreement with EW is for a period of 15 years but can be terminated by either party every anniversary.
Revenues from sale of reactors is recognized
upon shipment of the reactors while usage fees from processing of frack water volumes and utilization will only be recognized upon
actual usage and collectability is deemed certain.
During the year ended June 30, 2020, the Company recognized
$5,000 from sale of reactors and usage fees of $33,000 for a total of $38,000. During the year ended June 30, 2019, the Company
recognized $40,000 from sale of reactors. There were no usage fees recognized in 2019.
Note 3 – Operating Lease
The Company leases certain warehouse
and corporate office space under an 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:
|
|
June 30, 2020
|
Lease costs:
|
|
|
Operating lease (included in general and administrative in the Company’s consolidated statement of operations)
|
|
$
|
73,000
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
69,000
|
|
|
|
|
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
4.6
|
|
Average discount rate – operating leases
|
|
|
4%
|
|
|
|
|
|
|
The supplemental balance sheet
information related to leases for the period is as follows:
|
|
|
|
|
Long-term right-of-use assets
|
|
$
|
308,000
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
54,000
|
|
Long-term operating lease liabilities
|
|
|
258,000
|
|
Total operating lease liabilities
|
|
$
|
312,000
|
|
Maturity of the Company’s lease liabilities are as
follows:
Year Ending June 30:
|
|
Operating Lease
|
2021
|
|
|
$
|
71,000
|
|
2022
|
|
|
|
72,000
|
|
2023
|
|
|
|
75,000
|
|
2024
|
|
|
|
78,000
|
|
2025 and thereafter
|
|
|
|
47,000
|
|
Total lease payments
|
|
|
|
343,000
|
|
Less: Imputed interest/present value
|
|
|
|
(31,000
|
)
|
Present value of lease liabilities
|
|
|
$
|
312,000
|
|
Note 4 - Property and Equipment
Property and equipment consist of the following
as of June 30, 2020 and 2019:
|
|
June 30,
|
|
June 30,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Furniture
|
|
|
27,000
|
|
|
|
27,000
|
|
Office equipment
|
|
|
2,000
|
|
|
|
2,000
|
|
Equipment
|
|
|
356,000
|
|
|
|
306,000
|
|
Systems
|
|
|
187,000
|
|
|
|
187,000
|
|
|
|
|
574,000
|
|
|
|
524,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(498,000
|
)
|
|
|
(459,000
|
)
|
Property and equipment, net
|
|
$
|
76,000
|
|
|
$
|
65,000
|
|
Depreciation expense for the years ended
June 30, 2020 and 2019 amounted to $39,000 and $41,000, respectively and was recorded as part of General and Administrative expenses
in the accompanying Consolidated Statements of Operations.
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 June 30, 2019, total accrued payroll and payroll
taxes-related parties amounted to $892,000. During the year ended June 30, 2020, the Company reduced accrued payroll by $3,000.
In addition, $196,000 due to a former officer was acquired from the former officer by Strategic IR (SIR), an unrelated party. The
former officer, SIR, and the Company agreed that the amount of the accrued payroll $204,000, and the Company recorded a loss on
the transfer of the liability to SIR of $8,000. As of June 30, 2020, accrued payroll and payroll taxes-related parties totaled
$693,000.
Note 6 – Note Payable
On April 16, 2020, the Company received
loan proceeds in the amount of $104,000 pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus
Aid, Relief and Economic Security Act (the “Cares Act”), which was enacted on March 27, 2020. The note is scheduled
to mature in April 2022 and has a 1% interest rate and is subject to the terms and conditions applicable to loans administered
by the Small Business Administration (SBA) under the CARES Act. The Company applied ASC 470, Debt, to account for the PPP
loan. The loan and accrued interest are forgivable as long as the Company uses the loan proceeds for eligible purposes, including
payroll, benefits, rent and utilities, and maintains its payroll levels. Forgiveness of the note is only available for principal
that is used for the limited purposes that qualify for forgiveness under SBA requirements, and that to obtain forgiveness, the
Company must request it and must provide documentation in accordance with the SBA requirements, and certify that the amounts the
Company is requesting to be forgiven qualify under those requirements. The Company also understands that it shall remain responsible
under the note for any amounts not forgiven, and that interest payable under the note will not be forgiven but that the SBA may
pay the loan interest on forgiven amounts.
As of June 30, 2020, the outstanding balance
of the note payable amounted to $104,000. The Company is currently in the process of applying for forgiveness of the entire PPP
loan with respect to these qualifying expenses, however, the Company cannot assure that such forgiveness of any portion of the
PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release
is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded.
Note 7 - Stockholders’ Deficit
Preferred Stock
On March 17, 2009, the Company filed
an Amended and Restated Articles of Incorporation and created two new series of preferred stock, the first of which is designated
Series A Preferred Stock and the second of which is designated as Series B Preferred Stock. The total number of shares of
Common Stock which this corporation has authority to issue is 1,000,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred
Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors.
Each share of Common Stock and Preferred Stock has a par value of $0.001.
As of June 30, 2020, and 2019, there are
no shares of Series A or Series B Preferred Stock issued and outstanding.
Common Stock
During the years ended June 30, 2020 and 2019 the Company did
not issue any shares of common stock.
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
from June 30, 2020 and 2019 is as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
Weighted
|
|
Remaining
|
|
|
|
|
Average
|
|
Contractual
|
|
|
|
|
Exercise
|
|
Life
|
|
|
Option
|
|
Price
|
|
(Years)
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
11,378,754
|
|
|
$
|
0.31
|
|
|
|
2.23
|
|
- Granted
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Expired
|
|
|
|
(378,754
|
)
|
|
|
–
|
|
|
|
–
|
|
Outstanding at June 30, 2019
|
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
3.36
|
|
- Granted
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Expired
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at June 30, 2020
|
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
6.07
|
|
During the year ended June 30, 2020, stock
options granted in prior years to purchase 8,500,000 shares of common stock were modified to increase its expiration period to
ten years. All other terms of the original grant did not change. As a result of this modification, the Company recorded stock compensation
expense of $2,000 to account for the incremental change in fair value of these options before and after the modification based
upon a Black-Scholes Option Pricing model.
As of June 30, 2020, all outstanding options
were fully vested and exercisable. The intrinsic value of the outstanding options as of June 30, 2020 was zero as the exercise
prices of these options were greater than the trading price of the Company’s stock.
The following table summarizes additional
information concerning options outstanding and exercisable at June 30, 2020.
|
|
|
|
|
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
|
|
|
|
6.07
|
|
|
$
|
0.01
|
|
|
|
11,000,000
|
|
|
|
6.07
|
|
Warrants
A summary of the Company’s warrant activity and related
information from as of June 30, 2020 and 2019 is as follows.
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
Average
|
|
Contractual
|
|
|
|
|
Exercise
|
|
Life
|
|
|
Warrants
|
|
Price
|
|
(Years)
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
3.81
|
|
Granted
|
|
|
4,336,666
|
|
|
|
0.03
|
|
|
|
4.49
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
79,263,176
|
|
|
|
0.07
|
|
|
|
4.45
|
|
Granted
|
|
|
9,800,000
|
|
|
|
0.03
|
|
|
|
10.00
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,366,665
|
)
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
87,696,511
|
|
|
$
|
0.07
|
|
|
|
5.64
|
|
During the year ended June 30, 2020, stock
warrants granted in prior years to purchase 27,100,000 shares of common stock were modified to increase its expiration period to
ten years. All other terms of the original grant did not change. As a result of this modification, the Company recorded stock compensation
expense of $5,000 to account for the incremental change in fair value of these warrants before and after the modification based
upon a Black-Scholes Option Pricing model.
During the year ended June 30, 2019, the
Company granted warrants to purchase 4,336,666 shares of common stock to consultants for services rendered. The warrants are fully
vested, exercisable at $0.03 per share, and will expire in five years. Total fair value of these warrants amounted to $115,000
based upon a Black-Scholes Option Pricing model. In addition, the Company amended certain warrants granted in prior years to purchase
approximately 19 million common shares in order to extend the term or life to five years. As a result of this modification, the
Company recorded stock compensation expense of $334,000 to account for the incremental change in fair value of these warrants before
and after the modification based upon a Black-Scholes Option Pricing model.
As of June 30, 2020, all outstanding warrants
were fully vested and exercisable. The intrinsic value of the outstanding warrants as of June 30, 2020 was zero as the exercise
prices of these options were greater than the trading price of the Company’s stock.
The following table summarizes additional
information concerning warrants outstanding and exercisable at June 30, 2020.
|
|
|
|
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
|
|
|
|
68,736,518
|
|
|
|
7.80
|
|
|
$
|
0.04
|
|
|
|
68,736,518
|
|
|
$
|
0.04
|
|
$0.12
|
|
|
|
18,959,993
|
|
|
|
3.49
|
|
|
$
|
0.12
|
|
|
|
18,959,993
|
|
|
$
|
0.12
|
|
|
|
|
|
87,696,511
|
|
|
|
|
|
|
|
|
|
|
|
87,696,511
|
|
|
|
|
|
The fair value of the warrant awards was
estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
June 30,
|
|
June 30,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.56%
|
|
|
|
2.60%
|
|
Contractual terms (years)
|
|
|
6.75
|
|
|
|
4.82
|
|
Expected volatility
|
|
|
264%
|
|
|
|
138%
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the award; the contractual
term represents the weighted-average period of time the awards granted are expected to be outstanding giving consideration to vesting
schedules, contractual terms, and historical participant exercise behavior; the expected volatility is based upon historical volatility
of the Company’s Common Stock; and the expected dividend yield is based on the fact that the Company has not paid dividends
in the past and does not expect to pay dividends in the future.
Note 8 - Income Taxes
For the year ended June 30, 2020 the Company
recorded no provision for income taxes due to available Federal net operating loss (NOL) carryforwards of approximately $9.8 million
that are available to reduce taxable income. For the year ended June 30, 2019, the Company has no provision for income taxes due
to net losses incurred.
Deferred income taxes result from temporary
differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The components
of deferred tax assets are presented below.
At June 30, 2020, the Company had available
Federal NOL carryforwards of approximately $9.8 million that are available to reduce future taxable income. The Federal carryforward
expires in 2036. The NOL is subject to statutory limitations under Internal Revenue Code Section 382 regarding substantial changes
in ownership of companies with loss carry forwards.
During the year ended June 30, 2020 and
2019, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of
the carryforwards due to recurring operating losses. Based on their evaluation, the Company determined that the net deferred tax
assets, do not meet the requirements to realize, and as such, the Company has provided a full valuation allowance against them.
At June 30, 2029 and 2019, significant
component of the Company’s deferred tax assets and liabilities are as follows:
|
|
June 30,
|
|
June 30,
|
|
|
2020
|
|
2019
|
Net Operating loss carryforwards
|
|
$
|
2,620,000
|
|
|
$
|
2,827,000
|
|
Stock compensation expense
|
|
|
840,000
|
|
|
|
783,000
|
|
Total deferred tax assets
|
|
|
3,460,000
|
|
|
|
3,610,000
|
|
Less valuation discount
|
|
|
(3,460,000
|
)
|
|
|
(3,610,000
|
)
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
A reconciliation of the effective income
tax to statutory US federal income tax is as follows:
|
|
June 30,
|
|
June 30,
|
|
|
2020
|
|
2019
|
Federal statutory rate
|
|
|
(21)%
|
|
|
|
(21)%
|
|
State income taxes, net of Federal benefit
|
|
|
(7)%
|
|
|
|
(7)%
|
|
Net operating loss/carryforward
|
|
|
28 %
|
|
|
|
28 %
|
|
Income tax provision
|
|
|
–
|
|
|
|
–
|
|
Accounting rules prescribes a recognition
threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on
recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.
The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest
or penalties assessed or paid.
The Company measures and records uncertain
tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective
date may be recognized or continue to be recognized.
The following summarizes the open tax years
for each major jurisdiction:
Jurisdiction
|
|
|
Open Tax Years
|
|
|
|
|
Federal
|
|
|
2014 – 2019
|
California
|
|
|
2014 – 2019
|
The Company’s net operating loss
carry forwards are subject to IRS examination until they are utilized and such tax years are closed.
Note 9 – Commitments and Contingencies
Royalty Agreements
On July 1, 2008, the Company’s wholly
owned subsidiary entered into Patent Assignment Agreements with two parties, its President as well as its former Chief Executive
Officer (CEO) and current Technology Senior Manager, where certain devices and methods involved in the hydrodynamic cavitation
processes invented by the President and former CEO/ current Technology Senior Manager have been assigned to the Company. In
exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the President and former CEO/ current Technology
Senior Manager for licensing of the technology and leasing of the related equipment embodying the technology. These agreements
were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company’s former CEO/ current Technology
Senior Manager and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any
gross revenue generated through June 30, 2020 and 2019.
On April 30, 2008 (as amended November
22, 2010), the Company’s wholly owned subsidiary entered into an employment agreement with the Director of Chemical and
Analytical Department (the “Inventor”) providing that the Inventor shall 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 June 30, 2020, and 2019, no patents have been granted in which this person is the legally named
inventor.
Note 10 –
Subsequent Events
In
July 2020, the Company executed a loan agreement with the U.S.
Small Business Administration (SBA) under the Economic Injury Disaster Loan program in the amount of $150,000. The loan is secured
by all tangible and intangible assets of the Company and payable over 30 years at an interest rate of 3.75% per annum. Installment
payments, including principal and interest, will begin on July 2021.
.