ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31,
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June 30,
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2018
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2017
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(unaudited)
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(as adjusted)
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ASSETS
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Current assets:
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Cash
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$
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880,000
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$
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549,000
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Accounts receivable
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-
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85,000
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Inventory
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117,000
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143,000
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Total current assets
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997,000
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777,000
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Property and equipment, net
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107,000
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141,000
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Other assets
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10,000
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12,000
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Total assets
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$
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1,114,000
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$
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930,000
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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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315,000
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$
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246,000
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Accrued payroll and payroll taxes due to officers
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863,000
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994,000
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Related party payable
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1,000
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1,000
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Advances from distributor, net
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362,000
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-
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Total current liabilities
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1,541,000
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1,241,000
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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 March 31, 2018 and June 30, 2017, respectively
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-
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-
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Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 and 196,797,906 shares issued
and outstanding as of March 31, 2018 and June 30, 2017, respectively
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196,998
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196,798
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Additional paid-in capital
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22,641,002
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22,625,202
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Accumulated deficit
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(23,265,000
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)
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(23,133,000
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)
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Total stockholders’ deficit
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(427,000
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)
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(311,000
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Total liabilities and stockholders’ deficit
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$
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1,114,000
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$
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930,000
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
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For the Nine Months Ended
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March 31,
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March 31,
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2018
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2017
(as adjusted)
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2018
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2017
(as adjusted)
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Revenue
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$
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300,000
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$
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1,382,000
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$
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977,000
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$
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1,502,000
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Cost of revenue
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5,000
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40,000
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38,000
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55,000
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Gross profit
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295,000
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1,342,000
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939,000
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1,447,000
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General and administrative expenses
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356,000
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765,000
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1,160,000
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1,373,000
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Research and development expenses
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4,000
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7,000
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13,000
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15,000
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Total operating expenses
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360,000
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772,000
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1,173,000
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1,388,000
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Income (loss) from Operations
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(65,000
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)
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570,000
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(234,000
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)
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59,000
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Gain on settlement of debt
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-
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-
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101,000
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-
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Other income
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-
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-
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1,000
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-
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Net income (loss)
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$
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(65,000
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$
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570,000
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$
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(132,000
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)
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$
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59,000
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Net income (loss) 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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0.00
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$
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(0.00
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$
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0.00
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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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194,197,906
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196,996,446
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194,197,906
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT (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, 2017
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196,797,906
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$
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196,798
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$
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22,625,202
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$
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(23,967,000
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)
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$
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(1,145,000
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)
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Adjustment at June 30, 2017 upon adoption of ASC 606
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-
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-
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-
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834,000
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834,000
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Balance at June 30, 2017 (as adjusted)
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196,797,906
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196,798
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22,625,202
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(23,133,000
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(311,000
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Common stock issued to consultants
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400,000
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400
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15,600
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16,000
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Cancellation of common stock granted to Director
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(200,000
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(200
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200
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-
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Net Loss
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(132,000
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(132,000
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Balance at March 31, 2018
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196,997,906
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$
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196,998
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$
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22,641,002
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$
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(23,265,000
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)
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$
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(427,000
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)
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Nine Months Ended March 31,
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2018
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2017
(as
adjusted)
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Operating activities:
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Net income (loss)
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$
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(132,000
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)
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$
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59,000
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
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Depreciation and amortization
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36,000
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30,000
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Stock compensation expense
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16,000
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394,000
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Gain on settlement of debt
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(101,000
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)
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-
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Effect of changes in:
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Accounts receivable
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85,000
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-
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Inventory
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26,000
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(76,000
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)
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Accounts payable and accrued expenses
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69,000
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(21,000
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)
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Accrued payroll and payroll taxes due to officers
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(30,000
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)
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-
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Advances from distributors
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362,000
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(436,000
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)
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Net cash provided by (used in) operating activities
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331,000
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(50,000
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)
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Cash Flow from Investing Activities:
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Purchase of property and equipment
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-
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(41,000
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)
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Net cash used in investing activities
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-
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(41,000
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)
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Change in Cash
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331,000
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(91,000
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)
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Cash, beginning of period
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549,000
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|
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657,000
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Cash, end of period
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$
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880,000
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$
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566,000
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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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$
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-
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$
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2,000
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|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine months ended March 31, 2018 and 2017
Note 1 - Organization and Basis of Presentation
Basis of Presentation
The accompanying condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in
the United States of America (“U.S.”) and with instructions to Form 10-Q pursuant to the rules and regulations of Securities
and Exchange Act of 1934, as amended (the “Exchange Act”) and Article 8-03 of Regulation S-X under the Exchange Act.
Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by
GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting
of normal recurring adjustments) for a fair presentation. Operating results for the nine months ended March 31, 2018 are not indicative
of the results that may be expected for the fiscal year ending June 30, 2018. You should read these unaudited condensed consolidated
financial statements in conjunction with the audited financial statements and the notes thereto included in the Company’s annual
report on Form 10-K for the year ended June 30, 2017 filed on November 3, 2017. The condensed consolidated balance sheet as of
June 30, 2017 has been derived from the audited financial statements included in the Form 10-K for that year.
Cavitation Technologies, Inc. (referred to
herein, unless otherwise indicated, as “the Company,” “CTi,” “we,” “us,” and “our”)
is a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented, and commercialized
proprietary technology that may be used in liquid processing applications. CTi’s patented
Nano Reactor®
is the critical
component of CTi
Nano Neutralization® System
which is commercially proven to reduce operating costs and increase yields
in refining vegetable oils. CTi has two patented systems and has filed several national and international patents to employ its
proprietary technology in applications including, vegetable oil refining, wastewater treatment, biodiesel, algae oil extraction,
and alcoholic beverage enhancement.
On July 1, 2017, the Company adopted the new
accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”)
to all contracts using the full retrospective method resulting in a change to previously reported balance sheet and statement of
stockholders’ deficit. Upon adoption of this new standard, there was a change in previously reported statement of operations
for the three and nine months ended March 31, 2017 (see further discussion in Note 3).
Management Plan Regarding on Going Concerns
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 nine months ended March 31, 2018, the Company recorded a net loss of $132,000
and as of March 31, 2018, had a working capital deficiency of $544,000 and a total stockholders’ deficit of $427,000.
These factors, among others, raise doubts about the Company’s ability to continue as a going concern. In addition, our independent
auditors, in their report on the Company’s audited financial statements for the fiscal year ended June 30, 2017 expressed
doubt about its 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 March 31, the Company had cash on hand
of $880,000 and was not generating sufficient funds to cover operations. In addition to the funds on hand, management believes
it may require additional funds to continue to operate its business. Management’s plan is to generate income from operations by
continuing to license its technology globally through its strategic partners, Desmet Ballestra Group (Desmet) and GEA Westfalia,
AG (GEA). Desmet has agreed to provide us monthly advances of $50,000 through August 2018 to be applied against gross profit share
from future sales pursuant to a January 2016 agreement. GEA has agreed to provide us monthly advances of $25,000 less applicable
taxes through January 2020, to be applied against gross profit share from future sales pursuant to January 2017 agreement.
The Company 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.
Note 2 - Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include
the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions
and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in reserve for inventory
obsolescence, impairment analysis for fixed assets, accrual of potential liabilities, realizability of deferred tax assets and
fair value of stock options, warrants, and common stock issued for services, among other items. Actual results could differ from
these estimates.
Dependence on Major Customers
Through June 30, 2017, the Company’s
revenue was entirely dependent on Desmet Ballestra which is its exclusive distribution agent with regard to the
CTi Nano Neutralization®
System
for edible oils.
In January 2017, the Company executed a similar
agreement with another distributor, GEA for its
Nano Reactor™ technology. As a result
of this agreement, during the period ended March 31, 2018, the Company recognized revenues of $13,000 from the sale of reactors
and received advances totaling $327,000 as of March 31, 2018 which will be applied to future gross profit revenues.
During the nine months ended March 31, 2018
and 2017, 98% and 100%, respectively, of the Company’s revenues were derived from Desmet sales efforts (see Note 4).
Earnings (Loss) Per Share
The Company’s computation of earnings
(loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss)
available to common stockholders by the weighted average number of common shares during the period. Shares of restricted stock
subject to vesting are included in basic weighted average common shares outstanding from the time they vest. Diluted EPS reflects
the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss)
of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised,
and the proceeds are used to purchase common stock at the average market price and there were no instruments that would result
in issuance of additional shares during the period.
As of March 31, 2018, the Company had
11,685,852 stock options and 75,926,509 stock warrants outstanding to purchase shares of common stock that were not included in
the diluted net loss per common share because their effect would be anti-dilutive.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process
of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future
consolidated financial statements.
Business and Credit Concentrations
The Company’s cash balances in a
financial institution at times may exceed federally insured limits. As of March 31, 2018, and June 30, 2017, the Company had $880,000
and $549,000, respectively, deposited in one financial institution. The deposits are federally insured up to $250,000. The Company
believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment
of the creditworthiness and financial viability of this financial institution.
Recorded revenues during the nine months ended
March 31, 2018 and 2017 of $977,000 and $1,502,000, respectively, were attributable to two customers (see Note 4).
Note 3 - Adoption of ASC 606, Revenue
from Contracts with Customers
The Company has developed, patented, and commercialized
proprietary technology called
Nano Reactor®
that may be used in liquid processing applications. The Company generates
revenues from the sale of the
Nano Reactor®
to customers/distributors as well as share in gross profit from the sale
of such reactors by our distributors to their customers.
Through June 30, 2017, revenue from the sale
of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. The Company is also entitled to a gross profit
share from its distributor from the sale of the reactors to their customers. Such gross profit share was not fixed at the time
of delivery, and as such, revenue was recognized when the profit share was fixed and determinable, which was generally be upon
delivery and installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, the Company adopted the new
accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”)
to all contracts. Sales revenue from the sale of its Nano Reactors continues to be recognized when products are shipped from its
manufacturing facilities. The Company now recognizes the corresponding gross profit at the time of shipment of the Nano reactor
hardware in accordance to ASC 606 as such shipment is deemed to be the only performance obligation and the Company has no more
continuing obligation to its distributor. In addition, the Company has no control with regards to the sale and installation of
Nano Neutralization System, between its distributor and the end customer.
The Company has determined that the gross profit
to be earned from its distributor as a variable consideration that requires estimation in determining the transaction price, and
as such all or a portion can be recognized using the most likely amount approach (subject to the variable consideration constraint).
Estimates are available from its distributor which are considered in the determination of the most likely amount. However, given
the lack of control over the sale to the end customer and the lack of history of prior sales, the Company considered these as a
variable revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual
amount of cash received under the contract which the Company has determined as not refundable and preclude any probable of future
revenue reversal. Further, Company has been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements of
ASC 606, the Company adopted the full retrospective method. Under the full retrospective method, the Company is required to retrospectively
apply the new revenue standard to all period presented as if the new revenue standards had been applied to all prior period.
The effect of the changes made to the Company’s
previously reported consolidated June 30, 2017 balance sheet for the adoption of ASC 606, were as follows:
|
|
|
Balance at
|
|
|
Adjustments Due to
|
|
|
Adjusted
balance at
|
|
|
Balance Sheet
|
|
June 30, 2017
|
|
|
ASC 606
|
|
|
June 30, 2017
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
549,000
|
|
|
|
|
|
|
$
|
549,000
|
|
|
Accounts receivable
|
|
|
-
|
|
|
$
|
85,000
|
(A)
|
|
|
85,000
|
|
|
Inventory, net
|
|
|
143,000
|
|
|
|
|
|
|
|
143,000
|
|
|
Property and equipment, net
|
|
|
141,000
|
|
|
|
|
|
|
|
141,000
|
|
|
Other assets
|
|
|
12,000
|
|
|
|
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
245,000
|
|
|
|
|
|
|
|
245,000
|
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
994,000
|
|
|
|
|
|
|
|
994,000
|
|
|
Related party payable
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
Advances from distributor, net
|
|
|
749,000
|
|
|
|
(749,000
|
)(A)(B)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Common stock
|
|
|
196,798
|
|
|
|
|
|
|
|
196,798
|
|
|
Additional paid-in-capital
|
|
|
22,625,000
|
|
|
|
|
|
|
|
22,625,000
|
|
|
Accumulated deficit
|
|
|
(23,967,000
|
)
|
|
|
834,000
|
(B)
|
|
|
(23,133,000
|
)
|
A – To record accounts receivable as
of June 30, 2017 from the sale of nano reactors to a distributor. For financial reporting purposes, this amount was deducted from
the outstanding advances totaling $834,000 as of June 30, 2017, also received from the same distributor.
B – To record gross profit revenues amounting
to $834,000 in accordance with the new revenue standards, of which, $700,000 was also recorded during the three and nine-months
ended March 31, 2017.
The effect of the changes made to our previously
reported consolidated statements of operations for the three and nine-months ended March 31, 2017 for the adoption of ASC
606, were as follows:
|
|
I.
|
Three Months Ended March 31, 2017
|
|
|
|
Balance at March 31, 2017
|
|
|
Adjustments Due to ASC 606
|
|
|
Adjusted
balance at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
682,000
|
|
|
$
|
700,000
|
(C)
|
|
$
|
1,382,000
|
|
|
Gross Profit
|
|
|
642,000
|
|
|
|
700,000
|
(C)
|
|
|
1,342,000
|
|
|
Net income (loss)
|
|
|
(130,000
|
)
|
|
|
700,000
|
(C)
|
|
|
570,000
|
|
|
|
II.
|
Nine Months Ended March 31, 2017
|
|
|
|
Balance at March 31, 2017
|
|
|
Adjustments Due to ASC 606
|
|
|
Adjusted
balance at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
802,000
|
|
|
$
|
700,000
|
(C)
|
|
$
|
1,502,000
|
|
|
Gross Profit
|
|
|
747,000
|
|
|
|
700,000
|
(C)
|
|
|
1,447,000
|
|
|
Net income (loss)
|
|
|
(641,000
|
)
|
|
|
700,000
|
(C)
|
|
|
59,000
|
|
C - To record gross profit revenues amounting
to $700,000 in accordance with the new revenue standards.
Note 4 - Agreement with Distributors
Desmet Ballestra Agreement
On January 22, 2016, the Company signed a three-year
agreement with Desmet effective August 1, 2015 for the sale and marketing of the Company’s Nano reactor system. As part of
the agreement, Desmet will provide, under certain conditions, limited monthly advance payments of $50,000 against future gross
profit share to CTi through August 2018. The agreement may be terminated in case the Company loses ownership of patents and patent
applications being used in the
NANO Neutralization System.
The Company recognizes revenue from sale of
reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet other than the reactor’s
two-year standard warranty. In addition, Desmet pays for such reactors on credit terms and the amount of the sale is recorded as
a receivable upon acceptance by Desmet. The Company also receives a share in gross margin or profit from the sale of Desmet’s
integrated neutralization system to its customer of which the reactors are an integral component, however, such amount is subject
to adjustment based on certain factors including costs over run. The Company recognizes the gross profit at the time of shipment
of the Nano reactor hardware in accordance to ASC 606 as such shipment is deemed to be the only performance obligation and the
Company has no more continuing obligation to Desmet. In addition, the Company has no control with regards to the sale and installation
of Nano Neutralization System, between its distributor and the end customer. The Company has determined that the gross profit to
be earned from Desmet as a variable consideration that requires estimation in determining the transaction price, and as such all
or a portion can be recognized using the most likely amount approach (subject to the variable consideration constraint). Estimates
are available from Desmet which are considered in the determination of the most likely amount. However, given the lack of control
over the sale to the end customer and the lack of history of prior sales, the Company considered these as a variable revenue constraint
that required consideration. Thus, the amount of revenue recognized is being limited to the actual amount of cash received under
the contract which the Company has determined as not refundable and preclude any probable of future revenue reversal. Further,
Company has been able to develop an expectation of the actual collection based on its historical experience.
During the period ended March 31, 2018, the
Company recorded revenues of $504,000 from reactor sales and $460,000 from gross profit share for a total of $964,000 and received
$550,000 of advance payments pursuant to the 2016 agreement. As of March 31, 2018, $55,000 of the recorded revenues was not yet
collected, as such, for financial reporting purposes the Company deducted this amount from the advance payments received which
resulted in a net balance of $35,000 in advances from Desmet.
GEA Westfalia Agreement
In January
2017 the Company entered into a global technology license, R&D and marketing agreement with respect to its patented Nano Reactor™
technology, processes and applications. Under the agreement, GEA has been granted a worldwide exclusive license to integrate our
patented technology into water treatment application, milk and juice pasteurization, and certain food related processes. The license
agreement between the Company and GEA has a three-year term and provides for the payment of $300,000 per year in advanced license
fees or share in gross margin or profit to the Company.
GEA
Westfalia Separator manufactures filtration and equipment such as separators, clarifiers, decanters and membrane filtration systems.
This equipment is used for the purification of suspensions, the separation of fluid mixtures with simultaneous removal of solids,
extraction and concentration or removal of liquids from solids. The technology of the company is based on over one hundred
fifteen years of service providing engineering solutions and comprehensive processing capabilities.
The company was founded in 1893 in Oelde, Germany, and since 1994 has been a part of the
GEA Group AG
and is
a business unit within the GEA Mechanical Equipment segment. In 1950, Westfalia Separator established US and Canadian corporations
to serve as sales and marketing arms to compete in the North American market for centrifuges.
During the period ended March 31, 2018, the Company recorded revenues
of $13,000 from reactor sales and received $327,000 of advance payments pursuant to the 2017 agreement. There were no gross profit
revenues attributable from the reactors sold. As of March 31, 2018, advances from the distributor amounted to $327,000.
Note 5 - Property and Equipment
Property and equipment consisted of the following
as of March 31, 2018 and June 30, 2017:
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
|
Furniture
|
|
|
27,000
|
|
|
|
27,000
|
|
|
Office equipment
|
|
|
2,000
|
|
|
|
2,000
|
|
|
Equipment
|
|
|
68,000
|
|
|
|
68,000
|
|
|
Systems
|
|
|
408,000
|
|
|
|
408,000
|
|
|
|
|
|
507,000
|
|
|
|
507,000
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(400,000
|
)
|
|
|
(366,000
|
)
|
|
Property and Equipment, net
|
|
$
|
107,000
|
|
|
$
|
141,000
|
|
Depreciation expense for the nine months ended
March 31, 2018 and 2017 amounted to $34,000 and $20,000, respectively.
Note 6 - Accrued Payroll and Payroll Taxes
As of June 30, 2017, the Company had accrued
salaries to current and former officers of the Company amounting to $994,000. Included in this accrual was approximately $131,000
due to a former officer of the Company.
In October 2017, the Company paid $30,000 to the
former officer as settlement of the unpaid salary of $131,000. As a result, the Company recorded a gain of $101,000 to extinguish
the remaining accrual.
As of March 31, 2018, the Company had accrued
salaries to current and former officers of the Company amounting to $863,000.
Note 7 - Stockholders’ Deficit
Common Stock
During the period ended March 31, 2018, the Company issued 400,000
shares of common stock with a fair value of $16,000 to consultants for services rendered. The shares were valued at their respective
date of issuance.
During the period ended March 31, 2018, the Company cancelled 200,000
shares of common stock that was previously granted to a member of the Board of Directors.
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 nine months ended March 31, 2018 is as follows:
|
|
|
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining Life
(Years)
|
|
|
Outstanding – June 30, 2017
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
4.27
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding – March 31, 2018
|
|
|
11,685,852
|
|
|
$
|
0.07
|
|
|
|
1.66
|
|
As of March 31, 2018, all options granted were
vested and exercisable. Intrinsic value of the outstanding options as of March 31, 2018 amounted to $55,000.
The following table summarizes additional information
concerning options outstanding and exercisable at March 31, 2018.
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
4.61
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
4.61
|
|
|
$
|
0.33
|
|
|
|
174,022
|
|
|
|
0.42
|
|
|
$
|
0.33
|
|
|
|
174,022
|
|
|
|
0.42
|
|
|
$
|
0.67
|
|
|
|
511,830
|
|
|
|
0.22
|
|
|
$
|
0.67
|
|
|
|
511,830
|
|
|
|
0.22
|
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
Warrants
A summary of the Company’s warrant activity
and related information for the nine months ended on March 31, 2018 is as follows.
|
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining Life
(Years)
|
|
|
Outstanding – June 30, 2017
|
|
|
75,926,509
|
|
|
$
|
0.06
|
|
|
|
4.81
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding – March 31, 2018
|
|
|
75,926,509
|
|
|
$
|
0.06
|
|
|
|
4.06
|
|
As of March 31, 2018, all warrants granted
were vested and exercisable. Intrinsic value of the outstanding warrants as of March 31, 2018 amounted to $58,000.
The following table summarizes additional information
concerning warrants outstanding and exercisable at March 31, 2018.
|
Options Outstanding
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
Exercise
Price
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Life (Years)
|
|
|
$0.03 - $0.08
|
|
|
55,599,851
|
|
|
|
6.46
|
|
|
$0.03 - $0.08
|
|
|
55,599,851
|
|
|
|
6.46
|
|
|
$0.12
|
|
|
20,326,658
|
|
|
|
1.28
|
|
|
$0.12
|
|
|
20,326,658
|
|
|
|
1.28
|
|
|
|
|
|
75,926,509
|
|
|
|
|
|
|
|
|
|
75,926,509
|
|
|
|
|
|
Note 8 - 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 and Technology Development Supervisor,
where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and the Technology
Development Supervisor have been assigned to the Subsidiary. In exchange, the Subsidiary agreed to pay a royalty of
5% of gross revenues to each of the President and Technology Development Supervisor for licensing of the technology and leasing
of the related equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May
13, 2010 from its subsidiary. The Company’s President and Technology Development Supervisor both waived their rights to receive
royalty payments that have accrued, or that may accrue, on any gross revenue generated through March 31, 2018.
On April 30, 2008 and as amended on November
22, 2010, the Company’s 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 March 31, 2018, no patents have been granted in which this person is the legally named inventor.
Litigation
The Company may be
involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax
contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes
that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with
the contingency are expensed as incurred.
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 in this Quarterly Report on Form 10-Q. This
discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its
plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements, as a result of certain factors, including those discussed below and elsewhere
in this Quarterly Report. This discussion should be read in conjunction with the accompanying unaudited consolidated financial
statements and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the year ended June 30, 2017 filed with the Securities and Exchange Commission (the “2017 Annual Report”).
Overview of our Business
Cavitation Technologies, Inc. (“CTi”),
a Nevada corporation, was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly
technology-based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels,
water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our
systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process
and product development firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized
proprietary technology that can be used for processing of industrial fluids. CTi’s patented
Nano Reactor®
is
the critical components of
the CTi Nano Neutralization®
System which is commercially proven to reduce operating costs
and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano
Reactor®
systems and
has filed several national and international patents to employ its proprietary technology in applications including, vegetable
oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the
nine months ended March 31, 2018, we recorded revenue of $977,000 and incurred net loss of $132,000.
In July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers (ASC 606) and all the related amendments (“new revenue standard”)
to all contracts using the full retrospective method resulting in a change to previously reported balance sheet and statement of
stockholders’ deficit. As a result, all amounts in prior periods have been adjusted in the accompanying discussion as if
ASC 606 was adopted as of the earliest period presented. There were changes in previously reported statement of operations for
the three and nine months ended March 31, 2017 of $700,000 in order to account our gross profit share from the sale of reactors
in accordance with the new revenue standards. See further discussion at Note 3 in the accompanying financial statements.
Management’s Plan
We are engaged in manufacturing our Neutralization
System, which is designed to help refine vegetable oils such as soybean, canola, sunflower and rapeseed. Our near-term
goal is to continue to sell our systems through our partners, Desmet Ballestra and GEA. During the nine months ended March 31,
2018, we recorded revenues of $977,000 and incurred a net loss of $132,000. As of March 31, 2018, we had a working capital
deficiency of $544,000 and a total stockholders’ deficit of $427,000. The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate our continuation as a going concern.
As of March 31, 2018, we had cash on hand of
$880,000 and are not generating sufficient funds to cover operations. In addition to the funds on hand, Management believes we
may require additional funds to continue to operate our business. Management’s plan is to generate income from operations by continuing
to market our technology and products globally through our strategic partner, Desmet Ballestra and GEA Group.
Desmet and GEA are providing monthly advances
of $50,000 and $25,000 respectively, however, we anticipate that we may need additional funding, and we may attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that
we will be successful in obtaining such financing will be or obtained sufficient amounts necessary to meet our business needs,
or that we will be able to meet our future contractual obligations. The accompanying condensed consolidated financial statements
do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from our inability to continue as a going concern. As a result of the aforementioned
factors, our independent auditors, in their report on our audited financial statements for the fiscal ended June 30, 2017, expressed
substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
CTi’s critical accounting policies and estimates
are included in its Annual Report on Form 10-K for the year ended June 30, 2017 and did not change for the nine months ended March
31, 2018, except for the adaption of ASC 606, Revenue from Contracts with Customers and all the related amendments to all contracts
(see Note 3) of the accompanying financial statements.
Results of Operations
Results of Operations for the Three Months Ended March 31, 2018
and 2017
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
300,000
|
|
|
$
|
1,382,000
|
|
|
$
|
(1,082,000
|
)
|
|
|
-78
|
%
|
|
Cost of revenue
|
|
|
5,000
|
|
|
|
40,000
|
|
|
|
(35,000
|
)
|
|
|
-88
|
%
|
|
Gross profit
|
|
|
295,000
|
|
|
|
1,342,000
|
|
|
|
(1,047,000
|
)
|
|
|
-78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
356,000
|
|
|
|
765,000
|
|
|
|
(409,000
|
)
|
|
|
-53
|
%
|
|
Research and development expenses
|
|
|
4,000
|
|
|
|
7,000
|
|
|
|
(3,000
|
)
|
|
|
-43
|
%
|
|
Total operating expenses
|
|
|
360,000
|
|
|
|
772,000
|
|
|
|
(412,000
|
)
|
|
|
-53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(65,000
|
)
|
|
|
570,000
|
|
|
|
(635,000
|
)
|
|
|
-111
|
%
|
Revenue
The Company generates revenues from the sale
of the
Nano Reactor®
to customers/distributor as well as share in gross profit from the sale of such reactors by our
distributors to their customers.
Through June 30, 2017, revenue from the sale
of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. We are also entitled to a gross profit share
from our distributor from the sale of the reactors to their customers. Such gross profit share was not fixed at the time of delivery,
and as such, revenue was recognized when the profit share was fixed and determinable, which was generally be upon delivery and
installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts. Sales revenue from the sale of our Nano Reactors continues to be recognized when products are shipped from our manufacturing
facilities. We now recognize the corresponding gross profit at the time of shipment of the Nano reactor hardware in accordance
to ASC 606 as such shipment is deemed to be the only performance obligation and we have no more continuing obligation to our distributor.
In addition, we have no control with regards to the sale and installation of Nano Neutralization System, between our distributor
and the end customer.
We have determined that the gross profit
to be earned from our distributor as a variable consideration that requires estimation in determining the transaction price, and
as such all or a portion can be recognized using the most likely amount approach (subject to the variable consideration constraint).
Estimates are available from our distributor which are considered in the determination of the most likely amount. However, given
the lack of control over the sale to the end customer and the lack of history of prior sales, we considered these as a variable
revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual amount of
cash received under the contract which we have determined as not refundable and preclude any probable of future revenue reversal.
Further, we have been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements of
ASC 606, we adopted the full retrospective method. Under the full retrospective method, we are required to retrospectively apply
the new revenue standard to all period presented as if the new revenue standards had been applied to all prior period. Upon adoption
of this new standard, there was a change to the previously reported results of operations for the three months ended March 31,
2017 of $700,000 in order to account our gross profit share in accordance with the new revenue standards.
During the three months ended March 31, 2018
we recorded $55,000 in revenue from sale of reactors to our distributor, Desmet, pursuant to one purchase order. In addition, we
also recorded revenues of $245,000 to account for our share in gross margin or profit from sale of reactors to Desmet.
During the three months ended March 31, 2017
we recorded $515,000 in revenue from sale of reactors to our distributors, Desmet pursuant to three purchase orders. In addition,
we also recorded revenues of $867,000 to account for our share in gross margin or profit from the sale of reactors to Desmet.
Cost of Revenue
During the three months ended March 31, 2018,
our cost of sales amounted to $5,000, and to $40,000 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 March 31, 2018 amounted to $360,000 compared to $772,000 for the same period in 2017, a decrease of $412,000 or 53%. The
decrease was mainly due to decrease in stock compensation expense from $394,000 during the period ended March 31, 2017 to $16,000
during the period ended March 31, 2018.
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.
Results of Operations for the Nine Months
Ended March 31, 2018 and 2017
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
|
Revenue
|
|
$
|
977,000
|
|
|
$
|
1,502,000
|
|
|
$
|
(525,000
|
)
|
|
|
-35
|
%)
|
|
Cost of revenue
|
|
|
38,000
|
|
|
|
55,000
|
|
|
|
(17,000
|
)
|
|
|
-31
|
%
|
|
Gross profit
|
|
|
939,000
|
|
|
|
1,447,000
|
|
|
|
(508,000
|
)
|
|
|
-35.
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,160,000
|
|
|
|
1,373,000
|
|
|
|
(213,000
|
)
|
|
|
-16
|
%
|
|
Research and development expenses
|
|
|
13,000
|
|
|
|
15,000
|
|
|
|
(2,000
|
)
|
|
|
-134
|
%
|
|
Total operating expenses
|
|
|
1,173,000
|
|
|
|
1,388,000
|
|
|
|
(215,000
|
)
|
|
|
-15
|
%
|
|
Income (loss) from operations
|
|
|
(234,000
|
)
|
|
|
59,000
|
|
|
|
(293,000
|
)
|
|
|
-497
|
%
|
|
Other income
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
100
|
%
|
|
Gain on settlement of debt
|
|
|
101,000
|
|
|
|
-
|
|
|
|
101,000
|
|
|
|
100
|
%
|
|
Net income (loss)
|
|
|
(132,000
|
)
|
|
|
59,000
|
|
|
|
(191,000
|
)
|
|
|
-324
|
%
|
Revenue
We generate revenues from the sale
of the
Nano Reactor®
to customers/distributor as well as share in gross profit from the sale of such reactors by our
distributors to their customers.
Through June 30, 2017, revenue from the
sale of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has
occurred, including transfer of title and risk of loss for product sales, services have been rendered for service revenues;
the price to the buyer is fixed or determinable; and collectability was reasonably assured. We are also entitled to
a gross profit share from our distributor from the sale of the reactors to their customers. Such gross profit share was not
fixed at the time of delivery, and as such, revenue was recognized when the profit share was fixed and determinable, which
was generally be upon delivery and installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts. Sales revenue from the sale of our Nano Reactors continues to be recognized when products are shipped from our
manufacturing facilities. We now recognize the corresponding gross profit at the time of shipment of the Nano reactor hardware
in accordance to ASC 606 as such shipment is deemed to be the only performance obligation and the Company has no more continuing
obligation to our distributor. In addition, we have no control with regards to the sale and installation of Nano Neutralization
System, between our distributor and the end customer.
We have determined that the gross profit to
be earned from our distributor is a variable consideration that requires estimation in determining the transaction price, and as
such all or a portion can be recognized using the most likely amount approach (subject to the variable consideration constraint).
Estimates are available from our distributor which are considered in the determination of the most likely amount. However, given
the lack of control over the sale to the end customer and the lack of history of prior sales, we considered these as a variable
revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual amount of
cash received under the contract which we have determined as not refundable and preclude any probable of future revenue reversal.
Further, we have been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements of
ASC 606, we adopted the full retrospective method. Under the full retrospective method, we are required to retrospectively apply
the new revenue standard to all period presented as if the new revenue standards had been applied to all prior period. Upon adoption
of this new standard, there was a change to the previously reported results of operations for the nine months ended March 31, 2017
of $700,000 in order to account our gross profit share in accordance with the new revenue standards.
During the nine months ended March 31, 2018
we recorded $518,000 in revenue from sale of reactors to our distributors, Desmet and GEA pursuant to seven purchase orders. In
addition, we also recorded revenues of $459,000 to account for our share in gross margin or profit from sale of reactors to Desmet
and GEA.
During the nine months ended March 31, 2017
we recorded $635,000 in revenue from sale of reactors to our distributors, Desmet pursuant to five purchase orders. In addition,
we also recorded revenues of $867,000 to account for our share in gross margin or profit from the sale of reactors to Desmet.
Cost of Revenue
During the nine months ended March 31, 2018,
our cost of sales amounted to $38,000, and $55,000 during the same period in prior year, which was the result of the revenue transactions
described above.
Operating Expenses
Operating expenses for the nine months
ended March 31, 2018 amounted to $1,173,000 compared with $1,388,000 for the same period in 2017, a decrease of $215,000, or 15%.
The decrease was mainly due to decrease in stock compensation expense from $394,000 during the period ended March 31, 2017 to
$16,000 during the period ended March 31, 2018.
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.
Gain on Settlement of Debt
During the nine months ended March 31, 2018,
we settled a lawsuit with our former officer of the Company for $30,000. As a result,
we recorded a gain of $101,000 to extinguish the remaining accrual upon payment of the settled amount of $30,000. There was no
similar transaction in the prior period.
Liquidity and Capital Resources
The accompanying condensed consolidated financial
statements have been prepared in conformity with generally accepted accounting principles which contemplate our continuation as
a going concern. As of March 31, 2018, we had a working capital deficiency of $544,000 and a total stockholders’ deficit
of $427,000. Furthermore, we have been dependent on most of our funding from technology agreements with our distributors.
These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our independent auditors,
in their report on our audited financial statements for the fiscal year ended June 30, 2017 expressed substantial doubt about our
ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments
to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from an inability of us to continue as a going concern.
Management’s plan is to generate income from
operations by licensing our technology globally through our strategic partners, the Desmet Ballestra Group (Desmet) and GEA Westfalia
(GEA). In January 2016, we signed a marketing and research and development agreement with Desmet which include among others, a
monthly advance of $50,000 through August 2018 that will be applied to gross profit share from future sales. In January 2017, we
signed a similar marketing and research and development agreement with GEA which include among others, a monthly advance of $25,000
through January 2020, that will be applied to gross profit share from future sales. We will need additional funding, and we will
attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However,
there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet our needs, or
that we will be able to meet our future contractual obligations. Should management fail to obtain such financing, we may curtail
our operations.
At March 31, 2018, we had cash on hand in the
amount of $880,000. In addition to the funds on hand, we may require additional funds to continue to operate our business. This
includes expenses we will incur in connection with costs to manufacture and ship our products; costs to design and implement an
effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company
by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual
commitments for salaries to our executive officers. In light of our financial commitments over the next several months and its
liquidity constraints, we have implemented cost reduction measures in all areas of operations. We intend to review these measures
on an ongoing basis and make additional decisions as may be required.
Cash Flow
Net cash provided by operating activities during
the nine months ended March 31, 2018 amounted to $331,000, compared to net cash used of $50,000 for the same period in fiscal 2017.
Funding for the operating activities was provided primarily by sales of our systems and advances from distributors, Desmet and
GEA. During the nine months ended March 31, 2018, we paid $316,000 in employees’ compensation, compared to $259,000 in the prior
period