ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
555,000
|
|
|
$
|
945,000
|
|
Account receivable
|
|
|
207,000
|
|
|
|
–
|
|
Inventory
|
|
|
64,000
|
|
|
|
34,000
|
|
Total current assets
|
|
|
826,000
|
|
|
|
979,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
74,000
|
|
|
|
90,000
|
|
Other assets
|
|
|
10,000
|
|
|
|
10,000
|
|
Total assets
|
|
$
|
910,000
|
|
|
$
|
1,079,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
235,000
|
|
|
$
|
307,000
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
863,000
|
|
|
|
889,000
|
|
Related party payable
|
|
|
1,000
|
|
|
|
1,000
|
|
Advances from distributor
|
|
|
627,000
|
|
|
|
427,000
|
|
Total current liabilities
|
|
|
1,726,000
|
|
|
|
1,624,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2019 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 March 31, 2019 and June 30, 2018, respectively
|
|
|
196,998
|
|
|
|
196,998
|
|
Additional paid-in capital
|
|
|
23,089,002
|
|
|
|
22,641,002
|
|
Accumulated deficit
|
|
|
(24,102,000
|
)
|
|
|
(23,383,000
|
)
|
Total stockholders' deficit
|
|
|
(816,000
|
)
|
|
|
(545,000
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
910,000
|
|
|
$
|
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)
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
252,000
|
|
|
$
|
300,000
|
|
|
$
|
692,000
|
|
|
$
|
977,000
|
|
Cost of revenue
|
|
|
14,000
|
|
|
|
5,000
|
|
|
|
22,000
|
|
|
|
38,000
|
|
Gross profit
|
|
|
238,000
|
|
|
|
295,000
|
|
|
|
670,000
|
|
|
|
939,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
250,000
|
|
|
|
356,000
|
|
|
|
1,368,000
|
|
|
|
1,160,000
|
|
Research and development expenses
|
|
|
11,000
|
|
|
|
4,000
|
|
|
|
21,000
|
|
|
|
13,000
|
|
Total operating expenses
|
|
|
261,000
|
|
|
|
360,000
|
|
|
|
1,389,000
|
|
|
|
1,173,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(23,000
|
)
|
|
|
(65,000
|
)
|
|
|
(719,000
|
)
|
|
|
(234,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlement of debt
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
101,000
|
|
Other Income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(23,000
|
)
|
|
$
|
(65,000
|
)
|
|
$
|
(719,000
|
)
|
|
$
|
(132,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per share,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
196,997,906
|
|
|
|
196,997,906
|
|
|
|
196,997,906
|
|
|
|
196,996,446
|
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Unaudited)
Three Months Ended March 31, 2019
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
23,089,002
|
|
|
$
|
(24,079,000
|
)
|
|
$
|
(793,000
|
)
|
Net Loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(23,000
|
)
|
|
|
(23,000
|
)
|
Balance at March 31, 2019
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
23,089,002
|
|
|
$
|
(24,102,000
|
)
|
|
$
|
(816,000
|
)
|
Nine Months Ended March 31, 2019
|
|
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 amended warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
333,000
|
|
|
|
–
|
|
|
|
333,000
|
|
Net Loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(719,000
|
)
|
|
|
(719,000
|
)
|
Balance at March 31, 2019
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
23,089,002
|
|
|
$
|
(24,102,000
|
)
|
|
$
|
(816,000
|
)
|
Three Months Ended March 31, 2018
|
|
Common Stock
|
|
|
Additional Paid-
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
|
197,197,906
|
|
|
$
|
197,198
|
|
|
$
|
22,640,802
|
|
|
$
|
(23,199,000
|
)
|
|
$
|
(361,000
|
)
|
Cancellation of common stock issued to Director
|
|
|
(200,000
|
)
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
–
|
|
|
|
–
|
|
Net Loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(65,000
|
)
|
|
|
(65,000
|
)
|
Balance at March 31, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
22,641,002
|
|
|
$
|
(23,265,000
|
)
|
|
$
|
(427,000
|
)
|
Nine Months Ended March 31, 2018
|
|
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
|
)
|
|
$
|
(311,000
|
)
|
Common stock issued for services
|
|
|
400,000
|
|
|
|
400
|
|
|
|
15,600
|
|
|
|
–
|
|
|
|
16,000
|
|
Cancellation of common stock issued to Director
|
|
|
(200,000
|
)
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
–
|
|
|
|
–
|
|
Net Loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(132,000
|
)
|
|
|
(132,000
|
)
|
Balance at March 31, 2018
|
|
|
196,997,906
|
|
|
$
|
196,998
|
|
|
$
|
22,641,002
|
|
|
$
|
(23,265,000
|
)
|
|
$
|
(427,000
|
)
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
Nine Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(719,000
|
)
|
|
$
|
(132,000
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
31,000
|
|
|
|
36, 000
|
|
Fair value of stock compensation expense
|
|
|
448,000
|
|
|
|
16,000
|
|
Gain on settlement of debt
|
|
|
–
|
|
|
|
(101,000
|
)
|
Effect of changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(207,000
|
)
|
|
|
85,000
|
|
Inventory
|
|
|
(30,000
|
)
|
|
|
26,000
|
|
Accounts payable and accrued expenses
|
|
|
(72,000
|
)
|
|
|
69,000
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
(26,000
|
)
|
|
|
(30,000
|
)
|
Advances from distributor
|
|
|
200,000
|
|
|
|
362,000
|
|
Net cash provided by (used in) operating activities
|
|
|
(375,000
|
)
|
|
|
331,000
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(15,000
|
)
|
|
|
–
|
|
Net Cash used in investing activities
|
|
|
(15,000
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(390,000
|
)
|
|
|
331,000
|
|
Cash and cash equivalents, beginning of period
|
|
|
945,000
|
|
|
|
549,000
|
|
Cash and cash equivalents, end of period
|
|
$
|
555,000
|
|
|
$
|
880,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
–
|
|
|
$
|
–
|
|
Cash paid for income taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
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 nine months ended March 31, 2019 and 2018
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, produced and frack water treatment, biodiesel production,
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 nine months ended March 31, 2019
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.
Going Concern
The accompanying condensed consolidated
financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation
of the Company as a going concern. During the nine months ended March 31, 2019, the Company recorded a net loss of $719,000, used
cash in operating activities of $375,000, and at March 31, 2019 had a working capital deficiency of $900,000 and a stockholders'
deficit of $816,000. 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, our independent registered public accounting
firm, in their report on our audited financial statements for the fiscal year ended June 30, 2018, expressed substantial doubt
about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification
of liabilities that may result from an inability of the Company to continue as a going concern.
As of March 31, 2019 we had cash and cash equivalents on hand
of $555,000 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), agreement with Alchemy Beverages, Inc (ABI), and recent agreement with Enviro Watertek, LLC (EWT). 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 been providing us monthly advances of $25,000 with current agreement running through
January 2020. The $25,000 monthly advances from GEA is to be applied against the Company’s gross profit share from future
sales. In June 2018, we also entered into two licensing agreements with ABI and anticipate to start receiving certain royalties’
payments and revenue stream from in our fiscal 2019. In April 2019, the Company entered into a technology license and lease agreement
with a new customer, Enviro Watertek, LLC for the sale and licensing of the Company’s nano reactor system.
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 March 31, 2019 and June 30, 2018, the
fair values of cash and cash equivalents, accounts receivable, inventory and accounts payable and accrued expenses approximate
their carrying values due to their short-term nature.
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 March 31, 2019, 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 nine months ended March 31, 2019
and 2018, the Company recognized revenue of $692,000 and $977,000 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 March 31, 2019, we received additional advances totaling $200,000 from GEA. As of March 31, 2019, outstanding
advance from GEA amounted to $627,000.
There were no reactor sales or gross profit
or margin revenue recognized during the period ended March 31, 2019.
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 March
31, 2019 pursuant to these agreements.
As of March 31, 2019, 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
nine months ended March 31, 2019 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 March 31, 2019, vested and exercisable
|
|
|
11,000,000
|
|
|
$
|
0.03
|
|
|
|
3.86
|
|
There was no intrinsic value of the outstanding
options as of March 31, 2019 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 March 31, 2019.
|
|
|
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 nine months ended on March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
Warrants
|
|
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
3.81
|
|
Granted
|
|
|
4,336,667
|
|
|
|
0.06
|
|
|
|
4.74
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019, vested and exercisable
|
|
|
80,263,176
|
|
|
$
|
0.07
|
|
|
|
4.95
|
|
During the period ended March 31, 2019,
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 March 31, 2019,
the Company amended certain warrants granted in prior years to purchase approximately 19 million common shares in order to extend
the term or life to five years. As a result of this modification, the Company recorded stock compensation expense of $333,000 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:
|
|
March 31, 2019
|
|
Risk-free interest rate
|
|
|
2.60
|
%
|
Contractual 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 contractual
term represents the weighted-average period of time the awards granted are expected to be outstanding giving consideration to vesting
schedules, contractual terms, and historical participant exercise behavior; the expected volatility is based upon historical volatility
of the Company’s Common Stock; and the expected dividend yield is based on the fact that the Company has not paid dividends
in the past and does not expect to pay dividends in the future.
There was no intrinsic value of the outstanding
warrants as of March 31, 2019 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 March 31, 2019.
|
|
|
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 March 31, 2019.
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 March 31, 2019
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 nine months ended March 31, 2019 we recorded revenue
of $692,000 and a net loss of $719,000.
Management's Plan
We are engaged in manufacturing our Nano-Reactors,
which are 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 nine months ended March 31, 2019 we recorded
revenues of $692,000 and incurred a net loss of $719,000. As of March 31, 2019 the Company had a working capital deficiency
of $900,000 and a stockholders' deficit of $816,000. 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 March 31, 2019 we had cash and cash
equivalents on hand of $555,000 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, such as Desmet Ballestra
and GEA Group. Further, we believe our business development with Alchemy Beverages, Inc. may start generating revenues in our Fiscal
2019. In addition, in April of 2019 we have signed a new agreement with Enviro Watertek, LLC. We anticipate to start recognizing
system sales in our Fiscal Fourth Quarter 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.
Desmet is providing monthly advances of
$50,000 while GEA is providing monthly advances of $25,000 which will be applied to future sales, 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 March 31,
2019 Compared to the Three Months Ended March 31, 2018
The following is a comparison of our results of operations for
the three months ended March 31, 2019 and 2018.
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
252,000
|
|
|
$
|
300,000
|
|
|
$
|
(48,000
|
)
|
|
|
(16%)
|
|
Cost of revenue
|
|
|
14,000
|
|
|
|
5,000
|
|
|
|
6,000
|
|
|
|
180%
|
|
Gross profit
|
|
|
238,000
|
|
|
|
295,000
|
|
|
|
(57,000
|
)
|
|
|
(19.32%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
250,000
|
|
|
|
356,000
|
|
|
|
(106,000
|
)
|
|
|
(29.78%)
|
|
Research and development expenses
|
|
|
11,000
|
|
|
|
4,000
|
|
|
|
7,0000
|
|
|
|
175%
|
|
Total operating expenses
|
|
|
261,000
|
|
|
|
360,000
|
|
|
|
(99,000
|
)
|
|
|
(27.5%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(23,000
|
)
|
|
|
(65,000
|
)
|
|
|
(42,000
|
)
|
|
|
64.62%
|
|
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 March 31, 2019, we recorded $252,000
in revenues pursuant to 3 purchase orders received from our distributor, Desmet. During the three months ended March 31, 2018,
we recorded $300,000 in revenues pursuant to 6 purchase orders received from Desmet.
Cost of Revenue
During the three months ended March 31,
2019 our cost of sales amounted to $14,000 and to $5,000 during the same period in prior year, which was the result of the revenue
transactions described above.
Operating Expenses
Operating expenses for the three months
ended March 31, 2019 amounted to $261,000 compared with $360,000 for the same period in 2018, a decrease of $99,000 or 27.5%. The
decrease was mainly due to the decrease in legal and professional services.
Research and development (R&D) expenses
remained relatively low as we continued to rely on Desmet and GEA for support in R&D and development of new applications for
our technology. It is our intention to pursue R&D as our cash position permits.
Results of Operations for the Nine Months
Ended March 31, 2019 Compared to the Nine Months Ended March 31, 2018
The following is a comparison of our results of operations for
the nine months ended March 31, 2019 and 2018.
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
692,000
|
|
|
$
|
977,000
|
|
|
$
|
(285,000
|
)
|
|
|
(29%)
|
|
Cost of revenue
|
|
|
22,000
|
|
|
|
38,000
|
|
|
|
(16,000
|
)
|
|
|
(42%)
|
|
Gross profit
|
|
|
670,000
|
|
|
|
939,000
|
|
|
|
(269,000
|
)
|
|
|
(29%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
1,368,000
|
|
|
|
1,160,000
|
|
|
|
208,000
|
|
|
|
18%
|
|
Research and development expenses
|
|
|
21,000
|
|
|
|
13,000
|
|
|
|
8,000
|
|
|
|
61%
|
|
Total operating expenses
|
|
|
1,389,000
|
|
|
|
1,173,000
|
|
|
|
216,000
|
|
|
|
18%
|
|
Loss from operations
|
|
|
(718,000
|
)
|
|
|
(234,000
|
)
|
|
|
(484,000
|
)
|
|
|
(206%)
|
|
Gain on settlement of debt and other income
|
|
|
–
|
|
|
|
102,000
|
|
|
|
(102,000
|
)
|
|
|
(100%)
|
|
Net loss
|
|
$
|
(719,000
|
)
|
|
$
|
(132,000
|
)
|
|
|
(587,000
|
)
|
|
|
(645%)
|
|
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 nine months ended March 31,
2019 the Company recognized revenues of $692,000 from sale of nine reactors to Desmet through 5 purchase orders.
During the nine months ended
March 31, 2018 we recorded $977,000 in revenue from sale of reactors to our distributors, Desmet and GEA pursuant to seven
purchase orders.
Cost of Revenue
During the nine months ended March 31,
2019 our cost of sales amounted to $22,000 and $38,000 during the same period in prior year, which was the result of the revenue
transactions described above.
Operating Expenses
Operating expenses for the nine months
ended March 31, 2019 amounted to $1,389,000 compared with $1,173,000 for the same period in 2018, an increase of $216,000 or 18%.
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 $101,000 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 nine months ended March 31,
2019 the Company incurred a net loss of $719,000 and used cash in operations of $375,000 and on March 31, 2019 had a working capital
deficiency of $900,000 and a stockholders' deficit of $816,000. 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 March 31, 2019 we had cash and cash
equivalents on hand of $555,000 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), Alchemy Beverages, Inc (ABI), and recent agreements with Enviro Watertek, LLC (EWT) that was signed in
April 2019. 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 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 royalty payments and revenue stream from ABI in our fiscal 2019-2020. We have signed a joint venture agreement with EWT
and anticipate to generate initial revenue in our Fiscal Fourth Quarter in 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 nine months ended March 31, 2019 amounted to $144,000 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 nine months ended
March 31, 2019 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.