ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis
should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements
based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions.
Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of Our Business
We are a Nevada corporation originally
incorporated under the name Bio Energy, Inc. On January 29, 2007, we incorporated a wholly owned subsidiary, Hydrodynamic Technology,
Inc. as a California corporation.
We have developed, patented, and commercialized
proprietary technology that can be used for processing of various industrial and consumer-oriented fluids. Our patented
Nano
Reactor®
is the critical components of
the CTi Nano Neutralization®
System which has been shown to reduce operating
costs and increase yields in processing oils and fats. CTi holds and applied for numerous patents covering technology and various
processes in US and Internationally, covering vegetable and crude oil refining, waste water treatment, algae oil extraction, and
alcoholic beverage enhancement. During our Fiscal 2018, we have developed additional technologies and products, such as, LPN (low
pressure nano reactor and system). LPN is designed to become a highly efficient mixer and homogenizer. We believe that LPN has
a great commercial utilization opportunity by providing efficient and cost-effective solution in multiple fluid processing industries.
LPN has a number of advantages over current mechanically operated mixers and homogenizers.
During the year ended June 30, 2018, we
recorded revenue of $1,303,000. Our loss from operations for the year ended June 30, 2018 was $351,000
.
Management’s Plan of Operation
At June 30, 2018 we are continuously engaged
in manufacturing our Nano Reactor® and
Nano Neutralization Systems
which are designed to help refine vegetable oils
such as soybean, canola and rapeseed. Additionally, our near-term goal is to develop strategic and marketing tools to apply our
technologies that can be commercially accepted in enhancement of wines and spirits, industrial water treatment and consumer related
products.
We have a working capital deficiency of
$645,000 and a stockholders’ deficit of $545,000 as of June 30, 2018. The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.
Management’s plan is to generate
income from operations by licensing our technology globally through our licensees, Desmet Ballestra Group (Desmet) and GEA Westfalia
Group (GEA). In January 2016, we signed a three-year global
R and D, Marketing and Technology License Agreement
with Desmet
for the sale and licensing of our reactors. The agreement originally expired in August 2018 but was extended up to October 2018.
As part of the agreement, Desmet was also obligated to provide us with monthly advances of $50,000 against future sales. During
the year ended June 30, 2018, advances received and applied to sales from Desmet amounted to $700,000. These funds service operational
expenses on a monthly basis. The Company is currently in negotiations with Desmet for a new licensing agreement.
In January 2017, we signed a three-year
global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications.
This agreement provides us with $25,000 monthly advances against future sales. This agreement may be terminated by either party
on each anniversary date. As of June 30, 2018, we received advances from GEA in the amount of $427,000 under this agreement.
In addition to these advances, we anticipate
that we may need additional funding, and we may attempt to raise additional debt and/or equity financing to fund operations and
to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient
amounts necessary to meet our needs, or that we will be able to meet our future contractual obligations. Should management fail
to obtain such financing, we may curtail its operations. Management estimates that cash on hand together with advances from Desmet
and GEA will allow us to operate beyond fiscal 2019.
The accompanying 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 consolidated financial statements as of
and for the year ended June 30, 2018, expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies and Revenue
Recognition
Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities
and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those we consider
most critical in preparing its consolidated financial statements. The following is a review of the accounting policies and estimates
that include significant judgments made by management using information available at the time the estimates are made. However,
these estimates could change materially if different information or assumptions were used instead.
Note 1 of the accompanying consolidated
financial statements includes a summary of significant accounting policies, estimates, and methods used in the preparation of our
financial statements. Accounting estimates are an integral part of the preparation of financial statements and are based on judgments
by management using its knowledge and experience about the past and current events and assumptions regarding future events, all
of which we consider to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain
and that affect the carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts
of expenses during the reporting period.
Revenue Recognition
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 profit share from
our distributor upon their ultimate sale of the reactors to their customers. Pursuant to the January 2016 agreement with
the Company’s distributor, the profit share is 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 as this is our sole performance obligation under these contracts and we have no continuing obligation to the customer.
Accordingly, we now estimate and recognize the corresponding gross profit at the time of shipment of the Nano reactor hardware,
subject to variable consideration constraints, in accordance to ASC 606.
Specifically, 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 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, we considered these as a variable
revenue constraint that required consideration and as such, 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 has concluded that future revenue reversal
of such amount is not probable.
The adoption of this standard resulted
in a material impact on our previously reported statement of operations and balance
sheet as of and for the year
ended June 30, 2017
.
Pursuant to the transition requirements of ASC 606, the Company adopted the full retrospective method
and retrospectively applied the new revenue standard to all period presented as if the new revenue standards had been applied to
all prior period.
Recoverability of Long-Lived Assets
Management believes that the accounting
estimate related to the recoverability of its long-lived assets is a “critical accounting estimate” because significant
changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income and
non-current assets.
Testing of long-lived assets for impairment
involves a high degree of judgment due to the assumptions that underlie the undiscounted cash flows analysis. We evaluate long-lived
assets for impairment whenever events or changes in circumstances indicate that the net book value may not be recoverable. When
such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset
or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on
the excess of the carrying amount over the fair value based on market value when available or discounted expected cash flows of
those assets and is recorded in the period in which the determination is made. Management believes there is no impairment of its
long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under
development will continue. Either of these could result in future impairment of long-lived assets.
Share-Based Compensation
We periodically issue stock options and
warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for
stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting
Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. We account
for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative guidance of the Financial
Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either
a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity
instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately
vested and the total stock-based compensation charge is recorded in the period of the measurement date.
Determining the fair value of share-based
awards at the measurement date requires judgment, including estimating the expected term that stock options and warrants will be
outstanding prior to exercise, the associated volatility, and the expected dividends. We estimate the fair value of options granted
using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period the options are
expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of our stock for a period approximating the expected life, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life. Judgment is also required
in estimating the number of share-based awards that will be forfeited prior to vesting. We believe that these assumptions are “critical
accounting estimates” because significant changes in the assumptions used to develop the estimates could materially affect
key financial measures including net income (loss).
Recent Accounting Pronouncements
See Note 1 of the financial statements
for discussion of recent accounting pronouncements.
Results of Operations
Below is summary comparing fiscal 2018
and fiscal 2017.
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,303,000
|
|
|
$
|
1,897,000
|
|
|
$
|
(594,000
|
)
|
|
|
(31
|
)%
|
Cost of revenue
|
|
|
122,000
|
|
|
|
97,000
|
|
|
|
25,000
|
|
|
|
26
|
%
|
Gross profit
|
|
|
1,181,000
|
|
|
|
1,800,000
|
|
|
$
|
(619,000
|
)
|
|
|
(34
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,507,000
|
|
|
|
2,005,000
|
|
|
$
|
(498,000
|
)
|
|
|
(25
|
)%
|
Research and development expenses
|
|
|
25,000
|
|
|
|
27,000
|
|
|
|
(2,000
|
)
|
|
|
(7
|
)%
|
Total operating expenses
|
|
|
1,532,000
|
|
|
|
2,032,000
|
|
|
|
(500,000
|
)
|
|
|
(25
|
)%
|
Loss from Operations
|
|
$
|
(351,000
|
)
|
|
$
|
(232,000
|
)
|
|
$
|
(119,000
|
)
|
|
|
(51
|
)%
|
Revenue
During the year ended June 30, 2018 revenue
decreased by 31% to $1,303,000 and was derived from the sale of our
CTi Nano Neutralization Systems
through Desmet Ballestra
and GEA of $603,000 pursuant to eight purchase orders and corresponding share in gross profit of $700,000. During the year ended
June 30, 2017, revenue of $1,897,000 was derived from the sale of our
CTi Nano Neutralization Systems
through Desmet Ballestra
of $895,000 pursuant to nine purchase orders and corresponding share in gross profit of $1,002,000
.
Operating Expenses
Operating expenses for fiscal 2018 amounted
to $1,532,000 versus $2,032,000 in fiscal 2017, a decrease of $500,000 or 25 %. The decrease in operating expenses was attributed
to lower general and administrative expenses and decrease in stock-based compensation of $549,000. Non-cash expense items such
as amortization and depreciation expense of $50,000, primarily amounted to a small proportion of operating expenses, with major
expense categories being salaries and payroll taxes of approximately $643,000, legal and professional fees of approximately $208,000,
various insurance policies amounting to $185,000 and travel, insurance and marketing services fees. Research and development (R&D)
expense decreased by approximately $2,000 or 7% for the year ended June 30, 2018.
Operating expenses for fiscal 2017 amounted to $2,032,000. Non-cash
expense items such as amortization and depreciation expense of $51,000 among others, amounted to a small proportion of operating
expenses, with major expense categories being salaries and payroll taxes of approximately $643,000, legal and professional fees
of approximately $376,000, various insurance policies, travel and marketing services amounting to $115,000.
During the year ended June 30, 2018, accrued
salary of $131,000 due to a former director was settled for a payment of $30,000, resulting in a gain on settlement of $101,000.
There was no such transaction during the year ended June 30, 2017.
Our reported Net Loss in fiscal 2018 was
$250,000 compared to Net Loss in fiscal 2017 of $233,000.
Liquidity and Capital Resources
During the fiscal year ended on June 30,
2018, we recognized revenues from Desmet Ballestra Group (Desmet) and received advances from GEA Group, (GEA) which covered all
our operating expenses, which resulted in our increased cash position by $396,000.
During the fiscal year ended June 30, 2017,
cash used in operating activities was $52,000 and cash used in investing activities was $56,000 resulting from the purchase of
equipment which was financed with cash reserves and proceeds from reactor sales from our partner, Desmet Ballestra, resulted in
net decrease in cash of $108,000.
The accompanying 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 year ended June 30, 2018, we recorded net loss of $250,000. As of June 30, 2018,
we had a working capital deficiency of $645,000, and stockholders’ deficit of $545,000. We have also been dependent
on certain aspects of our funding from a technology agreement with a distributor. These factors, among others, raise certain doubts
about our ability to continue as a going concern.
The accompanying consolidated financial
statements do not include any 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. In addition,
our independent registered public accounting firm, in its report on our June 30, 2018 consolidated financial statements, has raised
substantial doubt about our ability to continue as a going concern. Management’s plan is to generate income from operations
by continuing to license our technology globally through our strategic partner with the Desmet. Pursuant to a R&D, Marketing
and Technology License agreement with Desmet that was signed in January 2016, Desmet has provided us monthly advances of $50,000
which started in January of 2016 and are expected to continue up to the expiration of the agreement originally in August 2018 but
was extended through October 2018, but can be terminated on each August 1 under certain circumstances. These advances will be applied
against future sales to Desmet. During the year ended June 30, 2018 advances received from Desmet and applied to sales amounted
to $700,000.
In January 2017, we signed a three-year
global R&D, Marketing and Technology License Agreement with GEA covering certain processes and patented applications. This
agreement provides the company with $25,000 monthly advances against future sales. This agreement may be terminated by either party
on each anniversary date. As of June 30, 2018, the Company has received $427,000 in advances from GEA under this agreement.
We may also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing
will be available in the future or obtained in sufficient amounts necessary to meet our needs, that we will be able to achieve
profitable operations or that we will be able to meet our future contractual obligations. Should management fail to obtain such
financing, we may curtail its operations.
Sources and Uses of Cash
During the fiscal year ended June 30, 2018,
we have received advances from Desmet and GEA, also we have generated revenue from sales of our
Nano Neutralization® System
s
and corresponding shares in gross profit which resulted in our cash position totaling $945,000, an increase over fiscal 2017 of
$396,000. During the year ended June 30, 2018 we received sale proceeds totaling $1,303,000 from Desmet Ballestra and GEA.
During fiscal 2017, net cash used in operating
activities amounted to $52,000 and we received gross proceeds of $1,897,000 from the sale of the reactors and share in gross profit
from our Desmet Ballestra.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Stockholders and Board of Directors
Cavitation Technologies, Inc.
Los Angeles, CA
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Cavitation Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2018 and 2017, the
related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2018 and
2017, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has suffered recurring losses and at June 30, 2018, has a stockholders’ deficit. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principles
As discussed in Note 2 to the financial
statements, the Company has changed its method of accounting for revenue from contracts with customers in fiscal year 2018 due
to the adoption of the new revenue standard. The Company adopted the new revenue standard using the full retrospective approach.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement, whether due to error fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Weinberg & Company, P.A.
|
|
|
|
Los Angeles, California
|
|
October 15, 2018
|
|
We have served as the Company’s auditor since 2013
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
June 30,
|
|
|
|
June 30,
2018
|
|
|
2017
(as adjusted)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
945,000
|
|
|
$
|
549,000
|
|
Accounts receivable
|
|
|
-
|
|
|
|
85,000
|
|
Inventory, net
|
|
|
34,000
|
|
|
|
143,000
|
|
Total current assets
|
|
|
979,000
|
|
|
|
777,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
90,000
|
|
|
|
141,000
|
|
Other assets
|
|
|
10,000
|
|
|
|
12,000
|
|
Total assets
|
|
$
|
1,079,000
|
|
|
$
|
930,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
307,000
|
|
|
$
|
246,000
|
|
Accrued payroll and payroll taxes
|
|
|
889,000
|
|
|
|
994,000
|
|
Related party payable
|
|
|
1,000
|
|
|
|
1,000
|
|
Advances from distributor
|
|
|
427,000
|
|
|
|
-
|
|
Total current liabilities
|
|
|
1,624,000
|
|
|
|
1,241,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2018 and 2017, respectively
|
|
|
-
|
|
|
|
-
|
|
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 June 30, 2018 and 2017, respectively
|
|
|
196,998
|
|
|
|
196,798
|
|
Additional paid-in capital
|
|
|
22,641,002
|
|
|
|
22,625,202
|
|
Accumulated deficit
|
|
|
(23,383,000
|
)
|
|
|
(23,133,000
|
)
|
Total stockholders' deficit
|
|
|
(545,000
|
)
|
|
|
(311,000
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
1,079,000
|
|
|
$
|
930,000
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the Years Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
(as adjusted)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,303,000
|
|
|
$
|
1,897,000
|
|
Cost of revenue
|
|
|
122,000
|
|
|
|
97,000
|
|
Gross profit
|
|
|
1,181,000
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,507,000
|
|
|
|
2,005,000
|
|
Research and development expenses
|
|
|
25,000
|
|
|
|
27,000
|
|
Total operating expenses
|
|
|
1,532,000
|
|
|
|
2,032,000
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(351,000
|
)
|
|
|
(232,000
|
)
|
|
|
|
|
|
|
|
|
|
Gain on settlement of accrued payroll
|
|
|
101,000
|
|
|
|
-
|
|
Other expense, net
|
|
|
-
|
|
|
|
(1,000
|
)
|
Other income (expense)
|
|
|
101,000
|
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(250,000
|
)
|
|
$
|
(233,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share,
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding,
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
197,148,043
|
|
|
|
195,053,401
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
YEARS ENDED JUNE 30, 2018 AND 2017 (as
adjusted)
|
|
Common
Stock
|
|
|
Additional
Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at June 30, 2016
|
|
|
193,997,906
|
|
|
$
|
193,998
|
|
|
$
|
22,063,002
|
|
|
$
|
(22,900,000
|
)
|
|
$
|
(643,000
|
)
|
Issuance of common stock for services
|
|
|
2,800,000
|
|
|
|
2,800
|
|
|
|
109,200
|
|
|
|
|
|
|
|
112,000
|
|
Fair value of warrants issued for services
|
|
|
|
|
|
|
|
|
|
|
453,000
|
|
|
|
|
|
|
|
453,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233,000
|
)
|
|
|
(233,000
|
)
|
Balance at June 30, 2017
|
|
|
196,797,906
|
|
|
|
196,798
|
|
|
|
22,625,202
|
|
|
|
(23,133,000
|
)
|
|
|
(311,000
|
)
|
Issuance of common stock for services
|
|
|
400,000
|
|
|
|
400
|
|
|
|
15,600
|
|
|
|
|
|
|
|
16,000
|
|
Cancellation of common stock granted to Director
|
|
|
(200,000
|
)
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250,000
|
)
|
|
|
(250,000
|
)
|
Balance at June 30, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
22,641,002
|
|
|
$
|
(23,383,000
|
)
|
|
$
|
(545,000
|
)
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended June 30,
|
|
|
|
2018
|
|
|
2017
(as adjusted)
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(250,000
|
)
|
|
$
|
(233,000
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
51,000
|
|
|
|
52,000
|
|
Fair value of common stock issued for services
|
|
|
16,000
|
|
|
|
112,000
|
|
Fair value of vested warrants
|
|
|
-
|
|
|
|
453,000
|
|
Gain on settlement of accrued payroll
|
|
|
(101,000
|
)
|
|
|
-
|
|
Effect of changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
85,000
|
|
|
|
(85,000
|
)
|
Inventory
|
|
|
109,000
|
|
|
|
11,000
|
|
Other assets
|
|
|
2,000
|
|
|
|
-
|
|
Accounts payable and accrued expenses
|
|
|
61,000
|
|
|
|
74,000
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
(4,000
|
)
|
|
|
-
|
|
Advances from distributor
|
|
|
427,000
|
|
|
|
(436,000
|
)
|
Net cash provided by (used in) operating activities
|
|
|
396,000
|
|
|
|
(52,000
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(56,000
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(56,000
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
396,000
|
|
|
|
(108,000
|
)
|
Cash, beginning of period
|
|
|
549,000
|
|
|
|
657,000
|
|
Cash, end of period
|
|
$
|
945,000
|
|
|
$
|
549,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2018 AND 2017
Note 1 – Organization and Summary of Significant Accounting
Policies
Cavitation Technologies, Inc. (referred
to herein, unless otherwise indicated, as “the Company,” “CTi,” “we,” “us,” and
“our”) is a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented,
and commercialized proprietary technology that may be used in liquid processing applications. CTi’s patented
Nano Reactor®
is the critical component of CTi
Nano Neutralization® System
which has commercially been shown to reduce operating costs
and increase yields in refining vegetable oils. We have four US and one international patented systems, as well as twelve US approved
patents for various processes, and have filed another seven US and international patents to employ our proprietary technology in
applications including vegetable and oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
In addition, we have commercialized our
CTi Nano Neutralization® System
in the refining process of certain vegetable oils which has proven to reduce costs and
increase yields for our customers.
Going Concern
The accompanying 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 year ended June 30, 2018, the Company incurred a net loss of $250,000 and at
June 30, 2018, the Company had a stockholders’ deficit of $545,000. The Company has also been dependent on certain aspects
of its funding from a technology and license agreement with its distributors, GEA Westfalia (GEA) and Desmet Ballestra (Desmet),
whose agreement expired in August 2018. Desmet and CTi have extended their current license agreement until October 1, 2018, while
a new three-year license agreement is under negotiations. These factors, among others, raise substantial doubt about the Company’s
ability to continue as a going concern.
The accompanying consolidated financial
statements do not include any adjustments 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.
Management’s plan is to generate income from operations by continuing to license its technology globally through our strategic
partner with the Desmet Ballestra Group (Desmet). Pursuant to a R&D, Marketing and Technology License agreement with Desmet
that was signed in January 2016, Desmet has provided the Company with monthly advances of $50,000 which started in January of 2016
and continued through expiration of the technology and license agreement in August 2018. These advances were applied against sales
to Desmet. During the year ended June 30, 2018 advances received from Desmet that were applied against sales amounted to $700,000.
In January 2017, the Company signed a three-year
global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications.
This agreement provides the Company with $25,000 monthly advances against future sales. This agreement may be terminated by either
party on each anniversary date. As of June 30, 2018, the Company has received $427,000 in advances from GEA and recorded approximately
$13,000 in revenues under this agreement.
The Company may also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing
will be available in the future or obtained in sufficient amounts necessary to meet the Company’s needs, that the Company
will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should
management fail to obtain such financing, the Company may curtail its operations.
Principles of Consolidation
The consolidated financial statements include
the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Intercompany transactions
and balances have been eliminated in consolidation.
Fair Value Measurement
FASB Accounting Standards Codification
(“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of
a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
In addition to defining fair value, the
standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The
hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable
in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input
that is significant to the fair value measurement in its entirety. These levels are:
Level 1 - inputs are based upon unadjusted
quoted prices for identical instruments traded in active markets.
Level 2 - inputs are based upon significant
observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or
can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - inputs are generally unobservable
and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow
models, and similar techniques.
As of June 30, 2018, and 2017, the carrying
value of certain accounts such as inventory, accounts payable, accrued expenses and accrued payroll approximates their fair value
due to the short-term nature of such instruments.
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 reserves for
inventory obsolescence, valuing our stock options, stock warrants and common stock issued for services and realization of our deferred
tax asset, among other items. Actual results could differ from these estimates.
Revenue Recognition
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 profit share from
our distributor upon their ultimate sale of the reactors to their customers. Pursuant to the January 2016 agreement with
the Company’s distributor, the profit share is 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 as this is our sole performance obligation under these contracts and we have no continuing obligation to the customer.
Accordingly, the Company now estimates and recognizes the corresponding gross profit at the time of shipment of the Nano reactor
hardware, subject to variable consideration constraints, in accordance to ASC 606.
Specifically, the Company has determined
that the gross profit to be earned from its distributor as a variable consideration that requires estimation in determining the
transaction price, and as such all or a portion can be recognized using the most likely amount approach (subject to the variable
consideration constraint). Estimates are available from our distributor which are considered in the determination of the most likely
amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the Company
considered these as a variable revenue constraint that required consideration and as such, 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 has
concluded that future revenue reversal of such amount is not probable.
The adoption of this standard resulted
in a material impact on our previously reported statement of operations and balance
sheet as of and for the year
ended June 30, 2017
.
Pursuant to the transition requirements of ASC 606, the Company adopted the full retrospective method
and retrospectively applied the new revenue standard to all periods presented as if the new revenue standards had been applied
to all prior periods (see Note 2).
Cash
The Company considers highly liquid investments
with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates
market value.
The Company maintains its cash with one
domestic financial institution. From time to time, cash balance in this domestic bank may exceed federally insured limits provided
by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000. As of June 30, 2018, and 2017, Company had
approximately $945,000 and $549,000 respectively, on deposit with one bank. The Company believes that no significant concentration
of credit risk exists with respect to this cash balances because of its assessment of the creditworthiness and financial viability
of this financial institution.
Accounts Receivable
The Company evaluates the collectability
of our trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of
past due trade accounts receivable outstanding. Accounts receivable as of June 30, 2017 of $85,000 were subsequently collected
in fiscal 2018. There were no account receivables outstanding as of June 30, 2018.
Inventory
Inventory, net of an allowance for excess
quantities and obsolescence, is stated at the lower of cost or market. Cost is determined on a specific item basis. Inventory is
composed of finished goods and represents costs incurred to manufacture the Company’s
Nano Reactor®
systems.
Property and Equipment
Property and equipment is presented at
cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of
the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs
and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are
removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements
of operations.
Property and equipment are recorded at
cost and depreciated using the straight-line method over the following estimated useful lives.
Leasehold improvements
|
|
Shorter of life of asset or lease
|
Furniture
|
|
5-7 Years
|
Office equipment
|
|
5 Years
|
Lab equipment
|
|
4 Years
|
Skid systems
|
|
4 Years
|
Management assesses the carrying value
of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the
asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized
to write down the asset to its estimated fair value. For the years ended June 30, 2018 and 2017, the Company did not recognize
any impairment for its property and equipment.
Share-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting
period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative
guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over
the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the
non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the
measurement date.
The fair value of the Company’s common
stock option and warrant grants is estimated using the Black-Scholes option pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life of the options and warrants, and future dividends. Compensation
expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The
assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740-10,
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.
ASC 740-10 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company
classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties
assessed or paid.
The Company measures and records uncertain
tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective
date may be recognized or continue to be recognized.
Advertising Costs
Advertising costs, including marketing
expense, incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $23,000 and $31,000
for the years ended June 30, 2018 and 2017 respectively and was reported as part of General and administrative expenses in the
accompanying Consolidated Statements of Operations.
Research and Development Costs
Research and development expenses relate
primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are
expensed as incurred. Total research and development costs recorded during the years ended June 30, 2018 and 2017 amounted to $25,000
and $27,000, respectively.
Warranty Policy
The Company provides a limited warranty
with every set of reactors sold, typically 2 to 5 years. The Company has not experienced significant claims under its warranty
policy, and management determined no accrual for warranty reserve was necessary at June 30, 2018 and 2017.
Net Loss Per Share
The Company’s computation of loss
per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income available to common stockholders
divided by the weighted average common shares outstanding for the period. Diluted income per share reflects the potential
dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company as if
they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income per
share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase
common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury
stock method only when the average market price of the common stock during the period exceeds the exercise price of the options
and warrants. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
The following table sets forth the computation
of basic and diluted loss per common share.
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(250,000
|
)
|
|
$
|
(233,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic
|
|
|
197,148,043
|
|
|
|
195,053,401
|
|
Dilutive effect of outstanding stock options and warrants
|
|
|
-
|
|
|
|
|
|
Weighted average shares – diluted
|
|
|
197,148,043
|
|
|
|
195,053,401
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
There were no adjustments to net loss required
for purposes of computing diluted earnings per share. At June 30, 2018 and 2017, the Company excluded the outstanding securities
summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of its diluted earnings
per share, as their effect would have been anti-dilutive.
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Options
|
|
|
11,378,754
|
|
|
|
11,685,852
|
|
Warrants
|
|
|
75,926,510
|
|
|
|
75,926,510
|
|
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting
Standards Update 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.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires equity investments that
are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income
and updates certain presentation and disclosure requirements. ASU 2016-01 is effective beginning after December 15, 2017. The Company
will adopt this guidance on July 1, 2018 and is currently evaluating the impact ASU 2016-01 will have on its consolidated financial
statements and associated 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.
Dependence on Desmet Ballestra
The Company’s revenue is entirely
dependent on Desmet Ballestra who is its distribution agent with regard to the
CTi Nano Neutralization® System
for edible oils. During the year ended June 30, 2018 and 2017, almost all of the Company’s revenue was derived from Desmet
(see Note 3).
Reclassification
An amount of $28,000 related to write-off
of inventory reflected in prior years as general and administrative expenses has been reclassified to cost of revenue to conform
to the current year presentation. Such reclassification did not change the reported net loss during those periods.
Note 2 – Adoption of ASC 606,
Revenue from Contracts with Customers
The Company has developed, patented, and
commercialized proprietary technology called
Nano Reactor®
that may be used in liquid processing applications. The Company
generates revenues from the sale of the
Nano Reactor®
to customers/distributor as well as share in gross profit from
the sale of such reactors by our distributors to their customers.
Through June 30, 2017, revenue from the
sale of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. The Company is 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, 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 our Nano Reactors continues to be 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. Accordingly, the Company now estimates and recognizes the corresponding gross profit at the time of shipment of
the Nano reactor hardware, subject to variable consideration constraints, in accordance to ASC 606.
Specifically, the Company has determined
that the gross profit to be earned from its 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, the Company
considered these as a variable revenue constraint that required consideration and as such, 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 has
concluded that future revenue reversal of such amount is not probable.
Pursuant to the transition requirements
of ASC 606, the Company adopted the full retrospective method. Under the full retrospective method, the Company is required to
retrospectively apply the new revenue standard to all period presented as if the new revenue standards had been applied to all
prior period.
The effect of the changes made to our previously
reported consolidated June 30, 2017 balance sheet for the adoption of ASC 606, were as follows:
|
|
Balance as
previously
reported at
|
|
|
Adjustments due
to adoption of
|
|
|
Balance as
adjusted
balance at
|
|
Balance Sheet
|
|
June 30, 2017
|
|
|
ASC 606
|
|
|
June 30, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
-
|
|
|
$
|
85,000
|
(A)
|
|
$
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from distributor, net
|
|
|
749,000
|
|
|
|
(749,000
|
)(A),(B)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(23,967,000
|
)
|
|
|
834,000
|
(B)
|
|
$
|
(23,133,000
|
)
|
|
|
Balance as
previously
reported for the
year ended
|
|
|
Adjustments due
to adoption of
|
|
|
Balance as
adjusted for the
year ended
|
|
Statement of operations
|
|
June 30, 2017
|
|
|
ASC 606
|
|
|
June 30, 2017
|
|
Revenue
|
|
$
|
1,063,000
|
|
|
$
|
834,000
|
(B)
|
|
$
|
1,897,000
|
|
Net loss
|
|
|
(1,067,000
|
)
|
|
|
834,000
|
(B)
|
|
|
(233,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic and diluted
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.00
|
|
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.
Note 3 - Agreement with Distributors
Desmet Ballestra Agreement
On January 22, 2016, the Company signed
a three-year global
Research and Development, Marketing and Technology License Agreement
with the n.v. Desmet Ballestra
Group s.a. (Desmet), a Belgian company that is actively marketing the
NANO Neutralization System
, the key component of which
is the Company’s reactor to soybean and other vegetable oil refiners. The agreement provided Desmet (licensee) a limited,
exclusive license and right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devices
on a global basis but is limited to oils and fats and oleo chemical applications. The Company (licensor) remains owner of the current
patents and patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet provided,
under certain conditions, limited monthly advance payments of $50,000 to be applied against gross profit share earned by the Company
on installation of the nano reactors by Desmet to its customers. The agreement expired in August 2018. Desmet and CTi have extended
current license agreement until October 1, 2018, while a new three-year license agreement is still under the negotiations.
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 profit share
from our distributor upon their ultimate sale of the reactors to their customers. Pursuant to the January 2016 agreement
with the Company’s distributor, the profit share is 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 our Nano Reactors continues to be 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. Accordingly, the Company now estimates and recognizes the corresponding gross profit at the time of shipment of
the Nano reactor hardware, subject to variable consideration constraints, in accordance to ASC 606.
Specifically, 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 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 and as such, 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 has concluded that
future revenue reversal of such amount is not probable.
During the year ended June 30, 2017, the
Company recorded revenues of $895,000 from reactor sales and $1,002,000 from gross profit share for a total of $1,897,000. As of
June 30, 2017, $85,000 of the recorded revenues was outstanding and was collected in fiscal 2018.
During the year ended June 30, 2018, the
Company recorded revenues of $590,000 from reactor sales and $700,000 from gross profit share for a total of $1,290,000.
GEA Westfalia Agreement
In
January 2017 the Company entered into a global technology license, R&D and marketing agreement with GEA Westfalia (GEA) with
respect to our 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 us and GEA has a three-year term and provides for the payment
of $300,000 per year in advanced license fees or share in gross profit to us.
GEA
Westfalia Separator manufactures filtration and equipment such as separators, clarifiers, decanters and membrane filtration systems.
This equipment is used for the purification of suspensions, the separation of fluid mixtures with simultaneous removal of solids,
extraction and concentration or removal of liquids from solids. The technological dominance of the company is based on over one
hundred fifteen years of innovation, first-class engineering solutions and comprehensive processing capabilities. The company was
founded in 1893 in Oelde, Germany, and since 1994 has been a part of the GEA Group AG and is a business unit within the
GEA Mechanical Equipment segment. In 1950, Westfalia Separator established US and Canadian corporations to serve as sales and marketing
arms to compete in the North American market for centrifuges.
As
of June 30, 2018, the Company received $427,000 in advances from GEA and has recorded such amount as deferred revenue as the reactors
have not been delivered. In addition, the Company also recorded revenues of $13,000 from reactor sales. There were no advances
received or revenues recorded in fiscal 2017.
Note 4 - Property and Equipment
Property and equipment consist of the following
as of June 30, 2018 and 2017:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Furniture
|
|
|
27,000
|
|
|
|
27,000
|
|
Office equipment
|
|
|
2,000
|
|
|
|
2,000
|
|
Equipment
|
|
|
290,000
|
|
|
|
290,000
|
|
Systems
|
|
|
187,000
|
|
|
|
187,000
|
|
|
|
|
508,000
|
|
|
|
508,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(418,000
|
)
|
|
|
(367,000
|
)
|
Property and equipment, net
|
|
$
|
90,000
|
|
|
$
|
141,000
|
|
Depreciation expense for the years ended
June 30, 2018 and 2017 amounted to $51,000 and $38,000, respectively and was recorded as part of General and Administrative expenses
in the accompanying Consolidated Statements of Operations.
Note 5 - Accrued Payroll and Payroll Taxes
As of June 30, 2018, and 2017, the Company
had accrued unpaid salaries to officers and former officers amounting to $889,000 and $994,000 respectively. During the year ended
June 30, 2018, accrued salary of $131,000 due to a former director was settled for a payment of $30,000 resulting in a gain on
settlement of $101,000 (see Note 8).
Note 6 - Stockholders’ Deficit
Preferred Stock
On March 17, 2009, the Company filed
an Amended and Restated Articles of Incorporation and created two new series of preferred stock, the first of which is designated
Series A Preferred Stock and the second of which is designated as Series B Preferred Stock. The total number of shares of
Common Stock which this corporation has authority to issue is 1,000,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred
Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors.
Each share of Common Stock and Preferred Stock has a par value of $0.001. As of June 30, 2018, and 2017, there are no shares of
Series A or Series B Preferred Stock issued and outstanding.
Common Stock
Year ended June 30, 2018
During the year ended June 30, 2018 the
Company issued 400,000 shares of common stock with fair value of $16,000 for services rendered. These shares were valued at fair
value at the date of issuance.
During the year ended June 30, 2018 the
Company cancelled 200,000 shares of common stock issued to a member of the Company’s Board of Director in prior period.
Year ended June 30, 2017
During the year ended June 30, 2017 the
Company issued 2,800,000 shares of common stock valued at $112,000 to service providers and a director for services rendered. These
shares were valued at fair value at the date of issuance.
Stock Options
The Company has not adopted a formal stock
option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic
Technology, Inc. In addition, the Company has made periodic non-plan grants. A summary of the stock option activity from June 30,
2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
12,595,992
|
|
|
$
|
0.44
|
|
|
|
4.96
|
|
- Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
(910,140
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2017
|
|
|
11,685,852
|
|
|
$
|
0.37
|
|
|
|
2.41
|
|
- Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
(307,098
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2018
|
|
|
11,378,754
|
|
|
$
|
0.31
|
|
|
|
2.23
|
|
As of June 30, 2018, and 2017, all outstanding
options were fully vested and exercisable. The intrinsic value of the outstanding options as of June 30, 2018 was $55,000. The
following table summarizes additional information concerning options outstanding and exercisable at June 30, 2018.
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
4.36
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
4.36
|
|
$
|
0.33
|
|
|
|
71,656
|
|
|
|
0.09
|
|
|
$
|
0.33
|
|
|
|
71,656
|
|
|
|
0.09
|
|
$
|
0.67
|
|
|
|
307,098
|
|
|
|
0.09
|
|
|
$
|
0.67
|
|
|
|
307,098
|
|
|
|
0.09
|
|
|
|
|
|
|
11,378,754
|
|
|
|
|
|
|
|
|
|
|
|
11,378,754
|
|
|
|
|
|
Warrants
A summary of the Company’s warrant activity and related
information from as of June 30, 2018 and 2017 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
Warrants
|
|
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
5.09
|
|
Granted
|
|
|
11,600,000
|
|
|
|
0.03
|
|
|
|
7.5
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
75,926,510
|
|
|
|
0.06
|
|
|
|
4.81
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
3.81
|
|
As of June 30, 2018, and 2017, all outstanding
warrants were fully vested and exercisable. The intrinsic value of the outstanding warrants as of June 30, 2018 was $58,000. The
following table summarizes additional information concerning warrants outstanding and exercisable at June 30, 2018.
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.03 - 0.08
|
|
|
55,599,851
|
|
|
|
6.75
|
|
|
$
|
0.05
|
|
|
|
55,599,851
|
|
|
$
|
0.05
|
|
$0.12
|
|
|
20,326,659
|
|
|
|
1.03
|
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
$
|
0.12
|
|
|
|
|
75,926,510
|
|
|
|
|
|
|
|
|
|
|
|
75,926,510
|
|
|
|
|
|
Note 7 - Income Taxes
At June 30, 2018 and 2017, the Company
had available Federal net operating loss (NOL) carryforwards to reduce future taxable income. The amounts available were approximately
$9.3 million and $9.1 million for Federal purposes, respectively. The Federal carryforward expires in 2036. The NOL is also subject
to statutory limitations under Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss
carry forwards.
ASC 740 requires the consideration of a
valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required
in determining any valuation allowance recorded against deferred tax assets. In evaluating the ability to recover deferred tax
assets, the Company considered available positive and negative evidence, giving greater weight to its recent cumulative losses
and its ability to carry-back losses against prior taxable income and lesser weight to its projected financial results due to the
challenges of forecasting future periods. The Company also considered, commensurate with its objective verifiability, the forecast
of future taxable income including the reversal of temporary differences.
During the year ended June 30, 2018 and 2017, management has determined that it is more likely than not that
the Company will not be able to realize the tax benefit of the carryforwards due to recurring operating losses. Based on their
evaluation, the Company determined that the net deferred tax assets, do not meet the requirements to realize, and as such, the
Company has provided a full valuation allowance against them.
The Company has no provision for current
income taxes during the year ended June 30, 2018 and 2017 due to net loss incurred. Deferred income taxes result from temporary
differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The components
of deferred tax assets are comprised of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Net Operating loss carryforwards
|
|
$
|
2,607,000
|
|
|
$
|
4,118,000
|
|
Stock compensation expense
|
|
|
658,000
|
|
|
|
957,000
|
|
Amortization of patents
|
|
|
48,000
|
|
|
|
69,000
|
|
Reserve for obsolete inventory
|
|
|
46,000
|
|
|
|
68,000
|
|
Total net deferred tax assets
|
|
|
3,359,000
|
|
|
|
5,212,000
|
|
Less valuation discount
|
|
|
(3,359,000
|
)
|
|
|
(5,212,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the difference between
the expense and income taxes as the statutory US federal income tax are as follows:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Federal statutory rate
|
|
|
(28
|
)%
|
|
|
34
|
%
|
State income taxes
|
|
|
(7
|
)%
|
|
|
7
|
%
|
Net operating loss/carryforward
|
|
|
35
|
%
|
|
|
(41
|
)%
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
On December 22, 2017, the Tax Cuts and
Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue
Code of 1986, as amended (the “Code”), that impact corporate taxation requirements, such as the reduction of the federal
tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions.
The following summarizes the open tax years
for each major jurisdiction:
Jurisdiction
|
|
|
Open Tax Years
|
|
|
|
|
Federal
|
|
|
2014 – 2018
|
California
|
|
|
2014 – 2018
|
The Company’s net operating loss
carry forwards are subject to IRS examination until they are utilized and such tax years are closed.
Note 8 – Commitments and Contingencies
Lease Agreement
The Company leases approximately 5,000
square feet of office and warehouse space under a non-cancellable operating lease agreement through February 1, 2019. Monthly
payments are approximately $5,200 per month.
Total rent expense was $67,000 and $65,000
for the years ended June 30, 2018 and 2017, respectively, and was reported as part of General and administrative expenses in the
accompanying Consolidated Statements of Operations,
Royalty Agreements
On July 1, 2008, the Company’s wholly
owned subsidiary entered into Patent Assignment Agreements with two parties, its President as well as its former Chief Executive
Officer (CEO) and current Technology Senior Manager, where certain devices and methods involved in the hydrodynamic cavitation
processes invented by the President and former CEO/ current Technology Senior Manager have been assigned to the Company. In
exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the President and former CEO/ current Technology
Senior Manager for licensing of the technology and leasing of the related equipment embodying the technology. These agreements
were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company’s former CEO/ current Technology
Senior Manager and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any
gross revenue generated through June 30, 2018 and 2017.
On April 30, 2008 (as amended November
22, 2010), the Company’s wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical
Department (the “Inventor”) providing that the Inventor shall receive an amount equal to 5% of actual gross royalties
received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor
was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent
year. As of June 30, 2018, and 2017, 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.
In August 2014,
a former employee and former Director (Plaintiff) filed an administrative Complaint for approximately $179,000 in unpaid wages,
plus penalties and interest, with the California Labor Commissioner’s Office (CLCO). In January 2016, the CLCO ruled
in favor of the Company and dismissed the case. As a result of this ruling, the Company’s obligation to the Plaintiff only
amounted to approximately $134,000 which was already accrued in prior periods and included as part of Accrued Payroll and payroll
taxes due to officers in the accompanying balance sheet.
In February 2016,
the Plaintiff appealed this ruling to the Los Angeles County Superior Court. In addition to defending itself, the Company
also has filed a cross-complaint against the Plaintiff for breach of contract and breach of fiduciary duty as a Director. In
August 2017, the Plaintiff filed a notice of appeal of the trial court’s ruling granting the Company’s anti-SLAPP motion.
The Court of Appeal has dismissed Plaintiff’s appeal for failing to timely to designate the record on appeal.
In March 2018,
the Company has reached a settlement agreement with the Plaintiff, resulting in removal of all claims by both parties. As a result
of this settlement, the Company has recorded a gain of $101,000 to extinguish accrued salary.
Note 9 – Agreement with Alchemy Beverages, Inc.
In fiscal 2014, Roman Gordon, one of the
Company’s shareholders and a former officer, formed a company, Cameo USA LLC (Cameo). Since its formation, Cameo has had
no revenue, no operations, and has had no assets or liabilities. On June 4, 2018, Mr. Gordon contributed his 100% interest in Cameo
to the Company. As Mr. Gordon had no basis in his investment in Cameo, there was no value assigned to the contribution of Cameo.
On June 29, 2018, the Company agreed to
sell Cameo to Alchemy Beverages Inc. (ABI). In addition, the Company entered into two licensing agreements with ABI. In consideration
for the sale of Cameo and for entering into the licensing agreements, ABI agreed to issue 19.9% of ABI’s outstanding common
shares to the Company (limited to 20 million shares of ABI). ABI is a private company and in the business of producing and selling
alcoholic beverages, equipment, and home appliances. Prior to this agreement, ABI was independent of CTI and had no relation to
the Company nor to the Company’s management. ABI purchased Cameo for the right to use its name in marketing a vodka spirit.
Pursuant to the licensing agreements, ABI
has the exclusive global distribution rights for the Company’s patented and patent pending technology for the processing
of alcoholic beverages. The Company has agreed to assist in the installation and maintenance of the nano reactor systems for ABI
and will receive royalty payments ranging from 1% to 3% on all net revenues, as defined, of ABI for the life of the applicable
patents. In addition, the Company will receive leasing, consulting, and manufacturing fees as defined. In addition, on a future
transaction involving the sale of ABI, the Company will receive approximately 10% of the transaction price (with a minimum of $5
million) and in the event ABI becomes a public entity, the Company will receive approximately 10% of ABI’s shares.
Pursuant to current accounting guidelines
the Company accounted for its investment in the 19.9% share of the outstanding capital of ABI based on a cost method of accounting.
Under the cost method, investments are recorded at cost and adjusted for additional contributions or distributions, and for other-than
temporary impairments, if any. The Company determined that although it owns 19.9% of ABI, it does not have any control over the
operations and financial policies of the ABI, and does not have the ability to exercise significant influence over ABI. As the
Company had no basis in its investment in ABI, there is no value assigned at June 30, 2018.