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Cavitation Technologies, Inc. - Quarter Report: 2014 September (Form 10-Q)

September 30, 2014 DOC


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549




FORM 10-Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

Commission File Number: 0-29901

Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)

 

Nevada
20-4907818
  (State or Other Jurisdiction of Incorporation or Organization) 
(I.R.S. Employer Identification Number)

10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA    91311
(Address, including Zip Code, of Principal Executive Offices )

(818) 718-0905
(Registrant's Telephone Number, Including Area Code)


      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
YES    x        NO    ¨

      Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  x     NO  ¨

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ¨

Accelerated filer    ¨

Non-accelerated filer    ¨
(Do not check if a smaller reporting company)

Smaller reporting company    x

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES    ¨        NO    x

      As of November 14, 2014, the issuer had 183,099,694 shares of common stock outstanding.



TABLE OF CONTENTS

 

 

Page

Part I.

FINANCIAL INFORMATION

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2014 (unaudited) and June 30, 2014

 

 

 

 

Condensed Consolidated Statements of Operations - Three Months Ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)

 

 

 

 

Condensed Consolidated Statement of Stockholders' Deficit - Three Months Ended September 30, 2014 (unaudited)

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended September 30, 2014 (unaudited) and September 30, 2013 (unaudited)

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

17

 

 

 

Item 4.

Controls and Procedures

17

 

 

 

Part II.

OTHER INFORMATION

17

 

 

 

Item 1.  

Legal Proceedings

17

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

17

 

 

 

Item 3.  

Defaults Upon Senior Securities

17

 

 

 

Item 4.  

Mine Safety Disclosures

17

 

 

 

Item 5.  

Other Information

17

 

 

 

Item 6.

Exhibits

18

 

 

 

Signatures

 

19

i


PART I - FINANCIAL INFORMATION

ITEM 1 - Condensed Consolidated Financial Statements

CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

      September 30,         June 30,    
      2014     2014
      (unaudited)      
ASSETS            
             
Current assets:            
     Cash and cash equivalents   $ 1,653,075    $ 1,226,508 
     Inventory, net     116,644      116,644 
          Total current assets     1,769,719      1,343,152 
             
Property and equipment, net      120,558      137,095 
Patents, net     64,609      67,473 
Other assets     9,500      9,500 
          Total assets   $ 1,964,386    $ 1,557,220 
             
LIABILITIES AND STOCKHOLDERS' DEFICIT            
             
Current liabilities:            
     Accounts payable and accrued expenses   $ 182,871    $ 173,110 
     Accrued payroll and payroll taxes due officers     1,016,223      1,030,031 
     Related party payable     1,147      1,147 
     Advances from distributor     1,109,956      734,956 
          Total current liabilities     2,310,197      1,939,244 
             
Commitments and contingencies            
             
Stockholders' deficit:            
     Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and
          outstanding as of September 30 and June 30, 2014, respectively
       
     Common stock, $0.001 par value, 1,000,000,000 shares authorized, 183,099,694 and
          177,906,365 shares issued and outstanding as of September 30 and June 30, 2014, respectively
    183,099      177,906 
     Additional paid-in capital     21,130,625      20,580,952 
     Common stock issuable, 9,029,251 shares     812,633      812,633 
     Accumulated deficit      (22,472,168)     (21,953,515)
          Total stockholders' deficit     (345,811)     (382,024)
          Total liabilities and stockholders' deficit   $ 1,964,386    $ 1,557,220 

See accompanying notes, which are an integral part of these condensed consolidated financial statements

1


CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

      For the Three Months Ended
      September 30,
      2014     2013
      (unaudited)     (unaudited)
Revenue   $   $ -  
Cost of revenue     -       -  
Gross profit     -       -  
             
General and administrative expenses     508,136      312,765 
Research and development expenses     10,429      6,123 
Total operating expenses     518,565      318,888 
             
Loss from operations     (518,565)     (318,888)
Interest expense and other     (88)     (26,604)
Net loss   $ (518,653)   $ (345,492)
             
Net loss per share,            
Basic and diluted   $ (0.00)   $ (0.00)
             
Weighted average shares outstanding,            
Basic and diluted     183,099,694      165,089,134 

See accompanying notes, which are an integral part of these condensed consolidated financial statements

2


CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)

    Series A Preferred Stock     Common Stock     Additional Paid-     Common Stock     Accumalated      
    Shares     Amount     Shares     Amount     in Capital     Issuable     Deficit     Total
                                               
Balance at June 30, 2014    -     $ -       177,906,365    $ 177,906    $ 20,580,952    $ 812,633    $ (21,953,515)   $ (382,024)
                                               
                                               
Common stock issued for cash    -       -       5,193,329      5,193      370,305      -       -       375,498 
Fair value of vested warrants   -       -       -       -       179,368      -       -       179,368 
Net loss    -       -       -       -       -       -       (518,653)     (518,653)
Balance at September 30, 2014    -     $ -       183,099,694    $ 183,099    $ 21,130,625    $ 812,633    $ (22,472,168)   $ (345,811)

See accompanying notes, which are an integral part of these condensed consolidated financial statements

3


CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

      Three Months Ended September 30,
      2014     2013
      (unaudited)     (unaudited)
Operating activities:            
Net loss   $ (518,653)   $ (345,492)
Adjustments to reconcile net loss to net cash             
     provided by (used in) operating activities:            
     Depreciation and amortization     19,401      24,493 
     Amortization of convertible notes discount         15,018 
     Fair value of options issued to directors, employees and consultants     179,368     
Effect of changes in:            
     Inventory         (88,543)
     Prepaid expenses and other current assets         3,125 
     Accounts payable and accrued expenses     9,761      81,407 
     Accrued payroll and payroll taxes     (13,808)    
     Advances from distributor     375,000      250,000 
          Net cash provided by (used in) operating activities     51,069      (59,992)
             
Investing activities:            
     Purchase of property and equipment         (13,500)
     Payments for patents         (6,822)
          Net cash used in investing activities     -       (20,322)
             
Financing activities:            
     Proceeds from sale of common stock     375,498     
          Net cash provided by financing activities     375,498      -  
             
Net increase (decrease) in cash     426,567      (80,314)
Cash, beginning of period     1,226,508      241,976 
Cash, end of period   $ 1,653,075    $ 161,662 
             
Supplemental disclosures of cash flow information:            
     Cash paid for interest   $   $ 3,000 
     Cash paid for income taxes   $ 1,600    $

See accompanying notes, which are an integral part of these condensed consolidated financial statements

4


CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended September 30, 2014 and 2013

Note 1 - Organization and Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") as promulgated in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September 30, 2014 are not indicative of the results that may be expected for the fiscal year ending June 30, 2015. 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, 2014 filed on October 14, 2014. The condensed consolidated balance sheet as of June 30, 2014 has been derived from the audited financial statements included in the Form 10-K for that year.

Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as "the Company," "CTi," "we," "us," and "our") is a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented, and commercialized proprietary technology that may be used in liquid processing applications. CTi's patented Nano Reactor® is the critical component of CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in refining vegetable oils. CTi has two patented systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, waste water treatment, biodiesel, algae oil extraction, and alcoholic beverage enhancement.

Management's Plan Regarding Going Concern

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  During the three months ended September 30, 2014, the Company incurred a net loss of $518,653. As of September 30, 2014, the Company had a working capital deficiency of $540,478 and a stockholders' deficit of $345,811.   These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. In addition, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2014 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.

Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly advances of $125,000 against future sales. During the three months ended September 30, 2014, advances received from Desmet amounted to $375,000. We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet 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.

5


Note 2 - Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions and balances have been eliminated in consolidation.

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. As of September 30, 2013, the carrying value of certain accounts such as inventory, accounts payable, accrued expenses, accrued payroll and short-term loans approximate fair value due to the short-term nature of such instruments.

The following table presents information about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of September 30, 2014 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. 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 September 30, 2014 and June 30, 2014, the fair values of cash and cash equivalents, inventory and accounts payable 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 valuing our stock options, warrants, convertible notes, and common stock issued for services, among other items. Actual results could differ from these estimates.

Revenue Recognition

Revenue from the sale of our Nano Reactor® Systems is recognized when persuasive evidence of an agreement exists; shipment has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured.

The Company is also entitled to certain profit share from its distributor from the sale of the reactors. The profit share is non-refundable and is recorded upon shipment of the reactors to the distributor.

6


Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill. The Company has two patents issued in fiscal 2012 and another 3 in fiscal 2014. As of September 30, 2014, we have a total of 25 patents pending. The patents have duration of twenty years from filing date.

Based upon our estimate, we believe that our patents have an estimated life of four years before the next generation of reactors is developed or until other forms of competition appear. During the three months ended September 30, 2014 and 2013, we recorded amortization expense of $2,864 and $6,647 respectively.

As of September 30 and June 30, 2014 the Company had remaining unamortized patent costs of $64,609 and $67,473 respectively.

Impairment of Intangible and Long-Lived Assets

In accordance with ASC 350-30 (General Intangibles Other than Goodwill), the Company evaluates amortizable intangibles and long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Based on our annual impairment tests, management believes there is no impairment of its intangibles and long-lived assets as of September 30, 2014. There can be no assurance, however, that market conditions will not change or demand for the Company's products under development will continue. Either of these could result in future impairment of intangibles and long-lived assets.

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.

7


Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes.  The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.

The Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.

Warranty Policy

The Company provides a limited warranty with every set of reactors sold, typically 2 years. The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at September 30, 2014.

Dependence on Desmet Ballestra

Our revenue is almost entirely dependent on Desmet Ballestra who is our exclusive distribution agent with regard to the CTi Nano Neutralization® System for edible oils. During fiscal 2014, 100% of our revenue was derived from Desmet sales efforts (see Note 3).

Basic Loss Per Share

The Company computes the loss per common share using ASC 260, Earnings per Share.  The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period.  The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.

As of September 30, 2014, the Company had 13,611,815 stock options and 68,259,843 stock warrants outstanding to purchase shares of common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive.

Recent Accounting Pronouncements

On August 27, 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties about and Entity's Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements is issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2014-15 on its results of operations or financial condition.

8


In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014.

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 3 - Agreement with Desmet Ballestra

On May 14, 2012 we signed a global R and D, Marketing and Technology License Agreement with the n.v. Desmet Ballestra Group s.a. (Desmet), a Belgian company that is actively marketing the NANO Neutralization System, the key component of which is the Company's reactor to soybean and other vegetable oil refiners. The Agreement provides Desmet (licensee) a limited, exclusive license and right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devices on a global basis but is limited to oils and fats and oleo chemical applications. CTi (licensor) remains owner of the current patents and patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet has agreed to provide, under certain conditions, limited monthly advance payments of $125,000 against future sales to CTi. Desmet shall be entitled to immediately terminate the present agreement in case the claims of current US Patent Application Number 12/484,981 are not granted as such or are cancelled. In addition, Desmet may terminate the agreement on August 1 of any particular year if they have not installed at least 6 Nano Reactor® devices in the previous 12 month period. CTi may terminate the Agreement for material default. This Agreement supersedes a previous agreement dated November 1, 2010, amended on June 1, 2011 and on September 2, 2011.

Desmet, together with its affiliates, is a global engineering and equipment supply firm engaged in the development, design and supply of process equipment for oils and fats processing facilities including vegetable oil refining, biofuel, oleo chemical, seed crushing, surfactant and detergent markets. Desmet supplies these markets with competitive services based on the latest globally sourced technologies.

9


The Company and Desmet have worked together to determine the appropriate sales approach and installation process. The Company's Nano Neutralization is designed to be used as an add-on process to an existing neutralization system within soybean and other vegetable oil refineries. Desmet purchases Nano Reactor Systems from the Company and installs them at the refinery as part of an integrated neutralization system. We are therefore substantially dependent on Desmet to identify prospects, complete sales contracts, install the system and manage relationships with end-users.

During the fiscal quarters ended September 30, 2014 and 2013, we recorded no revenues from Desmet or otherwise. The Company received advances of $375,000 in three months ended September 30, 2014 and $250,000 in the same period ended September 30, 2013. As of September 30, 2014, Desmet has advanced to us an excess of funds of $1,109,956 which will be recognized as revenue as sales orders are shipped.

Note 4 - Property and Equipment

Property and equipment consisted of the following as of September 30, 2014 and June 30, 2014:

      September 30,     June 30,
      2014     2014
             
Leasehold improvement   $ 2,475    $ 2,475 
Furniture       26,837      26,837 
Office equipment     1,499      1,499 
Equipment     68,380      68,380 
Systems     268,340      268,340 
      367,531      367,531 
Less: accumulated depreciation and amortization     (246,973)     (230,436)
     Property and equipment, net   $ 120,558    $ 137,095 

Depreciation expense for the three months ended September 30, 2014 and 2013 amounted to $16,537 and $18,026, respectively.

Note 5 - Accrued Payroll and Payroll Taxes

As of September 30, 2014 and June 30, 2014, the Company had accrued unpaid salaries due to current and former officers of the Company amounting to $936,866 and $950,674 respectively. In addition, the Company also accrued the estimated payroll taxes due to this unpaid payroll of $79,357 and $79,357 respectively.

Note 6 - Stockholders' Deficit

Common Stock

In July 2014 we issued 5,193,329 shares of common stock at $0.08/share and warrants to purchase 5,193,329 shares of common stock at $0.12 per share, vesting immediately and expiring in 5 years from grant date to various entities and individuals in exchange for cash of $375,498, net of commission of $14,002. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public. The Company issued rule 144 shares in connection with these issuances.

10


Stock Options

The Company has not adopted a formal stock option plan, however, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity from September 30, 2014 is as follows:

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Options     Price   (Years)
               
Outstanding June 30, 2014   13,611,815    $ 0.10    6.37 
               
     - Granted   -            
     - Forfeited   -       -     -  
     - Exercised   -       -     -  
     - Expired   -       -     -  
Outstanding September 30, 2014   13,611,815    $ 0.10    6.12 
Exercisable and vested at September 30, 2014   13,611,815    $ 0.10    6.12 

The intrinsic value of the outstanding options was $590,043 as of September 30, 2014. The following table summarizes additional information concerning options outstanding and exercisable at September 30, 2014.

      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   11,800,858    6.71    $ 0.03    11,800,858      6.71 
$ 0.33   637,297    2.06    $ 0.33    637,297      2.31 
$ 0.67   1,173,660    2.43    $ 0.67    1,173,660      2.68 
      13,611,815              13,611,815       

11


Warrants

A summary of the Company's warrant activity and related information for the three months ended on September 30, 2014 is as follows.

              Weighted-
              Average
          Weighted-   Remaining
          Average   Contractual
          Exercise   Life
    Warrants     Price   (Years)
Outstanding at June 30, 2014   63,066,514    $ 0.06    6.91 
               
Granted   5,193,329      0.12    5.00 
Exercised   -            
Expired   -            
Outstanding at September 30, 2014   68,259,843    $ 0.07    6.52 
Vested and exercisable at September 30, 2014   67,218,177    $ 0.07    6.52 

On July 1 of 2014, the Company issued warrants to purchase 5,193,329 shares of common stock to the purchasers of common stock offering at $0.12 per share, vesting immediately and expiring in 5 years from grant date. Pursuant to the term of the grant, the underlying shares of common stock must be registered with the SEC within one year after its purchase otherwise, the warrant will be considered cashless.

During the three months ended on September 30, 2014, the Company recognized $179,368 of compensation costs as part of general and administrative expenses related to the vesting of warrants granted in prior periods. To compute compensation expense, the Company estimated the fair value of each warrant award on the date of grant using the Black-Scholes-Merton option pricing model for employees, and calculated the fair value of each warrant award at the end of the period for non-employees. The following average assumptions were used in the Black-Scholes-Merton valuation model: risk-free interest rate of 3.25%; dividend yield of 0%; volatility of 184%; and an expected life of 9.15 years.

As of September 30, 2014, total compensation cost related to non-vested warrant awards not yet recorded is approximately $83,021. The intrinsic value of the outstanding warrants was $1,551,329 as of September 30, 2014. The following table summarizes additional information concerning warrants outstanding and exercisable at September 30, 2014.

      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
                           
$ 0.04 - 0.07   47,933,184    7.25   $ 0.05    44,641,518    $ 0.05 
$ 0.12   20,326,659    4.75   $ 0.12    15,133,330    $ 0.12 
      68,259,843              67,218,177       

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Note 7 - Commitments and Contingencies

On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two parties, our President as well as our former Chief Executive Officer (CEO) and current Chief Technology Officer (CTO), where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and former CEO/current CTO have been assigned to the Subsidiary.  In exchange, that Subsidiary agreed to pay a royalty of 5% of gross revenues to each of the CTO and President and former CEO 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 CTO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through September 30, 2014.

On April 30, 2008 and as amended on November 22, 2010, our wholly owned subsidiary entered into an employment agreement with our former Director of Chemical and Analytical Department (the "Inventor") to receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of September 30, 2014, no patents have been granted in which this person is the legally named inventor.

 

 

 

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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 three months ended September 30, 2014, we recorded no revenue and net loss of $518,653. We generated net cash of $51,069 from our operating activities and financing activities provided additional $375,498.

Management's Plan

We are engaged in merchandising 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 merchandise our systems through our partner, Desmet Ballestra. We did not record any revenues and incurred a net loss of $518,653 in the current fiscal quarter. As of September 30, 2014, the Company had a working capital deficiency of $540,478 and a stockholders' deficit of $345,811.   The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.

Management's plan is to generate income from operations by licensing our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly advances of $125,000 against future sales. During the three months ended September 30, 2014, advances received from Desmet amounted to $375,000 and approximately $3,375,000 as of October 31, 2014. These funds service portion of operational expenses on a monthly basis. Desmet shall be entitled to immediately terminate the present agreement in case the claims of current US Patent Application Number 12/484,981 are not granted as such or are cancelled. In addition, Desmet may terminate the agreement on August 1 of any particular year if they have not installed at least 6 Nano Reactor® devices in the previous 12 month period. CTi may terminate the Agreement for material default. This Agreement supersedes a previous agreement dated November 1, 2010, amended on June 1, 2011 and on September 2, 2011. In addition to these advances, we anticipate that we will need additional funding, and we will attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, 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.

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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 a result of the aforementioned factors, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2014, expressed substantial doubt about our ability to continue as a going concern.

Critical Accounting Policies

CTi's critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended June 30, 2014, and did not change for the three months ended September 30, 2014.

Results of Operations

The following is a comparison of our results of operations for the three months ended September 30, 2014 and 2013.

      For the Quarter Ended          
      September 30,          
      2014     2013     $ Change   % Change
Revenue   $   $   $   0.0%
Cost of revenue               0.0%
     Gross profit               0.0%
General and administrative expenses     508,136      312,765      195,371    62.5%
Research and development expenses     10,429      6,123      4,306    70.3%
Total operating expenses     518,565      318,888      199,677    62.6%
     Loss from operations     (518,565)     (318,888)     (199,677)   62.6%
Interest expense and other     (88)     (26,604)     26,516    -99.7%
     Net loss before income tax     (518,653)     (345,492)     (173,161)   50.1%
Income tax expense              
     Net loss   $ (518,653)   $ (345,492)   $ (173,161)   50.1%

Revenue

We recorded no revenue in the first quarter of fiscal 2015 or fiscal 2014.

Operating Expenses

Operating expenses for the three months ended September 30, 2014 amounted to $518,565 compared with $318,888 for the same period in 2013, an increase of $199,677, or 63%. In both periods, the major expense component was compensation to consultants and the officers/employees. In the first quarter of fiscal 2015, compensation amounted to $306,558 or 59% of total costs compared with $91,815 or 29% of total costs in the first quarter of fiscal 2014. This increase in compensation in the first quarter of fiscal 2015 was attributable largely to the increase in a number of consultants and base salaries of management.

During the first quarter of 2015, the other major component of operating expense was professional service fees related to auditors, accounting, and legal services which amounted to $46,844 or 9% of total operating expenses versus $76,284 or 24% in the first quarter of fiscal 2014. These expenses were lower in the first quarter of fiscal 2015 as the corporate attorney and the audit fees decreased.

R&D expenses remained relatively low as we continued to rely on Desmet Ballestra for support in R&D. It is our intention to pursue R&D as our cash position permits.

15


Interest Expense

The Company did not incur any interest expenses in the current quarter as all promissory notes were settled in fiscal 2014. Interest expense of $26,604 during the first three months of fiscal 2014 was composed of non-cash expenses of $22,978, $15,018 of which related to convertible note amortization, and $9,585 to accrued interest on all outstanding loans.

As of September 30, 2014, the Company had no outstanding debt. On September 30 of 2013, the outstanding balance of Convertible Notes Payable (net of discount) as recorded on the balance sheet amounted to $59,844 consisting of outstanding principal of $100,000 less discount of $40,156.

Liquidity and Capital Resources

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  During the three months ended September 30, 2014, the Company incurred a net loss of $518,653. As of September 30, 2014, the Company had a working capital deficiency of $540,477 and a stockholders' deficit of $345,810.   These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. In addition, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2014 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.

Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partner, the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly advances of $125,000 against future sales. During the quarter ended September 30, 2014, advances received from Desmet amounted to $375,000. In July 2014, we also received approximately $375,000 from sale of our shares of common stock and warrants. We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet 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.

On September 30, 2014, we had cash on hand in the amount of $1,653,075. In addition to the funds on hand, we will require additional funds to continue to operate our business. This includes expenses we will incur in connection with costs to manufacture and ship our products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual commitments for salaries to our executive officers. In light of our financial commitments over the next several months and its liquidity constraints, we have implemented cost reduction measures in all areas of operations. We intend to review these measures on an ongoing basis and make additional decisions as may be required.

Cash Flow

Net cash provided by operating activities during the three months ended September 30, 2014 amounted to $51,069, compared with $59,992 used by these activities for the same period in fiscal 2014. Funding for the operating activities was provided by $375,000 in advances from our distributor. For the first quarter of fiscal 2015, we paid $124,700 in employees' compensation, $25,200 in fees associated with financing activities, $37,347 in professional services fees, $21,000 in various insurance premiums, and $127,000 in fixed operating costs and other obligations. In the first quarter of 2014, cash was used to pay $91,815 in compensation, $95,074 in fixed operating costs, $76,284 in professional services fees, $22,443 in various insurance premiums, and $3,000 in interest payments, and other obligations of about $39,000.

There was no cash used for investing activities in the current fiscal quarter. Net cash used in investing activities during the three months ended September 30, 2013 was relating to $6,822 in capitalized patents and $13,500 for property, plant, and equipment.

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For the period ended September 30, 2014, financing activities provided a net cash of $375,498. For the first quarter of fiscal 2014, the company did not perform any financing activities.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable for smaller reporting companies.

ITEM 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with rule 13a-15(a), CTi management must maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, or the Exchange Act, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In accordance with Rule 13a-15(b) and (c), management must also evaluate the effectiveness of these disclosure control and procedures at the end of each fiscal year. As of September 30, 2014, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that these disclosure controls and procedures were not effective as of September 30, 2014.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting during the first quarter of fiscal 2015 that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1  Legal Proceedings

We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 - Defaults Upon Senior Securities

None

Item 4 - Mine Safety Disclosures

None

Item 5 - Other Information

None

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Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES

      Incorporated by Reference
Exhibit   Filed        
Number Exhibit Description Herewith Form Pd. Ending Exhibit Filing Date
             
3(i)(a) Articles of Incorporation - original name of Bioenergy, Inc.   SB-2 N/A 3.1 October 19, 2006
3(i)(b) Articles of Incorporation - Amended and Restated   10-Q December 31, 2008 3-1 February 17, 2009
3(i)( c ) Articles of Incorporation - Amended and Restated   10-Q June 30, 2009 3-1 May 14, 2009
3(i)(d) Articles of Incorporation - Amended; increase in authorized shares   8-K N/A N/A October 29, 2009
3(i)(e) Articles of Incorporation - Certificate of Amendment; forward split   10-Q December 31, 2009 3-1 November 16, 2009
             
10.1 Patent Assignment Agreement between the Company and Roman Gordon dated July 1, 2008.   8-K June 30, 2009 10.1 May 18, 2010
10.2 Patent Assignment Agreement between the Company and Igor Gorodnitsky dated July 1, 2008.   8-K June 30, 2009 10.2 May 18, 2010
10.3 Assignment of Patent Assignment Agreement between the Company and Roman Gordon   8-K June 30, 2009 10.3 May 18, 2010
10.4 Assignment of Patent Assignment Agreement between the Company and Igor Gorodnitsky   8-K June 30, 2009 10.4 May 18, 2010
10.5 Employment Agreement between the Company and Roman Gordon date March 17, 2008   10K/A June 30, 2009 10.3 October 20, 2011
10.6 Employment Agreement between the Company and Igor Gorodnitsky dated March 17, 2008   10K/A June 30, 2009 10.4 October 20, 2011
10.7 Employment and Confidentiality and Invention Assignment Agreement between the Company and Varvara Grichko dated April 30, 2008   10-Q December 31, 2010 10.3 February 11, 2011
10.8 Board of Director Agreement - James Fuller   10-Q December 31, 2011 10.12 October 20, 2011
10.9 Technology and License Agreement with Desmet Ballestra dated 14 May 2012   10-K June 30, 2012 10.1 October 15, 2012
10.10 Short Term Loan Agreement - CEO    10-K June 30, 2012 10.11 October 15, 2012
10.11 Loan Agreement - Desmet Ballestra - Oct. 26, 2010          
             
14.1 Code of Business Conduct and Ethics*   10-K June 30, 2011 14.1 September 28, 2011
31.1 Certificate of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 X        
31.2 Certificate of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 X        
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted  X        
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted  X        
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          
             
101.INS XBRL Instance Document X        
101.SCH XBRL Taxonomy Extension Schema X        
101.CAL XBRL Taxonomy Extension Calculation Linkbase X        
101.DEF XBRL Taxonomy Extension Definition Linkbase X        
101.LAB XBRL Taxonomy Extension Label Linkbase X        
101.PRE XBRL Taxonomy Extension Presentation Linkbase X        
             
* In accordance with Regulation S-K 406 of the Securities Act of 1934, we undertake to provide to any person          
  without charge, upon request, a copy of our "Code of Business Conduct and Ethics". A copy may be requested           
  by sending an email to info@cavitationtechnologies.com.          
             
             

 

18


SIGNATURES

Pursuant to the requirements of the securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SIGNATURE   TITLE   DATE
         
/s/ Igor Gorodnitsky   President; Member of Board of Directors   November 14, 2014
Igor Gorodnitsky   (Principal Executive Officer)    
         
/s/ N. Voloshin   Chief Financial Officer   November 14, 2014
N. Voloshin    (Principal Financial Officer)    
         
/s/ Jim Fuller   Audit Committee Chairman, Independent Financial Expert   November 14, 2014
Jim Fuller        

 

 

 

 

19