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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2020
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2020
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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722,000
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$
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759,000
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Accounts receivable
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242,000
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104,000
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Inventory
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36,000
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47,000
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Total current assets
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1,000,000
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910,000
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Property and equipment, net
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143,000
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76,000
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Operating lease right of use asset, net
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292,000
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308,000
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Other assets
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10,000
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10,000
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Total assets
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$
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1,445,000
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$
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1,304,000
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
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Accounts payable and accrued expenses
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$
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322,000
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$
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316,000
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Accrued payroll and payroll taxes due to officers
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677,000
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693,000
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Related party payable
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1,000
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1,000
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Operating lease liability, current portion
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55,000
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54,000
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Advances from distributor
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292,000
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368,000
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Total current liabilities
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1,347,000
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1,432,000
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Notes payable, non-current
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254,000
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104,000
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Operating lease liability, non-current portion
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243,000
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258,000
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Total liabilities
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1,844,000
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1,794,000
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Commitments and contingencies
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Stockholders' deficit:
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Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively
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–
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–
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Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively
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197,000
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197,000
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Additional paid-in capital
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23,291,000
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23,291,000
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Accumulated deficit
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(23,887,000
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)
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(23,978,000
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)
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Total stockholders' deficit
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(399,000
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(490,000
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)
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Total liabilities and stockholders' deficit
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$
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1,445,000
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$
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1,304,000
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See accompanying notes, to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
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September 30,
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2020
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2019
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Revenue
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$
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418,000
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$
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351,000
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Cost of revenue
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(11,000
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)
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(12,000
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)
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Gross profit
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407,000
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339,000
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General and administrative expenses
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310,000
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299,000
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Research and development expenses
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6,000
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2,000
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Total operating expenses
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316,000
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301,000
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Income before income tax
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91,000
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38,000
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Provision for income taxes
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–
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–
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Net income
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$
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91,000
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$
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38,000
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Net income per share,
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Basic and Diluted
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$
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(0.00
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)
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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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Basic and Diluted
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196,997,906
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196,997,906
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See accompanying notes to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)
AS OF SEPTEMBER 30, 2020 AND 2019
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Three Months Ended September 30, 2020 (unaudited)
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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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in Capital
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Deficit
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Total
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Balance at June 30, 2020
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196,997,906
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$
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197,000
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$
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23,291,000
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$
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(23,978,000
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)
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$
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(490,000
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)
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Net income
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–
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–
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–
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91,000
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91,000
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Balance at September 30, 2020
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196,997,906
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$
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197,000
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$
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23,291,000
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$
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(23,887,000
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)
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$
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(399,000
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)
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Three Months Ended September 30, 2019 (unaudited)
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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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in Capital
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Deficit
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Total
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Balance at June 30, 2019
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196,997,906
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$
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197,000
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$
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23,090,000
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$
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(24,106,000
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)
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$
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(819,000
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)
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Net income
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–
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–
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–
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38,000
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38,000
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Balance at September 30, 2019
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196,997,906
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$
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197,000
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$
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23,090,000
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$
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(24,068,000
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)
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$
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(781,000
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)
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See accompanying notes to the 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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2020
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2019
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Operating activities:
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Net income
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$
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91,000
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$
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38,000
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Adjustments to reconcile net income to net cash provided by (used in) operating activities:
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Depreciation and amortization
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8,000
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10,000
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Amortization of right of use Asset
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16,000
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12,000
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Effect of changes in:
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Accounts receivable
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(138,000
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)
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136,000
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Inventory
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11,000
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12,000
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Accounts payable and accrued expenses
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6,000
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(86,000
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)
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Accrued payroll and payroll taxes due to officers
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(16,000
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)
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–
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Advances from distributor
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(76,000
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)
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181,000
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Operating lease liability
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(14,000
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)
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(11,000
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)
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Net cash provided by (used in) operating activities
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(112,000
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)
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292,000
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Cash flow from investing activities:
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Purchase of property and equipment
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(75,000
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)
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–
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Net cash used in investing activities
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(75,000
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)
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–
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Cash flow from financing activities:
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Proceeds from note payable
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150,000
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–
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Net cash provided by financing activities
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150,000
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|
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–
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|
|
|
|
|
|
|
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Net increase (decrease) in cash and cash equivalents
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(37,000
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)
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292,000
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|
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Cash and cash equivalents, beginning of period
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759,000
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649,000
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Cash and cash equivalents, end of period
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$
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722,000
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$
|
941,000
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$
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–
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|
$
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–
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|
Cash paid for income taxes
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$
|
–
|
|
|
$
|
1,600
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|
See accompanying notes to the condensed
consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended September 30, 2020 and 2019
Note 1 - Organization and Summary of
Significant Accounting Policies
Organization
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, wastewater treatment, biodiesel, algae oil extraction,
and alcoholic beverage enhancement.
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,
2020 are not indicative of the results that may be expected for the fiscal year ending June 30, 2021. You should read these unaudited
condensed consolidated financial statements in conjunction with the audited financial statements and the notes thereto included
in the Company's annual report on Form 10-K for the year ended June 30, 2020 filed on October 13, 2020. The condensed consolidated
balance sheet as of June 30, 2020 has been derived from the audited financial statements included in the Form 10-K for that year.
Going Concern
The accompanying condensed consolidated
financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation
of the Company as a going concern. During the three months ended and as of September 30, 2020, the Company used cash
in operating activities of $112,000, had a working capital deficiency of $347,000 and a stockholders' deficit of $399,000. These
factors, among others, raise doubt about the Company's ability to continue as a going concern. In addition, our independent registered
public accounting firm, in their report on our audited financial statements for the fiscal year ended June 30, 2020, 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 2020 we had cash and
cash equivalents on hand of $722,000 and are not generating sufficient funds to cover operations. In addition to the cash on hand,
management believes we may require additional funds to continue to operate our business. Management's plan is to generate income
from operations by continuing to license our technology globally through our strategic partners, including the extension or renewal of our existing global R
and D, Marketing and Technology License Agreement with Desmet Ballestra Group (Desmet),
agreement with Alchemy Beverages, Inc (ABI), and agreement with Enviro Watertek, LLC (EWT).
We may also attempt to raise additional
debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such
financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be
able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management
fail to obtain such financing, the Company may curtail its operations.
Covid-19
In March 2020, the World Health Organization
declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely
affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many
businesses. This outbreak could decrease spending, adversely affect demand for the Company’s products, and harm the Company’s
business and results of operations. During the three months ended September 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 September 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 condensed consolidated financial statements
include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company
transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used for allowance for
doubtful accounts, reserve for inventory obsolescence, impairment analysis for property and equipment, accrual of potential liabilities,
valuation allowance for deferred tax assets, and assumption in valuing our stock options, warrants, and common stock issued for
services, among other items. Actual results could differ from these estimates.
Revenue Recognition
The Company follows the guidance of Accounting
Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires
entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements
with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price,
(4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation
is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration
it is entitled to in exchange for the services it transfers to its clients
Revenue from sale of our Nano Reactors
is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these
contracts and we have no continuing obligation to the customer.
The Company also recognizes revenue from
its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using
the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most
likely amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the
amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company
has determined is not refundable and that a significant future reversal of cumulative revenue under the contract will not occur.
In addition, the Company also recognizes
revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
Income Taxes
The Company follows the asset and liability
method of accounting for income taxes. The Company recognizes deferred tax assets and liabilities to reflect the estimated
future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events
that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
The Company recorded no provision for
income taxes during the three months ended September 30, 2020 and 2019 due to available Federal net operating loss (NOL) carryforwards
of approximately $9 million that are available to reduce taxable income.
Earnings Per Share
The Company’s computation of earnings
per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income available to
common stockholders by the weighted average number of common shares during the period. Shares of restricted stock subject to vesting
are included in basic weighted average common shares outstanding from the time they vest. Diluted EPS reflects the potential dilution,
using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. In computing diluted
EPS, the treasury stock method assumes that outstanding options and warrants are exercised, and the proceeds are used to purchase
common stock at the average market price and there were no instruments that would result in issuance of additional shares during
the period.
As of September 30, 2020, the Company had
11,000,000 stock options and 87,696,511 stock warrants outstanding (and out of the money) to purchase shares of common stock that
were not included in the diluted net income per common share because their effect would be anti-dilutive.
Concentrations
Cash - cash is deposited in one financial
institution. The balances held at this financial institution at times may be in excess of Federal Deposit Insurance Corporation
(“FDIC”) insurance limits of up to $250,000.
Accounts Receivable – accounts receivable
at September 30, 2020 and June 30, 2020, were all due from Desmet.
Accounts Payable and Accrued Expenses –
two vendors accounted 63% and 13% of accounts payable and accrued expenses as of September 30, 2020. Two vendors accounted 64%
and 14% of accounts payable and accrued expenses as of June 30, 2020 .
Revenues – revenues during the three
months period ended September 30, 2020 and 2019, were all from Desmet (see Note 2).
Fair Value Measurement
FASB Accounting Standards Codification
("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of
a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy
are as follows:
|
·
|
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
·
|
Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
·
|
Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
On September 30, 2020 and June 30, 2020,
the fair values of cash and cash equivalents, accounts receivable, inventory and accounts payable and accrued expenses approximate
their carrying values due to their short-term nature.
Segments
The Company operates in one segment, its
nano reactor technology business. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s
chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results
to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based
on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to
report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds
material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting”
due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement,
manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment
Reporting” can be found in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Credit
Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASU 2016-13 requires entities
to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain
types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses.
ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe
the potential impact of the new guidance and related codification improvements will be material to its financial position, results
of operations and cash flows.
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 - Agreement with Distributor
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 gross profit
share revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined
is not refundable and probable that a significant revenue reversal would not occur. Further, the Company has not been able to
develop an expectation of the actual collection based on its historical experience.
During the three months ended September
30, 2020, the Company recorded sales of $242,000 from Nano Reactor® sales and $176,000 from gross profit share
for a total revenue of $418,000 from Desmet.
During the three months ended September
30, 2019, the Company recorded sales of $207,000 from Nano Reactor® sales and $144,000 from gross profit share
for a total revenue of $351,000.
As of September 30, 2020 and June 30, 2020
and 2019, accounts receivable from Desmet related to the sale of Nano Reactor®
amounted to $242,000 and $104,000, respectively.
As of September 30, 2020 and June 30, 2020
and 2019, advances received from Desmet related to the Company’s share in gross
profit amounted to $292,000 and $368,000, respectively. These advances will only be recognized as revenues once the condition for
revenue recognition have been met.
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 condensed 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:
|
|
September 30, 2020
|
|
Lease costs:
|
|
|
|
|
Operating lease (included in general and administrative in the Company’s
condensed consolidated statement of operations)
|
|
$
|
18,000
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
18,000
|
|
|
|
|
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
4.4
|
|
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
|
|
$
|
292,000
|
|
|
|
|
|
|
Short-term operating lease liabilities
|
|
$
|
55,000
|
|
Long-term operating lease liabilities
|
|
|
243,000
|
|
Total operating lease liabilities
|
|
$
|
298,000
|
|
Maturity of the Company’s lease liabilities are as follows:
Year Ending June 30:
|
|
Operating Lease
|
|
2021 (9 months remaining)
|
|
$
|
53,000
|
|
2022
|
|
|
72,000
|
|
2023
|
|
|
75,000
|
|
2024
|
|
|
78,000
|
|
2025 and thereafter
|
|
|
47,000
|
|
Total lease payments
|
|
|
325,000
|
|
Less: Imputed interest/present value
|
|
|
(27,000
|
)
|
Present value of lease liabilities
|
|
$
|
298,000
|
|
Note 4 – Related Party Transactions
Accrued Payroll and Payroll Taxes
In prior periods, the Company accrued salaries
and estimated payroll taxes due to current and former officers of the Company. As of September 30, 2020 and June 30, 2020, total
accrued payroll and payroll taxes-related parties amounted to $677,000 and $693,000, respectively.
Note 5 – Notes Payable
|
|
September 30, 2020
|
|
|
June 30,
2020
|
|
A. Note Payable – PPP
|
|
$
|
104,000
|
|
|
$
|
104,000
|
|
B. Note Payable - EIDL
|
|
|
150,000
|
|
|
|
–
|
|
Total
|
|
$
|
254,000
|
|
|
$
|
104,000
|
|
|
A.
|
On April 16, 2020, the Company received loan proceeds in the amount of $104,000 pursuant to the
Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”),
which was enacted on March 27, 2020. The note is scheduled to mature in April 2022 and has a 1% interest rate and is subject to
the terms and conditions applicable to loans administered by the Small Business Administration (SBA) under the CARES Act. The Company
applied ASC 470, Debt, to account for the PPP loan. The loan and accrued interest are forgivable as long as the Company
uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.
Forgiveness of the note is only available for principal that is used for the limited purposes that qualify for forgiveness under
SBA requirements, and that to obtain forgiveness, the Company must request it and must provide documentation in accordance with
the SBA requirements, and certify that the amounts the Company is requesting to be forgiven qualify under those requirements. The
Company also understands that it shall remain responsible under the note for any amounts not forgiven, and that interest payable
under the note will not be forgiven but that the SBA may pay the loan interest on forgiven amounts.
|
|
|
As of September 30, 2020 and
June 30, 2020, the outstanding balance of the note payable amounted to $104,000. The Company is currently in the process of applying
for forgiveness of the entire PPP loan with respect to these qualifying expenses, however, the Company cannot assure that such
forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or
wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment
would be recorded.
|
|
B.
|
In July 2020, the Company received a loan of $150,000 from the Small Business Association under
its Economic Injury Disaster Loan (EIDL) assistance program. The EIDL loan is payable over 30 years, bears interest at a rate of
3.75% per annum and secured by all tangible and intangible property of the Company. As of September 30, 2020, the outstanding balance
of the note payable amounted to $150,000.
|
Note 6 - Stockholders' Deficit
Stock Options
The Company has not adopted a formal stock
option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic
Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity during the
three months ended September 30, 2020 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
6.07
|
|
- Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
- Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at September 30, 2020
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
5.82
|
|
Exercisable and vested at September 30, 2020
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
5.82
|
|
As of September 30, 2020, all outstanding
options are fully vested. There was no intrinsic value of the outstanding options as of September 30, 2020 as the exercise price
of these options were greater than the market price. The following table summarizes additional information concerning options outstanding
and exercisable at September 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
|
|
|
|
5.82
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
5.82
|
|
Warrants
A summary of the Company's warrant activity
and related information for the three months ended on September 30, 2020 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
Warrants
|
|
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
87,696,511
|
|
|
$
|
0.07
|
|
|
|
5.64
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at September 30, 2020
|
|
|
87,696,511
|
|
|
|
0.07
|
|
|
|
5.39
|
|
Vested and exercisable at September 30, 2020
|
|
|
87,696,511
|
|
|
$
|
0.07
|
|
|
|
5.39
|
|
As of September 30, 2020, all outstanding
warrants are fully vested. There was no intrinsic value of the outstanding warrants as of September 30, 2020 as the exercise price
of these warrants were greater than the market price. The following table summarizes additional information concerning warrants
outstanding and exercisable at September 30, 2020.
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.03 - 0.05
|
|
|
68,736,518
|
|
|
|
7.55
|
|
|
$
|
0.04
|
|
|
|
68,736,518
|
|
|
$
|
0.04
|
|
$0.12
|
|
|
18,959,993
|
|
|
|
3.24
|
|
|
$
|
0.12
|
|
|
|
18,959,993
|
|
|
$
|
0.12
|
|
|
|
|
87,696,511
|
|
|
|
|
|
|
|
|
|
|
|
87,696,511
|
|
|
|
|
|
Note 7 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary
entered into Patent Assignment Agreements with two parties, our President and Technology Development Supervisor, where certain
devices and methods involved in the hydrodynamic cavitation processes invented by the President and the Technology Development
Supervisor have been assigned to the Subsidiary. In exchange, the Subsidiary agreed to pay a royalty of 5% of gross
revenues to each of the President and Technology Development Supervisor for licensing of the technology and leasing of the related
equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from
its subsidiary. The Company's President and Global Technology Manager both waived their rights to receive royalty payments
that have accrued, or that may accrue, on any gross revenue generated through September 30, 2020 and in the foreseeable future.
On April 30, 2008 and as amended on November
22, 2010, our wholly owned subsidiary entered into an employment agreement with our former Director of Chemical and Analytical
Department (the "Inventor") to receive an amount equal to 5% of actual gross royalties received from the royalty stream
in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor,
and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of September 30,
2020, no patents have been granted in which this person is the legally named inventor.
ITEM 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis
should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements
based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions.
Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. ("CTi"),
a Nevada corporation, was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly
technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels,
water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our
systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process
and product development firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized
proprietary technology that can be used for processing of industrial fluids. CTi's patented Nano Reactor® is
the critical components of the CTi Nano Neutralization® System which is commercially proven to reduce operating
costs and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano Reactor® systems
and has filed several national and international patents to employ its proprietary technology in applications including, vegetable
oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
We are engaged in manufacturing our Nano-Reactors,
which are designed to help refine vegetable oils, biodiesel transesterification and treatment of produced and frack water. Our
near-term goal is to continue to sell our systems through our partner Desmet Ballestra, EW, ABI and GEA.
During the past several years we have developed
a number of new applications utilizing the core principal of our technology. Our low pressure non-reactors (LPN) can be utilized
in multiple industries that process large volumes of fluids and we anticipate accelerated commercial sales in our fiscal 2020.
Further, we have miniaturized our non-reactors to be utilized in various consumer oriented products, such as, processing and enhancing
spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil.
We have agreements to license our technology
globally through our strategic partners, Desmet Ballestra Group (Desmet) and Enviro Watertek, LLC (EW) and Alchemy Beverages, Inc
(ABI). Desmet have been providing monthly advances of $50,000. We may need additional funding, and may attempt to raise additional
debt and/or equity financing to fund operations and additional working capital. However, there is no assurance that we will be
successful in obtaining such financing or obtained sufficient amounts necessary to meet our business needs, or that we will be
able to meet our future contractual obligations.
In March 2020 the World Health Organization
declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely
affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many
businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business
and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak
and its effects on our business or results of operations at this time.
Results of Operations
Results of Operations for the Three Months Ended September
30, 2020 and 2019
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
418,000
|
|
|
$
|
351,000
|
|
|
$
|
67,000
|
|
|
|
19
|
%
|
Cost of revenue
|
|
|
(11,000
|
)
|
|
|
(12,000
|
)
|
|
|
(1,000
|
)
|
|
|
(8
|
)%
|
Gross profit
|
|
|
407,000
|
|
|
|
339,000
|
|
|
|
68,000
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
310,000
|
|
|
|
299,000
|
|
|
|
11,000
|
|
|
|
4
|
%
|
Research and development expenses
|
|
|
6,000
|
|
|
|
2,000
|
|
|
|
4,000
|
|
|
|
200
|
%
|
Total operating expenses
|
|
|
316,000
|
|
|
|
301,000
|
|
|
|
15,000
|
|
|
|
5
|
%
|
Net income
|
|
$
|
91,000
|
|
|
$
|
38,000
|
|
|
$
|
53,000
|
|
|
|
139
|
%
|
Revenue
The Company generates revenues from the
sale of the Nano Reactor® to customers/distributor as well as share in gross profit from the sale of such reactors by
our distributors to their customers.
During the three months ended September
30, 2020, the Company recognized revenues of $418,000 from sale of reactors and the corresponding share in gross profit pursuant
to two purchase orders received from Desmet.
During the three months ended September
30, 2019, the Company recognized revenues of $351,000 from sale of reactors and the corresponding share in gross profit pursuant
to three purchase orders received from Desmet.
Cost of Revenue
During the three months ended September
30, 2020, our cost of sales amounted to $11,000, and to $12,000 during the same period in prior year, which was the result of
the revenue transactions described above.
Operating Expenses
Operating expenses for the three months
ended September 30, 2020 amounted to $310,000 compared with $299,000 for the same period in 2019, an increase of $15,000, or 5%.
The increase in operating expenses was due to increase in professional and consulting fees, offset by decrease in salaries and
wages.
Research and development (R&D) expenses
remained relatively low as we continued to rely on Desmet and GEA for support in R&D and development of new applications for
our technology. It is our intention to pursue R&D as our cash position permits.
Liquidity and Capital Resources
During the three months ended September
30, 2020, the Company realized a net income of $91,000 compared to a net income of $38,000 in September 30, 2019, had a working
capital deficiency of $347,000 and a stockholders' deficit of $399,000. These factors, among others, raise substantial doubt about
the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.
In addition, the Company’s independent registered public accounting firm, in its report on the Company’s June 30, 2020
financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern.
As of September 30, 2020, we had cash and
cash equivalents on hand of $722,000 and are not generating sufficient revenues to fund 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 partner Desmet Ballestra Group (Desmet),
and existing agreements with Alchemy Beverages, Inc. (ABI) and Enviro Watertek (EW).
We may also attempt to raise additional
debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such
financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be
able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management
fail to obtain such financing, the Company may curtail its operations.
In March 2020 the World Health Organization
declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related
adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially
leading to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. This outbreak
could decrease spending, adversely affect demand for our product and harm our business and results of operations. It is not possible
for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of
operations at this time.
Cash Flow
Net cash used in operating activities during
the three months ended September 30, 2020 amounted to $122,000 compared to net cash provided in operating activities of $292,000
during the three months ended September 30, 2019.
Net cash used in investing activities during
the three months ended September 30, 2020 amounted to $75,000 as a result our purchase of property and equipment. There was none
in fiscal 2019.
Net cash provided in financing activities
during the three months ended September 30, 2020 amounted to $150,000 as a result of a note payable obtained from the Small Business
Association under its Economic Injury Disaster Loan (EIDL) assistance program in light of the impact of the coronavirus (Covid-19)
pandemic on the Company's business. There was none in fiscal 2019.
Critical Accounting Policies
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used for allowance for
doubtful accounts, reserve for inventory obsolescence, impairment analysis for property and equipment, accrual of potential liabilities,
valuation allowance for deferred tax assets, and assumption in valuing our stock options, warrants, and common stock issued for
services, among other items. Actual results could differ from these estimates.
Revenue Recognition
The Company follows the guidance of Accounting
Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires
entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements
with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price,
(4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation
is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration
it is entitled to in exchange for the services it transfers to its clients.
Revenue from sale of our Nano Reactors
is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these
contracts and we have no continuing obligation to the customer.
The Company also recognizes revenue from
its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using
the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most
likely amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the
amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company
has determined is not refundable and it is probable that a significant revenue reversal of cumulative product revenue under the
contract will not occur.
In addition, the Company also recognizes
revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
Recently Issued Accounting Standards
See Note 1 of the accompanying Condensed
Consolidated Financial Statements for a discussion of recently issued accounting standards.