ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
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June 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
699,000
|
|
|
$
|
945,000
|
|
Account receivable
|
|
|
124,000
|
|
|
|
-
|
|
Inventory
|
|
|
27,000
|
|
|
|
34,000
|
|
Total current assets
|
|
|
850,000
|
|
|
|
979,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
84,000
|
|
|
|
90,000
|
|
Other assets
|
|
|
10,000
|
|
|
|
10,000
|
|
Total assets
|
|
$
|
944,000
|
|
|
$
|
1,079,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
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|
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|
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|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
269,000
|
|
|
$
|
307,000
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
889,000
|
|
|
|
889,000
|
|
Related party payable
|
|
|
1,000
|
|
|
|
1,000
|
|
Advances from distributor
|
|
|
577,000
|
|
|
|
427,000
|
|
Total current liabilities
|
|
|
1,736,000
|
|
|
|
1,624,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
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|
|
|
|
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|
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Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively
|
|
|
196,998
|
|
|
|
196,998
|
|
Additional paid-in capital
|
|
|
23,090,002
|
|
|
|
22,641,002
|
|
Accumulated deficit
|
|
|
(24,079,000
|
)
|
|
|
(23,383,000
|
)
|
Total stockholders' deficit
|
|
|
(792,000
|
)
|
|
|
(545,000
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
944,000
|
|
|
$
|
1,079,000
|
|
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 Six Months Ended
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|
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December 31,
|
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December 31,
|
|
|
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2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
353,000
|
|
|
$
|
338,000
|
|
|
$
|
408,000
|
|
|
$
|
678,000
|
|
Cost of revenue
|
|
|
2,000
|
|
|
|
14,000
|
|
|
|
7,000
|
|
|
|
33,000
|
|
Gross profit
|
|
|
351,000
|
|
|
|
324,000
|
|
|
|
401,000
|
|
|
|
645,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
785,000
|
|
|
|
343,000
|
|
|
|
1,089,000
|
|
|
|
803,000
|
|
Research and development expenses
|
|
|
6,000
|
|
|
|
5,000
|
|
|
|
8,000
|
|
|
|
8,000
|
|
Total operating expenses
|
|
|
791,000
|
|
|
|
348,000
|
|
|
|
1,097,000
|
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|
811,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other Income (expense)
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|
|
|
|
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|
|
|
|
|
|
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Gain on settlement of debt
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(440,000
|
)
|
|
$
|
76,000
|
|
|
$
|
(696,000
|
)
|
|
$
|
(66,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net Loss per share,
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted average shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
196,997,906
|
|
|
|
197,197,906
|
|
|
|
196,997,906
|
|
|
|
197,195,735
|
|
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)
Three Months Ended December 31, 2017
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at September 30, 2017
|
|
|
197,197,906
|
|
|
$
|
197,198
|
|
|
$
|
22,640,802
|
|
|
$
|
(23,275,000
|
)
|
|
$
|
(437,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,000
|
|
|
|
76,000
|
|
Balance at December 31, 2017
|
|
|
197,197,906
|
|
|
$
|
197,198
|
|
|
$
|
22,640,802
|
|
|
$
|
(23,199,000
|
)
|
|
$
|
(361,000
|
)
|
Six Months Ended December 31, 2017
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at June 30, 2017
|
|
|
196,797,906
|
|
|
$
|
196,798
|
|
|
$
|
22,625,202
|
|
|
$
|
(23,133,000
|
)
|
|
$
|
(311000
|
)
|
Common stock issued for services
|
|
|
400,000
|
|
|
|
400
|
|
|
|
15,600
|
|
|
|
|
|
|
|
16,000
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,000
|
)
|
|
|
(66,000
|
)
|
Balance at December 31, 2017
|
|
|
197,197,906
|
|
|
$
|
197,198
|
|
|
$
|
22,640,802
|
|
|
$
|
(23,199,000
|
)
|
|
$
|
(361,000
|
)
|
Three Months Ended December 31, 2018
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at September 30, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
22,641,002
|
|
|
$
|
(23,639,000
|
)
|
|
$
|
(801,000
|
)
|
Fair value of warrants granted for services
|
|
|
-
|
|
|
|
-
|
|
|
|
115,000
|
|
|
|
|
|
|
|
115,000
|
|
Fair value of modified warrants
|
|
|
|
|
|
|
|
|
|
|
334,000
|
|
|
|
|
|
|
|
334,000
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(440,000
|
)
|
|
|
(440,000
|
)
|
Balance at December 31, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
23,090,002
|
|
|
$
|
(24,079,000
|
)
|
|
$
|
(792,000
|
)
|
Six Months Ended December 31, 2018
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at June 30, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
22,641,002
|
|
|
$
|
(23,383,000
|
)
|
|
$
|
(545,000
|
)
|
Fair value of warrants granted for services
|
|
|
-
|
|
|
|
-
|
|
|
|
115,000
|
|
|
|
|
|
|
|
115,000
|
|
Fair value of modified warrants
|
|
|
|
|
|
|
|
|
|
|
334,000
|
|
|
|
|
|
|
|
334,000
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(696,000
|
)
|
|
|
(696,000
|
)
|
Balance at December 31, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
23,090,002
|
|
|
$
|
(24,079,000
|
)
|
|
$
|
(792,000
|
)
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
Six Months Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(696,000
|
)
|
|
$
|
(66,000
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
21,000
|
|
|
|
20,000
|
|
Fair value of warrants issued for services
|
|
|
115,000
|
|
|
|
16,000
|
|
Fair value of modified warrants
|
|
|
334,000
|
|
|
|
-
|
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
(100,000
|
)
|
Effect of changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(124,000
|
)
|
|
|
85,000
|
|
Inventory
|
|
|
7,000
|
|
|
|
24,000
|
|
Accounts payable and accrued expenses
|
|
|
(38,000
|
)
|
|
|
99,000
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
-
|
|
|
|
(6,000
|
)
|
Advances from distributor
|
|
|
150,000
|
|
|
|
240,000
|
|
Net cash provided by (used in) operating activities
|
|
|
(231,000
|
)
|
|
|
312,000
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(15,000
|
)
|
|
|
-
|
|
Cash used in investing activities
|
|
|
(15,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(246,000
|
)
|
|
|
312,000
|
|
Cash, beginning of period
|
|
|
945,000
|
|
|
|
549,000
|
|
Cash, end of period
|
|
$
|
699,000
|
|
|
$
|
861,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
1,600
|
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of and for the six months ended December 31, 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 is commercially proven to reduce operating costs and increase yields
in refining vegetable oils. CTi has two patented systems and has filed multiple national and international patents to employ its
proprietary technology in applications including, vegetable oil refining, wastewater treatment, biodiesel, algae oil extraction,
and alcoholic beverage enhancement.
Basis of Presentation
The accompanying condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") as promulgated
in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and regulations of
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange
Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary
(consisting of normal recurring adjustments) for a fair presentation. Operating results for the six months ended December 31, 2018
are not indicative of the results that may be expected for the fiscal year ending June 30, 2019. 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, 2018 filed on October 15, 2018. The condensed consolidated
balance sheet as of June 30, 2018 has been derived from the audited financial statements included in the Form 10-K for that year.
Management Plan Regarding 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 six months ended December 31, 2018, the Company recorded a net loss of
$696,000, used cash in operating activities of $231,000 had a working capital deficiency of $886,000 and a stockholders' deficit
of $792,000. These factors, among others, raise doubt about the Company's ability to continue as a going concern. In addition,
our independent registered public accounting firm, in their report on our audited financial statements for the fiscal year ended
June 30, 2018, expressed doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial
statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.
As of December 31, we had cash and cash
equivalents on hand of $699,000 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 license our technology globally through our strategic partners, Desmet Ballestra Group (Desmet)
and GEA Westfalia, AG (GEA) and recent agreement with Alchemy Beverages, Inc (ABI). Desmet and the Company have renewed a three
year License Agreement dated October 1, 2018 with essentially the same terms from the previous agreements, in which, Desmet agreed
to provide us monthly advances of $50,000 through October 1, 2022 to be applied against the Company’s gross profit share
from future sales. GEA has also agreed to provide us monthly advances of $25,000 through January 2020, to be applied against the
Company’s gross profit share from future sales. In June 2018, we entered into two licensing agreements with ABI and anticipate
to start receiving certain royalties payments and revenue stream from ABI in fiscal 2019.
We may also attempt to raise additional
debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such
financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be
able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management
fail to obtain such financing, the Company may curtail its operations.
Principles of Consolidation
The consolidated financial statements include
the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions
and balances have been eliminated in consolidation.
Fair Value Measurement
FASB Accounting Standards Codification
("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of
a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy
are as follows:
|
·
|
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or
liabilities that the entity has the ability to access.
|
|
·
|
Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the
full term of the assets or liabilities.
|
|
·
|
Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
|
At December 31, 2018 and June 30, 2018,
the fair values of cash and cash equivalents, inventory and accounts payable and accrued expenses approximate their carrying values
due to their short-term nature.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in allowance for
bad debts, reserve for inventory obsolescence, impairment analysis for fixed assets, accrual of potential liabilities, deferred
tax assets and valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could
differ from these estimates.
Revenue Recognition
Revenues from sale of reactors and the
corresponding share in gross profit is recognized in accordance with 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 is recognized
when products are shipped from our manufacturing facilities as this is our sole performance obligation under these contracts and
we have no continuing obligation to the customer. Accordingly, the Company 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.
Share-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting
period. The Company accounts for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative
guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over
the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the
non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the
measurement date.
The fair value of the Company's common
stock options and warrants grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation
expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The
assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
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 December 31, 2018, the Company had
11,000,000 stock options and 80,263,176 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.
Segments
The Company operates in one segment, its nano reactor technology
business. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision
maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about
allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach
to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide
disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports
revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer
base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution
processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can
be found in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In 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. In July 2018, the FASB issued
ASU 2018-11,
Targeted Improvements
, which allows for a cumulative-effect adjustment in the period the new lease standard
is adopted and will not require restatement of prior periods. The Company is in the process of evaluating the impact of ASU 2016-02
and ASU 2018-11 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.
Note 2 - Agreement with Distributors
Desmet Ballestra Agreement
On January 22, 2016, the Company signed
a three-year agreement with Desmet for the sale and marketing of the Company’s Nano reactor system. As part of the agreement,
Desmet provided, under certain conditions, limited monthly advance payments of $50,000 against future gross profit share to the
Company through August 2018. The agreement expired on October 1, 2018.
On October 1, 2018, Desmet and the Company
executed a new three year License Agreement with essentially the same terms with the January 2016 agreement. As part of the agreement,
Desmet agreed to provide us monthly advances of $50,000 through October 1, 2022 to be applied against gross profit share from future
sales.
The Company recognizes revenue from sale
of reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet other than the reactor’s
two-year standard warranty. In 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 Desmet 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 six months ended December 31,
2018 and 2017, the Company recognized revenue of $408,000 and $353,000, respectively, related to the shipment and acceptance of
reactors to Desmet and the corresponding share in gross profit.
GEA Westfalia Agreement
In
January 2017 we entered into a global technology license, R&D and marketing agreement with 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 margin or profit to us.
Revenues
from sale of reactors to GEA and share in gross profit is being recognized in accordance with current accounting guidelines as
previously discussed in the Desmet Ballestra Agreement.
As
of June 30, 2018, outstanding advances from GEA to be applied to share in gross profit in future period amounted to $427,000. During
the period ended December 31, 2018, we received additional advances totaling $150,000 from GEA. As of December 31, 2018, outstanding
advance from GEA amounted to $577,000.
There were no reactor sales or gross profit
or margin revenue recognized during the period ended December 31, 2018, or 2017.
Alchemy Beverages, Inc. Agreement
In June 2018, the Company entered into
licensing agreements with Alchemy Beverages Inc. (ABI). 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. There was no revenue recognized during the period ended December
31, 2018 pursuant to these agreements.
At December 31, 2018, the Company owns
19.9% of ABI. The investment in ABI has no value assigned to it, which approximates its fair value.
Note 3 - Stockholders' Deficit
Stock Options
The Company has not adopted a formal stock
option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic
Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity during the
six months ended December 31, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
11,378,754
|
|
|
$
|
0.31
|
|
|
|
2.23
|
|
- Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Forfeited
|
|
|
(378,754
|
)
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2018, vested and exercisable
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
3.86
|
|
There was no intrinsic value of the outstanding
options as of December 31, 2018 as the exercise price of these options were greater than the market price. The following table
summarizes additional information concerning options outstanding and exercisable at December 31, 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
|
|
|
|
3.86
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
3.86
|
|
Warrants
A summary of the Company's warrant activity
and related information for the six months ended on December 31, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
Warrants
|
|
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
3.81
|
|
Granted
|
|
|
4,336,667
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018, vested and exercisable
|
|
|
80,263,176
|
|
|
$
|
0.07
|
|
|
|
4.95
|
|
During the period ended December 31, 2018,
the Company granted consultants warrants to purchase 4,336,667 shares of common stock for services rendered. The warrants are fully
vested, exercisable at $0.03 per share, and will expire in five years. Total fair value of these warrants amounted to $115,000
based upon a Black-Scholes Option Pricing model.
During the period ended December 31, 2018,
the Company also amended certain warrants granted in prior years to purchase approximately 19 million common shares in order to
extend the term or life to five years. As a result of this modification, the Company recorded stock compensation expense of $334,000
to account the incremental change in fair value of these warrants before and after the modification based upon a Black-Scholes
Option Pricing model.
The fair value of the share option awards
was estimated using the Black-Scholes method based on the following weighted-average assumptions:
|
|
December 31, 2018
|
|
Risk-free interest rate
|
|
|
2.60
|
%
|
Expected term (years)
|
|
|
4.82
|
|
Expected volatility
|
|
|
138
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the award; the expected
term represents the weighted-average period of time the awards granted are expected to be outstanding giving consideration to vesting
schedules, contractual terms, and historical participant exercise behavior; the expected volatility is based upon historical volatility
of the Company’s Common Stock; and the expected dividend yield is based on the fact that the Company has not paid dividends
in the past and does not expect to pay dividends in the future.
There was no intrinsic value of the outstanding
warrants as of December 31, 2018 as the exercise price of these warrants were greater than the market price. The following table
summarizes additional information concerning warrants outstanding and exercisable at December 31, 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
|
|
|
|
59,936,518
|
|
|
|
6.00
|
|
|
$
|
0.04
|
|
|
|
59,936,518
|
|
|
$
|
0.04
|
|
$
|
0.12
|
|
|
|
20,326,658
|
|
|
|
4.00
|
|
|
$
|
0.12
|
|
|
|
20,326,658
|
|
|
$
|
0.12
|
|
|
|
|
|
|
80,263,176
|
|
|
|
|
|
|
|
|
|
|
|
80,263,176
|
|
|
|
|
|
Note 4 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, the Company entered into
Patent Assignment Agreements with two parties, our President and Technology Development Supervisor, where certain devices and methods
involved in the hydrodynamic cavitation processes invented by the President and the Technology Development Supervisor have been
assigned to the Subsidiary. In exchange, the Subsidiary agreed to pay a royalty of 5% of gross revenues to each of the
President and Technology Development Supervisor for licensing of the technology and leasing of the related equipment embodying
the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from its subsidiary. The
Company's President and Technology Development Supervisor both waived their rights to receive royalty payments that have accrued,
or that may accrue, on any gross revenue generated through December 31, 2018.
On April 30, 2008 and as amended on November
22, 2010, our wholly owned subsidiary entered into an employment agreement with our former Director of Chemical and Analytical
Department (the "Inventor") to receive an amount equal to 5% of actual gross royalties received from the royalty stream
in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor,
and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of December 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. There are no legal proceedings involving the company or its employees at this time.
ITEM 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction
with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing
of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. ("CTi"), a Nevada corporation,
was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly technology based systems
that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae
oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our systems are designed
to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development
firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized proprietary
technology that can be used for processing of industrial fluids. CTi's patented
Nano Reactor®
is the critical components
of
the CTi Nano Neutralization®
System which is commercially proven to reduce operating costs and increase yields in
processing oils and fats. CTi has two issued patents relating to our Nano
Reactor®
systems and has filed several national
and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production,
waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the six months ended December 31, 2018, we recorded revenue
of $408,000 and a net loss of $696,000.
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 six months ended December 31,
2018, we recorded revenues of $408,000 and incurred a net loss of $696,000. As of December 31, 2018, the Company had a working
capital deficiency of $886,000 and a stockholders' deficit of $792,000. The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern.
As of December 31, 2018, we had cash and
cash equivalents on hand of $699,000 and are not generating sufficient revenues to fund operations. In addition to the funds on
hand, Management believes we may require additional funds to continue to operate our business. Management's plan is to generate
income from operations by continuing to market our technology and products globally through our strategic partner, Desmet Ballestra
and GEA Group. Further, we believe our business development with Alchemy Beverages, Inc. may start generating revenues in our Fiscal
2019.
During the past several years we have developed
a number of new applications utilizing the core principal of our technology. Our low pressure non-reactors (LPN) can be utilized
in multiple industries that process large volumes of fluids and emulsions, we expect to start commercial sales in our fiscal 2019.
Further, we have miniaturized our non-reactors to be utilized in various consumer oriented products, such as, processing and enhancing
spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil.
We have completed initial system trials
treating fracked and produced water, achieving superior results compared to currently available technologies. We anticipate to
generate first system sale in our fiscal 2019.
Desmet had provided monthly advances of
$50,000 while GEA is providing monthly advances of $25,000, 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.
Critical Accounting Policies
Revenue Recognition
Revenues from sale of reactors and the
corresponding share in gross profit is recognized in accordance with 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 is recognized
when products are shipped from our manufacturing facilities as this is our sole performance obligation under these contracts and
we have no continuing obligation to the customer. Accordingly, the Company 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.
Share-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting
period. The Company accounts for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative
guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over
the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the
non-employee, option grants are immediately vested, and the total stock-based compensation charge is recorded in the period of
the measurement date.
The fair value of the Company's common
stock options and warrants grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation
expense is recorded based upon the value derived from the Black-Scholes option pricing model and based on actual experience. The
assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Recently Issued Accounting Standards
See Note 1 of the Condensed Consolidated
Financial Statements for a discussion of recently issued accounting standards.
Results of Operations
Results of Operations for the Three Months Ended December
31, 2018 Compared to the Three Months Ended December 31, 2017
The following is a comparison of our results of operations for
the three months ended December 31, 2018 and 2017.
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
353,000
|
|
|
$
|
338,000
|
|
|
$
|
15,000
|
|
|
|
4
|
%
|
Cost of revenue
|
|
|
2,000
|
|
|
|
14,000
|
|
|
|
(12,000
|
)
|
|
|
-86
|
%
|
Gross profit
|
|
|
351,000
|
|
|
|
324,000
|
|
|
|
27,000
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
785,000
|
|
|
|
343,000
|
|
|
|
442,000
|
|
|
|
129
|
%
|
Research and development expenses
|
|
|
6,000
|
|
|
|
5,000
|
|
|
|
1,000
|
|
|
|
20
|
%
|
Total operating expenses
|
|
|
791,000
|
|
|
|
348,000
|
|
|
|
443,000
|
|
|
|
127
|
%
|
Loss from operations
|
|
|
(440,000
|
)
|
|
|
(24,000
|
)
|
|
|
(416,000
|
)
|
|
|
1733
|
%
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
100,000
|
|
|
|
(100,000
|
)
|
|
|
-100
|
%
|
Net loss
|
|
|
(440,000
|
)
|
|
|
76,000
|
|
|
|
(516,000
|
)
|
|
|
-679
|
%
|
Revenue
The Company generates revenues from the
sale of the
Nano Reactor®
to customers/distributor as well as share in gross profit from the sale of such reactors by
our distributors to their customers.
During the three months ended December
31, 2018, the Company recognized revenues of $30,000 from sale of reactors to Desmet pursuant to one purchase order and our share
in gross profit of $323,000 from previously sold reactors to Desmet.
During the three months ended December
31, 2017 we recorded $223,000 in revenue from sale of reactors to our distributors, Desmet and GEA pursuant to four purchase orders.
In addition, we also recorded revenues of $115,000 to account for our share in gross margin or profit.
Cost of Revenue
During the three months ended December
31, 2018, our cost of sales amounted to $2,000 and to $14,000 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 December 31, 2018 amounted to $791,000 compared with $348,000 for the same period in 2017, an increase of $416,000 or 127%.
The increase was mainly due to the fair value of warrants granted for services and costs of warrants modified during the period
ended December 31, 2018 with a total costs of $449,000.
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.
Other Income
Other income consists of gain on settlement
of debt of $100,000 during the period ended December 31, 2017 resulting in settlement of a litigation with a former officer and
director of the Company. There was no similar transaction during the period ended December 31, 2018.
Results of Operations for the Six Months Ended December 31,
2018 Compared to the Six Months Ended December 31, 2017
The following is a comparison of our results of operations for
the six months ended December 31, 2018 and 2017.
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
408,000
|
|
|
$
|
678,000
|
|
|
$
|
(270,000
|
)
|
|
|
-40
|
%
|
Cost of revenue
|
|
|
7,000
|
|
|
|
33,000
|
|
|
|
(26,000
|
)
|
|
|
-79
|
%
|
Gross profit
|
|
|
401,000
|
|
|
|
645,000
|
|
|
|
(244,000
|
)
|
|
|
-38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,089,000
|
|
|
|
803,000
|
|
|
|
286,000
|
|
|
|
36
|
%
|
Research and development expenses
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
1,097,000
|
|
|
|
811,000
|
|
|
|
286,000
|
|
|
|
36
|
%
|
Loss from operations
|
|
|
(696,000
|
)
|
|
|
(166,000
|
)
|
|
|
(530,000
|
)
|
|
|
319
|
%
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
100,000
|
|
|
|
(100,000
|
)
|
|
|
-100
|
%
|
Net loss
|
|
$
|
(696,000
|
)
|
|
$
|
(66,000
|
)
|
|
|
(630,000
|
)
|
|
|
-955
|
%
|
Revenue
The Company generates revenues from the
sale of the
Nano Reactor®
to customers/distributor as well as share in gross profit from the sale of such reactors by
our distributors to their customers.
During the six months ended December 31,
2018, the Company recognized revenues of $85,000 from sale of reactors to Desmet pursuant to two purchase orders and our share
in gross profit of $323,000 from previously sold reactors to Desmet.
During the six months ended December 31,
2017 we recorded $463,000 in revenue from sale of reactors to our distributors, Desmet and GEA pursuant to six purchase orders.
In addition, we also recorded revenues of $215,000 to account for our share in gross margin or profit.
Cost of Revenue
During the six months ended December 31,
2018, our cost of sales amounted to $7,000 and to $33,000 during the same period in prior year, which was the result of the revenue
transactions described above.
Operating Expenses
Operating expenses for the six months ended
December 31, 2018 amounted to $1,097,000 compared with $811,000 for the same period in 2017, an increase of $286,000 or 127%. The
increase was mainly due to the fair value of warrants granted for services and costs of warrants modified during the period ended
December 31, 2018 with a total costs of $449,000, off-set by decrease in legal $172,000 due to the settlement of a litigation in
fiscal 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.
Other Income
Other income consists of gain on settlement
of debt of $100,000 during the period ended December 31, 2017 resulting in settlement of a litigation with a former officer and
director of the Company. There was no similar transaction during the period ended December 31, 2018.
Liquidity and Capital Resource
During the three months ended December
31, 2018 the Company incurred a net loss of $440,000 and used cash in operations of $231,000 and on December 31, 2018, had a working
capital deficiency of $886,000 and a stockholders' deficit of $792,000. These factors, among others, raise substantial doubt about
the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.
In addition, the Company’s independent registered public accounting firm, in its report on the Company’s June 30, 2018
financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern.
As of December 31, 2018, we had cash
and cash equivalents on hand of $699,000 and are not generating sufficient revenues to fund operations. In addition to the
funds on hand, management believes we may require additional funds to continue to operate our business. Management's plan is
to generate income from operations by continuing to license our technology globally through our strategic partners, Desmet
Ballestra Group (Desmet), GEA Westfalia, AG (GEA), and recent agreements with Alchemy Beverages, Inc. (ABI). Desmet has
agreed to provide us monthly advances of $50,000 through October 1, 2022 to be applied against gross profit share from future
sales. 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. In June 2018, we entered into two licensing agreements with ABI and anticipate
to start receiving certain royalties payments and revenue stream from ABI in fiscal 2019.
We may also attempt to raise additional
debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such
financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be
able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management
fail to obtain such financing, the Company may curtail its operations.
Cash Flow
Net cash used in operating activities during
the six months ended December 31, 2018 amounted to $231,000 compared to net cash provided in operating activities of $312,000 for
the same period in fiscal 2017. In addition, we also used cash of $15,000 in investing activities during the six months ended December
31, 2018 for the purchase of fixed assets.
Funding for the operating activities was
provided primarily by sales of our systems to Desmet and advances from distributors.