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Cavitation Technologies, Inc. - Annual Report: 2019 (Form 10-K)

 

Table of Contents

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

FORM 10-K

(Mark One)

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FROM THE TRANSITION PERIOD FROM _____ TO _______.

 

For the fiscal year ended June 30, 2019

 

Commission file number 000-53239

 

 

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 No.)

 

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

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

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Title of Each Class: Name of Each Exchange on Which Registered:
Common Stock, $0.001 par value Over the Counter (Bulletin Board)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒

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 ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES ☒ NO ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒
      Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant by reference to the price at which the common equity was last sold, or of the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $4,405,100 as of December 31, 2018 based on the closing price of $0.026 per share and 169,426,931 non-affiliate shares outstanding.

The registrant had 196,997,906 shares of common stock outstanding on September 30, 2019.

DOCUMENTS INCORPORATED BY REFERENCE:

None

 

   

 

 

CAVITATION TECHNOLOGIES, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 2019
TABLE OF CONTENTS

 

  Page
PART I  
Item 1. Business 4
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Mine Safety Disclosures 11
   
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Item 9B. Other Information 42
   
PART III  
Item 10. Directors, Executive Officers and Corporate Governance 43
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 47
Item 13. Certain Relationships and Related Transactions, and Director Independence 48
Item 14. Principal Accounting Fees and Services 49
   
PART IV  
Item 15. Exhibits, Financial Statement Schedules 50
Item 16. Form 10-K Summary 51
   
Signatures 52

 

 

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K and the exhibits attached hereto contain “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. We use words like “expects,” “believes,” “intends,” “anticipates,” “plans,” “targets,” “projects” or “estimates” in this annual report. When used, these words and other, similar words and phrases or statements that an event, action or result “will,” “may,” “could,” or “should” result, occur, be taken or be achieved, identify “forward-looking” statements. Such forward-looking statements are subject to certain risks and uncertainties, both known and unknown, and assumptions.

 

Management has included projections and estimates in this annual report, which are based primarily on management’s experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the Securities and Exchange Commission or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law. We qualify all of the forward-looking statements contained in this annual report by the foregoing cautionary statements.

 

 

 

 

 

 

 

 

 

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PART I

 

ITEM 1.BUSINESS

 

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. We are a process and product development firm that has developed, patented, and commercialized environmentally friendly technology-based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, wines and spirits enhancement, algae oil extraction, water-oil emulsions and crude oil yield improvement.  Our systems are designed to process industrial liquids at a reduced processing time, lower operating cost, improved yield while operating in environmentally friendly manner. We have developed, patented, and commercialized our proprietary technology that can be used in multiple liquid processing applications. Our patented Nano Reactor® is the critical component of our CTi Nano Neutralization® System which has been shown to reduce operating costs and increase yields in refining vegetable oils.

 

Vegetable Oil Refining

 

Our first commercial application for our technology has been the CTi Nano Neutralization® System which has been utilized to improve edible vegetable oil refining process. Our environmentally friendly process has been shown to reduce refining costs, increase oil yield, and limit the amount of chemical additives used in chemical refining of vegetables oils. This patented process (US Patent # 7,762,715 and # 8,042,989) is designed to be incorporated into new and existing soybean, rapeseed, canola and palm vegetable oil refineries.

 

Our first pilot test of our CTi NANO Neutralization System was conducted in 2010 at Carolina Soya, a 200-metric ton/day crude soy oil refining plant in Estill, South Carolina. Our second system, which became operational in fiscal 2011, has been continuously utilized since 2011 at the plant that processes approximately 450 metric tons per day of soy oil. Further, we have successfully shipped over 30 systems both domestically and abroad. We also continuously focus on developing additional Nano Reactor® applications and managing the intellectual property issues associated with new processes and applications.

 

The global consumption of vegetable oils has grown consistently at a rate of about 5.3% p.a. from 90.5 million metric tons in 2001 to over 203 million metric tons in 2019 (https://www.statista.com/statistics/263978/global-vegetable-oil-production-since2000-2001/). It is also a highly competitive commodity market in which the lowest-cost producer has the advantage.

 

Desmet Ballestra Agreement

 

On May 14, 2012 we signed a global R and D, Marketing and Technology License Agreement with Desmet Ballestra Group s.a. (Desmet), a Belgian company that is actively marketing the NANO Neutralization System, the key component of which is our Nano Reactor® to soybean and other vegetable oil refiners. The Agreement provided Desmet (licensee) a limited, exclusive license and right to develop, design and supply our NANO Neutralization System which incorporates Nano Reactor® devices on a global basis tools and fats and oleo chemical applications Desmet provided, under certain conditions, limited monthly advance payments of $125,000 against future sales to us through May 2015. This Agreement expired in May 2015.

 

 

 

 4 

 

 

On January 22, 2016, we signed a similar three-year agreement with Desmet effective August 1, 2015. As part of the agreement, Desmet was to provide, under certain conditions, limited monthly advance payments of $50,000 against future sales to us. The agreement expires in August 2018 or may be terminated by Desmet every August 1 should Desmet and its affiliates fail to convert a minimum of six NANO Neutralization Systems to sold status during the period of June 1 to May 31. The agreement may also be terminated in case we were to lose our rights under the patents and patent applications being used in our CTi NANO Neutralization System. This Agreement expired in August 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.

 

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 services based on the latest globally sourced technologies. Desmet has relationships with major refiners globally A significant portion of global vegetable oil refineries include major refiners such as Archer Daniels Midland Company, Cargill, Inc. and Bunge Limited. Desmet has more than 40 sales representatives selling in North America, South America, Europe, and Asia. Since its founding in 1946, Desmet reports that it has built a global network that includes 1,300 employees, 17 global and 8 representative offices, and more than 6,000 lines in a variety of applications. Desmet operates a separate division for each of the above markets and the Desmet Oils & Fats division has supplied small and large plants to approximately 1,900 oil millers in 150 countries, covering over 6300 process sections.

 

Along with Desmet, we have been working together to accelerate appropriate sales goals and installation process. Our CTi Nano Neutralization System is designed to be used as an add-on process to an existing neutralization system within soybean and other vegetable oil refineries. Desmet’s focus has been on marketing our CTi’s Nano Neutralization® System to vegetable oil refiners to help them increase profits through cost savings and improved oil yields. Desmet purchases our CTi Nano Neutralization Reactor Systems from us and installs them at the refinery as part of an integrated neutralization system. Based on successful commercial implementations, Desmet guarantees minimum economic benefits to a facility that installs our CTi Nano Neutralization® Systems. We are therefore substantially dependent on Desmet to identify prospects, complete sales contracts, install the system and manage relationships with end-users.

 

Additionally, in fiscal 2017 Desmet installed our first Nano Reactors® at bio-diesel production plant in South America. Bio-diesel industry has been under pricing pressure for a considerable period of time and slow to adopt to newer technologies. We are continuously working with Desmet pursuing additional installations, however, the acceptance was slow and there were no sales generated in our Fiscal 2019.

 

GEA Westfalia Agreement

 

In August 2012, we entered into a Technology and Licensing Agreement with the GEA Group AG - Westfalia Separator Group (“GEA”) pursuant to which the companies agreed to jointly develop and patent new applications of our core technologies. As part of the Agreement, GEA Westfalia was to assemble a complete commercial test system comprising Nano Reactors®. This Agreement was terminated in January 2017.

 

 

 

 5 

 

 

In January 2017 we entered into a new global technology license, R&D and marketing agreement with GEA with respect to our patented Nano Reactors® technology, processes and applications. Under the new 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 to us. As of June 30, 2019, the Company has received $727,000 in advances from GEA under this agreement.

 

GEA Westfalia Separator manufactures filtration and equipment such as separators, clarifiers, decanters and membrane filtration systems. This equipment is used for the purification of suspensions, the separation of fluid mixtures with simultaneous removal of solids, extraction and concentration or removal of liquids from solids. The technological dominance of the company is based on over one hundred fifteen years of innovation, first-class engineering solutions and comprehensive processing capabilities. The company was founded in 1893 in Oelde, Germany, and since 1994 has been a part of the GEA Group AG and is a business unit within the GEA Mechanical Equipment segment. In 1950, Westfalia Separator established US and Canadian corporations to serve as sales and marketing arms to compete in the burgeoning North American market for centrifuges. GEA is one of the largest suppliers for the food processing industry and a wide range of process industries that has reported consolidated revenues of approximately EUR 4.9 billion in 2018. As an international technology group, GEA focuses on process technology and components for sophisticated production processes in various end-user markets. The GEA Group AG generates more than 70 percent of its revenue in the food sector that enjoys long-term sustainable growth. As of December 31, 2018, GEA Group AG employed more than 18,000 people worldwide. GEA is a market and technology leader in its business areas. GEA is listed on the German MDAX (G1A, WKN 660 200). In addition, GEA’s share is a constituent of the MSCI Global Sustainability Indexes.

 

In our Fiscal 2019, we haven’t generated any sales related to our Nano Reactors® Systems, however, we are actively working on testing our technology in renewable energy sector. For example, the process of creating a stable emulsion by mixing water and hydrocarbons, or water and vegetable oil as an energy source for diesel engines or power generators has been pursued by a number of companies in the past with limited success. Our tests and laboratory analysis have indicated that by restructuring fluids at the molecular level, our technology achieves stable emulsion for certain periods of time thus allowing the end user to infuse the emulsion as a source of power generation. We anticipate to achieve similar results while conducting commercial system trials in fiscal 2019-2020.

 

Alchemy Beverages, Inc

 

In fiscal 2014, Roman Gordon, one of our shareholders and a former officer, formed a company, Cameo USA LLC (Cameo). Since its formation, Cameo has had no revenue, no operations, and has had no assets or liabilities. On June 4, 2018, Mr. Gordon contributed his 100% interest in Cameo to our company. As Mr. Gordon had no basis in his investment in Cameo, there was no value assigned to the contribution of Cameo.

 

On June 29, 2018, we agreed to sell Cameo to Alchemy Beverages Inc. (“ABI”). In addition, we entered into two licensing agreements with ABI. In consideration for the sale of Cameo and for entering into the licensing agreements, ABI agreed to issue 19.9% of ABI’s outstanding common shares to us (limited to 20 million shares of ABI). ABI is a private company and in the business of producing and selling alcoholic beverages, equipment, and home appliances. Prior to this agreement, ABI was independent of CTI and had no relation to us nor to our management. ABI purchased Cameo for the right to use its name in marketing a vodka spirit.

 

 

 

 6 

 

 

Pursuant to the licensing agreements, ABI will have the exclusive global distribution rights for our patented and patent pending technology for the processing of alcoholic beverages. We have 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, we will receive leasing, consulting, and manufacturing fees as defined in the licensing agreement.

 

To date, ABI hasn’t generated any sales under Cameo brand. Over the last 12 months, ABI has developed a small table top home appliance unit Barmuze®, allowing consumer to experience a new way of enjoying wines and spirits, utilizing CTi’s patented and patent pending technology to molecularly restructure alcohol, convert harsh acids to pleasant tasting esters, and reduce levels of certain impurities commonly present in alcohol. We have miniaturized our Nano Reactor® to be incorporated in Barmuze® along with proprietary designs and mechanical components.

 

We anticipate to start recognizing revenue on Barmuze® sales and receive royalties from the ABI transaction in our fiscal 2020. As of June 30, 2019 and the date of this report, the Company owns 19.9% of ABI. The investment in ABI has no value assigned to it, which approximates its fair value.

 

Enviro Watertek, LLC

 

In April 2019, we have entered into a licensing and service contract agreement with Enviro Watertek, LLC (“EW”). This agreement covers our first commercial entrance into industrial treatment of produced and frac water. Fracking industry has seen a significant growth over the past ten years, reaching daily water consumption volume of over 58 million barrels per day. Our newly designed Low Pressure Nano Reactor (LPN) , was specifically developed to be integrated into frac water treatment system along with proprietary chemical formulations, and has depicted measurable and quantifiable advantages over industry standard processes and equipment. Our agreement with EW provides for sales on Nano Reactors® plus recurring revenue stream based on processing frack water volumes and utilization. Our agreement with EW is for a period of 15 years . We sold our first Nano Reactor® system in the third fiscal quarter of fiscal 2019 and expect accelerated acceptance of our technology and revenue stream in our fiscal 2020 and beyond.

 

Customers Dependence

 

We continue to sell our industrial capacity Nano Reactor® and Nano Reactor® Systems and technology only to two licensees, Desmet and GEA, and they are responsible for installing and servicing the systems. Almost all of our revenue for the fiscal year ended June 30, 2019 and 2018 was derived from sales of products to Desmet. However, our recently signed agreements with ABI and EW have opened an opportunity for CTi to enter several new verticals which have significant upside potential both at the point of sale and recurring revenue stream.

 

Sources and availability of raw materials and the names of principal suppliers

 

We have historically sourced reactor components from various domestic and international suppliers. We do not have any long-term contracts, agreements, or commitments with any supplier. We believe it would take approximately 30 days to find a new supplier, if necessary.

 

 

 

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Competition

 

Our competitors who sell equipment and engineering services for the vegetable oil refining business are a myriad of companies both large and small that provide equipment and technology to oil refiners. These include known companies that have longer operating histories, more experience, and stronger financial capabilities. Competitors include Alfa Laval, and Crown Iron Works as well as many firms that provide advice and services to small and regional firms. In addition, Arisdyne Systems, a designer of cavitation devices, is marketing a system using similar technology. The vegetable oil refining business is a highly competitive commodity market in which the lowest-cost producer has the advantage. We intend to compete by offering solutions that help our clients remain or become a low-cost producer. Because the industry in which we compete has had limited new technology introduced in the last 50 years, we believe our CTi Nano Neutralization® Systems provide a unique opportunity for refiners to increase margins. We seek to differentiate ourselves by offering solutions based on our proprietary and patented designs, processes, and applications to help our clients described in our issued and patent pending applications. We compete by offering solutions that we believe can reduce operating expenses and increase oil yield vs currently applied technologies.

 

Patents

 

Our Cavitation Generator patent was issued during fiscal 2011. In addition, we have a patent for our Multi-Stage Cavitation Device that was issued on October 25, 2011. In the fiscal 2014 we received approvals for another apparatus patent and 2 additional process patents in the US. At June 30, 2019, our portfolio of patents included 17 issued patents in the United States and 8 issued patents internationally. Our patents cover multiple process and applications of our technology in vegetable oil refining, production of biodiesel, treatment of process and industrial water, upgrade of hydrocarbons and enhancing of alcoholic beverages. We continuously develop new technologies and applications, as we have filed a new patent application for Low Pressure Nano-Reactors, (LPN). LPN is a highly efficient homogenizer and emulsifier that can be utilized in multiple fluids processing applications. Recently, we have filed a patent application for a small home appliance. This new product is designed directly with consumer in mind and the first step for our company to introduce products outside of the industrial sector where we typically sell our products.

 

Issued

 US   Cavitation Generator   7,762,715 
           
 US   Multi-Stage Cavitation Device   8,042,989 
           
 US   Process for Producing Biodiesel Through Lower Molecular Weight Alcohol-Targeted Cavitation   8,603,198 
           
 US   High-Throughput Cavitation and Electro Coagulation Apparatus   8,673,129 
           
 US   Extraction of Oil from Algae by Hydrodynamic Cavitation for Biodiesel Production   8,709,750 
           
 US   Flow-Through Cavitation-Assisted Rapid Modification of Crude Oil   8,894,273 
           
 US   Method for Cavitation-Assisted Refining, Degumming and Dewaxing of Oil and Fat   8,911,808 
           
 US   Process to Remove Impurities from Triacylglycerol Oil   8,945,644 
           
 US   Process for Producing Biodiesel Through Lower Molecular Weight Alcohol-Targeted Cavitation   8,981,135 

 

 

 

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 US   Process for Removing Waxes and Phospholipids from Vegetable Oils and Increasing Production of Food Grade Lecithin Therefrom   9,357,790 
           
 US   Method and Flow Through Hydrodynamic Cavitational Apparatus for Alterations of Beverages   9,474,301 
           
 US   Method for Cavitation-Assisted Refining, Degumming and Dewaxing of Oil and Fat   9,481,853 
           
 US   Process for Extracting Carbohydrates from Biomass and Converting the Carbohydrates into Biofuels   9,611,496 
           
 US   Flow-Through Cavitation-Assisted Rapid Modification of Crude Oil   9,719,025 
           
 US   Processes for Increasing Bioalcohol Yield from Biomass   9,944,964 
           
 US   Processes for Increasing Bioalcohol Yield from Biomass   9,988,651 
           
 US   Processes for Extracting Carbohydrates from Biomass and Converting the Carbohydrates into Biofuels   10.093.953 
           
 Int’l    Process to Remove Impurities from Triacylglycerol Oil   Argentina AR083000B1 
           
 Int’l    Cavitation Generator   Brazil - PI0919602-1 
           
 Int’l    Process to Remove Impurities from Triacylglycerol Oil   Canada - 2,809,236 
           
 Int’l    Process to Remove Impurities from Triacylglycerol Oil   Malaysia MY164311A 
           
 Int’l    Process to Remove Impurities from Triacylglycerol Oil   Mexico – MX/E/2013/015504 
           
 Int’l    Process to Remove Impurities from Triacylglycerol Oil   Singapore P187241 
           
 Int’l   Process to Remove Impurities from Triacylglycerol Oil   Mexico – MX/a/2016/006201 
           
 Int’l   Process to Remove Impurities from Triacylglycerol Oil   EU 10 857 392.4 

 

 

 

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Patent Pending

 US   Variable Flow Through Cavitation Device
      
 US   System and Method for Purification of Drinking Water, Ethanol and Alcohol Beverages of Impurities
      
 Brazil   Method for Cavitation-Assisted Refining, Degumming and Dewaxing of Oil and Fat
      
 Brazil   Process to Remove Impurities from Triacylglycerol Oil

 

We plan to continue to invest in research and development and file for new and improved patents.

 

Royalty Agreements

 

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) who currently serves as our Technology Senior Manager, where certain devices and methods involved in our hydrodynamic cavitation processes invented by the President and former CEO/current Technology Senior Manager have been assigned to the subsidiary.  In exchange, that subsidiary agreed to pay a royalty of 5% of gross revenues to each of the President and former CEO/current Technology Senior Manager for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assumed by us on May 13, 2010 from our subsidiary. Our former CEO/current Technology Senior Manager and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2019.

 

On April 30, 2008 and as amended on November 22, 2010, our wholly owned subsidiary entered into an employment agreement with its former Director of Chemical and Analytical Department (the “Inventor”) to pay, in the first year, an amount equal to 5% of actual gross revenue received by us on any patent for which the Inventor was a legally named inventor, and, in each subsequent year, 3% of actual gross revenue received by us on any such patent. Since entering into that employment agreement, and during the term of this employment agreement, we have not received any revenue on any patents for which the Inventor was a legally named inventor.

 

Governmental Approval and Regulations and Environmental Compliance

 

Due to the nature of our products, we have incurred no costs with respect to environmental compliance with federal, state, and local laws. To our knowledge, our products do not require governmental approval, and we do not foresee that governmental regulations will have a material impact on our business.

 

Employees

 

As of June 30, 2019 we had five full-time employees and had engaged several consultants and independent contractors over the past year. Members of our staff and technical team are comprised of experienced professionals who are chemists, civil, chemical, and mechanical engineers with expertise in hydrodynamic cavitation, nano technology and water treatment. These individuals hold degrees in Civil, Chemical, and Mechanical Engineering.

 

Research and Development Expenditures

 

During the fiscal years ended June 30, 2019 and 2018, we spent $25,000 and $25,000, respectively, on research and development activities.

 

 

 

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ITEM 1A.RISK FACTORS

 

Not applicable for smaller reporting companies.

 

ITEM 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.PROPERTIES

 

Our corporate headquarter is located in Chatsworth, California, with an area of approximately 5,000 square foot facility, which includes office space and an area to conduct research and development.  Our lease agreement for this space will end in February 2025. Our monthly rent payments approximate $6,000 up to $7,000. We do not anticipate any material difficulties with the renewal of our rental agreement when it expires or in securing replacement facilities on commercially reasonable terms.

 

ITEM 3. LEGAL PROCEEDINGS

 

The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.

 

In August 2014, a former employee and former Director (Plaintiff) filed an administrative Complaint for approximately $179,000 in unpaid wages, plus penalties and interest, with the California Labor Commissioner’s Office (CLCO).  In January 2016, the CLCO ruled in favor of the Company and dismissed the case. As a result of this ruling, the Company’s obligation to the Plaintiff only amounted to approximately $134,000 which was already accrued in prior periods and included as part of Accrued Payroll and payroll taxes due to officers in the accompanying balance sheet.

 

In February 2016, the Plaintiff appealed this ruling to the Los Angeles County Superior Court.  In addition to defending itself, the Company also has filed a cross-complaint against the Plaintiff for breach of contract and breach of fiduciary duty as a Director. In August 2017, the Plaintiff filed a notice of appeal of the trial court’s ruling granting the Company’s anti-SLAPP motion. The Court of Appeal has dismissed Plaintiff’s appeal for failing to timely to designate the record on appeal.

 

In March 2018, the Company has reached a settlement agreement with the Plaintiff, resulting in removal of all claims by both parties. As a result of this settlement, during the year ended June 30, 2018, the Company recorded a gain of $101,000 to extinguish the previously recorded accrued salary.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

 

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PART II

 

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Common Stock

 

Our Common Stock is traded on the OTCQB Market under the symbol CVAT. The following table sets forth the high and low price per share based on the closing price of our Common Stock for the periods indicated.

 

       HIGH   LOW 
             
 Fiscal 2018   First Quarter  $0.04   $0.03 
     Second Quarter  $0.04   $0.02 
     Third Quarter  $0.04   $0.03 
     Fourth Quarter  $0.04   $0.02 

 

       HIGH   LOW 
             
 Fiscal 2019   First Quarter  $0.03   $0.02 
     Second Quarter  $0.03   $0.02 
     Third Quarter  $0.03   $0.02 
     Fourth Quarter  $0.03   $0.02 
                
 Fiscal 2020   First Quarter  $0.04   $0.02 

 

We became a public company through a share exchange that was affected in October 2008. The first day of public trading of our stock was November 11, 2008. Since our fiscal year end was changed to June 30, public trading of our stock began in the second quarter of fiscal 2009. As of September 30, 2019, there were approximately 1,100 holders of record of our Common Stock. This does not reflect the number of persons or entities who hold stock in nominee or “street” name through various brokerage firms. The closing price of our common stock on October 4, 2019 was 0.03.

 

Dividend Policy

 

We have neither declared nor paid any dividends on our Common Stock in the preceding two fiscal years. We currently intend to retain future earnings, if any, to fund ongoing operations and finance the growth and development of our business and, therefore, do not anticipate declaring or paying cash dividends on our Common Stock for the foreseeable future. Any future decision to declare or pay dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deems relevant.

 

 

 

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Securities Authorized for Issuance under Equity Compensation Plans

 

None.

 

Recent Sales of Equity Securities and Use of Proceeds

 

During the year ended June 30, 2019 the Company reissued 18,959,994 stock warrants at $.12. We did not sell any equity securities during the year ended June 30, 2018 in transactions that were not registered under the Securities Act of 1933, as amended, other than as previously disclosed in our filings with the Securities and Exchange Commission.

 

Issuer Purchases of Equity Securities

 

None.

 

ITEM 6.SELECTED FINANCIAL DATA

 

Not applicable for smaller reporting companies.

 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.

 

Overview of Our Business

 

We are a Nevada corporation originally incorporated under the name Bio Energy, Inc. On January 29, 2007, we incorporated a wholly owned subsidiary, Hydrodynamic Technology, Inc. as a California corporation.

 

We have developed, patented, and commercialized proprietary technology that can be used for processing of various industrial and consumer-oriented fluids. Our patented Nano Reactor® is the critical components of the CTi Nano Neutralization® System which has been shown to reduce operating costs and increase yields in processing oils and fats. CTi holds and applied for numerous patents covering technology and various processes in US and Internationally, covering vegetable and crude oil refining, processed and frac water treatment, algae oil extraction, and alcoholic beverage enhancement. During our Fiscal 2019, we have developed additional technologies and products, such as, LPN (low pressure nano reactor and system). LPN is designed to become a highly efficient mixer and homogenizer. We believe that LPN has a great commercial utilization opportunity by providing efficient and cost-effective solution in multiple fluid processing industries. LPN has a number of advantages over current mechanically operated mixers and homogenizers. Additionally, our miniature LPN has become an integral part of Barmuze®, consumer small home appliance device. In industrial produced and frac water treatment system, LPN’s along with our proprietary chemical formulations have depicted measurable and quantifiable advantages over industry standard processes and equipment.

 

During the year ended June 30, 2019, we recorded revenue of $1,090,000 and loss from operations and net loss of $724,000, respectively.

 

 

 

 13 

 

 

Management’s Plan of Operation

 

We are continuously engaged in manufacturing our Nano Reactor® and Nano Neutralization Systems which are designed to help refine vegetable oils such as soybean, canola and rapeseed. Additionally, we have developed LPN’s that provide commercial opportunity in industrial water treatment and alcoholic beverages consumer small home appliance. Our near-term goal is to develop strategic and marketing tools to accelerate sales cycles for our Nano Reactor® and Nano Neutralization Systems, with an addition of LPN’s.

 

During the year ended June 30, 2019, we incurred net loss of $723,000 and used cash in operations of $280,000. We also have a working capital deficiency of $894,000 and a stockholders’ deficit of $819,000 as of June 30, 2019. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.

 

Management’s plan is to generate income from operations by licensing our technology globally through our licensees, Desmet Ballestra Group (Desmet) and GEA Westfalia Group (GEA). In October 2018, we signed a three-year global R and D, Marketing and Technology License Agreement with Desmet for the sale and licensing of our reactors. This agreement is a continuation of the original agreement we signed with Desmet in May 2012. As part of the agreement, Desmet is also obligated to provide us with monthly advances of $50,000 to be applied against our share in gross profit from the sale of reactors. During the year ended June 30, 2019, advances received from Desmet amounted to $550,000, of which, $517,000 was recorded as revenues. These funds service operational expenses on a monthly basis.

 

In January 2017, we signed a three-year global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications. This agreement provides us with $25,000 monthly advances to be applied against our share in gross profit from the sale of reactors. This agreement may be terminated by either party on each anniversary date. During the year ended June 30, 2019, we received advances from GEA in the amount of $300,000 under this agreement. As of June 30, 2019, total advances received from GEA amounted to $727,000.

 

In addition to these advances, we anticipate that we may need additional funding, and we may attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet our needs, or that we will be able to meet our future contractual obligations. Should management fail to obtain such financing, we may curtail its operations.

 

 

 

 14 

 

 

Critical Accounting Policies and Revenue Recognition

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those we consider most critical in preparing its consolidated financial statements. The following is a review of the accounting policies and estimates that include significant judgments made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used instead.

 

Note 1 of the accompanying consolidated financial statements includes a summary of significant accounting policies, estimates, and methods used in the preparation of our financial statements. Accounting estimates are an integral part of the preparation of financial statements and are based on judgments by management using its knowledge and experience about the past and current events and assumptions regarding future events, all of which we consider to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain and that affect the carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts of expenses during the reporting period.

 

Revenue Recognition

 

Revenues from sale of reactors is recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). 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.

 

In addition, the Company recognizes revenue from its share of gross profit, as defined, to be earned from distributors. In accordance with ASC 606, the Company has determined that the gross profit to be earned from its distributor is variable consideration, and evaluates the amount of the potential payments and the likelihood that the payments will be received using the most likely amount approach. 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 variable revenue constraints, and as such, the amount of revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined is not refundable and probable that a significant revenue reversal would not occur.

 

 

 

 15 

 

 

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.

 

Recent Accounting Pronouncements

 

See Note 1 of the financial statements for discussion of recent accounting pronouncements.

 

Results of Operations

 

Below is summary comparing fiscal 2019 and fiscal 2018.

 

   For the Years Ended         
   June 30,         
   2019   2018   $ Change   %Change 
                 
Revenue  $1,090,000   $1,303,000   $(213,00)   (16)% 
Cost of revenue   (69,000)   (122,000)   53,000    43% 
Gross profit   1,021,000    1,181,000    (160,000)   (14)% 
                     
General and administrative expenses   1,719,000    1,507,000    212,000    14% 
Research and development expenses   25,000    25,000         
Total operating expenses   1,744,000    1,532,000    212,000    14% 
Loss from Operations   (723,000)   (351,000)   (372,000)   106% 
Gain on settlement of accrued payroll       101.000    (101,000)   (100)% 
Net Loss  $(723,000)  $(250,000)  $(473,000)   (189)% 

 

 

 

 16 

 

 

Revenue

 

During the year ended June 30, 2019 revenue decreased by 16% to $1,090,000 and was derived from the sale of our CTi Nano Neutralization Systems to Desmet Ballestra in the aggregate of $533,000 pursuant to seven purchase orders and corresponding share in gross profit in the aggregate of $517,000. In addition, the Company also recorded revenues of $40,000 from the sale of reactor system to a new customer, Enviro Watertek LLC. During the year ended June 30, 2018, revenue of $1,303,000 was derived from the sale of our CTi Nano Neutralization Systems through Desmet Ballestra of $603,000 pursuant to eight purchase orders and corresponding share in gross profit of $700,000.

 

Operating Expenses

 

Operating expenses for fiscal 2019 amounted to $1,744,000 versus $1,532,000 in fiscal 2018, an increase of $212,000 or 14%. The increase in operating expenses was attributed to issuance of stock warrants for services in fiscal 2019 and amendment of certain stock warrants issued in prior period which resulted in stock compensation expense in the aggregate of $449,000. Other Non-cash expense items such as amortization and depreciation expense of $26,000, primarily amounted to a small proportion of operating expenses, with major expense categories being salaries and payroll taxes of approximately $699,000, legal and professional fees of approximately $97,000, $167,000 for travel, insurance and marketing services combined. Research and development (R&D) expense was $25,000 and the same for the year ended June 30, 2019.

 

Operating expenses for fiscal 2018 amounted to $1,532,000. Non-cash expense items such as amortization and depreciation expense of $50,000 among others, amounted to a small proportion of operating expenses, with major expense categories being salaries and payroll taxes of approximately $643,000, legal and professional fees of approximately $208,000, various insurance policies, travel and marketing services amounting to $185,000.

 

Gain on settlement of accrued payroll

 

During the year ended June 30, 2018, accrued salary of $131,000 due to a former director was settled for a payment of $30,000, resulting in a gain on settlement of $101,000. There was no such transaction during the year ended June 30, 2019.

 

Net Loss

 

Our reported Net Loss in fiscal 2019 was $723,000 compared to Net Loss in fiscal 2018 of $250,000.

 

Liquidity and Capital Resources

 

Our cash balance at June 30, 2019 decreased to $649,000 as compared to $945,000 at June 30, 2018. The decrease was the result of $280,000 in cash used in operating activities and $16,000 of cash used in investing activities. Net cash used in operations during the year ended June 30, 2019 was $280,000 compared with $396,000 of cash provided by operations during the same period of the prior year. Cash used in operations during the year ended June 30, 2019 was primarily to fund our net loss of $723,000, offset by an increase in stock-based compensation expense of $449,000 and depreciation of $41,000, and a net decrease to our working capital accounts of $47,000.

 

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. During the year ended June 30, 2019, we recorded net loss of $723,000 and used cash in operations of $280,000. As of June 30, 2019, we had a working capital deficiency of $894,000, and stockholders’ deficit of $819,000. We have also been dependent on certain aspects of our funding from technology agreements with our distributors. These factors, among others, raise substantial doubt about our ability to continue as a going concern 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 our June 30, 2019 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable to continue as a going concern.

 

 

 

 17 

 

 

Management’s plan is to generate income from operations by continuing to license its technology globally. Currently, we have a R&D, Marketing and Technology License agreement with Desmet signed in October 2018, in which Desmet provides advances to the Company of $50,000 per month through October 2021 be applied to future gross profit revenues. In addition, we have a R&D, Marketing and Technology License agreement with GEA signed in January 2017, in which GEA provides advances to the Company of $25,000 per month through January 2020 to be applied to future sales. At June 30, 2018, advances from Desmet and GEA totaled $427,000. During the year ended June 30, 2019, the Company received advances of $850,000, of which $517,000 was recorded as revenues. As of June 30, 2019, advances from Desmet and GEA totaled $760,000.

 

We may also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing will be available in the future or obtained in sufficient amounts necessary to meet our needs, that we will be able to achieve profitable operations or that we will be able to meet our future contractual obligations. Should management fail to obtain such financing, we may curtail its operations.

 

Off-balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable for Smaller Reporting Companies.

 

 

 

 18 

 

 

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors
Cavitation Technologies, Inc.
Los Angeles, CA

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Cavitation Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2019 and 2018, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and at June 30, 2019, has a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Weinberg & Company, P.A.  
   
Los Angeles, California  
October 15, 2019  

 

We have served as the Company’s auditor since 2013

 

 

 

 19 

 

 

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

 

   June 30,
2019
   June 30,
2018
 
         
ASSETS          
           
Current assets:          
Cash  $649,000   $945,000 
Accounts receivable   240,000     
Inventory   57,000    34,000 
Total current assets   946,000    979,000 
           
Property and equipment, net   65,000    90,000 
Other assets   10,000    10,000 
Total assets  $1,021,000   $1,079,000 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current liabilities:          
Accounts payable and accrued expenses  $187,000   $307,000 
Accrued payroll and payroll taxes   892,000    889,000 
Related party payable   1,000    1,000 
Advances from distributors   760,000    427,000 
Total current liabilities   1,840,000    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 June 30, 2019 and 2018, respectively        
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 shares issued and outstanding as of June 30, 2019 and 2018, respectively   197,000    197,000 
Additional paid-in capital   23,090,000    22,641,000 
Accumulated deficit   (24,106,000)   (23,383,000)
Total stockholders' deficit   (819,000)   (545,000)
Total liabilities and stockholders' deficit  $1,021,000   $1,079,000 

 

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

 

 

 

 20 

 

 

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Years Ended 
   June 30, 
   2019   2018 
         
Revenue  $1,090,000   $1,303,000 
Cost of revenue   (69,000)   (122,000)
Gross profit   1,021,000    1,181,000 
           
General and administrative expenses   1,719,000    1,507,000 
Research and development expenses   25,000    25,000 
Total operating expenses   1,744,000    1,532,000 
           
Loss from operations   (723,000)   (351,000)
           
Gain on settlement of accrued payroll       101,000 
           
Net loss  $(723,000)  $(250,000)
           
Net loss per share,          
Basic and Diluted  $(0.00)  $(0.00)
           
Weighted average shares outstanding,          
Basic and diluted   196,997,906    197,148,043 

 

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

 

 

 

 21 

 

 

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

YEARS ENDED JUNE 30, 2019 AND 2018

 

   Common
Stock
   Additional
Paid-
   Accumulated     
   Shares   Amount   in Capital   Deficit   Total 
                     
Balance at June 30, 2017   196,797,906   $197,000   $22,625,000   $(23,133,000)  $(311,000)
                          
Issuance of common stock for services   400,000        16,000        16,000 
                          
Cancellation of common stock granted to Director   (200,000)                
                          
Net loss               (250,000)   (250,000)
                          
Balance at June 30, 2018   196,997,906    197,000    22,641,000    (23,383,000)   (545,000)
                          
Fair value of warrants granted for services           115,000        115,000 
                          
Fair value of amended warrants           334,000        334,000 
                          
Net loss               (723,000)   (723,000)
                          
Balance at June 30, 2019   196,997,906   $197,000   $23,090,000   $(24,106,000)  $(819,000)

 

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

 

 

 

 

 22 

 

 

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Years Ended June 30, 
   2019   2018 
         
Operating activities:          
Net loss  $(723,000)  $(250,000)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
Depreciation and amortization   41,000    51,000 
Fair value of common stock issued for services       16,000 
Fair value of vested warrants – stock compensation expense   449,000     
Gain on settlement of accrued payroll       (101,000)
Effect of changes in:          
Accounts receivable   (240,000)   85,000 
Inventory   (23,000)   109,000 
Other assets       2,000 
Accounts payable and accrued expenses   (120,000)   61,000 
Accrued payroll and payroll taxes due to officers   3,000    (4,000)
Advances from distributor   333,000    427,000 
Net cash provided by (used in) operating activities   (280,000)   396,000 
           
Investing activities:          
Purchase of property and equipment   (16,000)    
Net cash used in investing activities   (16,000)    
           
Net increase (decrease) in cash and cash equivalents   (296,000)   396,000 
Cash, beginning of period   945,000    549,000 
Cash, end of period  $649,000   $945,000 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $   $ 
Cash paid for income taxes  $2,000   $2,000 

 

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

 

 

 

 23 

 

 

CAVITATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 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 has commercially been shown to reduce operating costs and increase yields in refining vegetable oils.

 

We have commercialized our CTi Nano Neutralization® System in the refining process of certain vegetable oils which has proven to reduce costs and increase yields for our customers. In addition, we have four US and one international patented systems, as well as twelve US approved patents for various processes, and have filed another seven US and international patents to employ our proprietary technology in applications including vegetable and oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. During the year ended June 30, 2019, the Company incurred a net loss of $723,000 had a working capital deficit of $894,000. The Company has also been dependent on certain aspects of its funding from technology and license agreements with its distributors, Desmet Ballestra (Desmet) and GEA Westfalia (GEA). These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

The accompanying consolidated financial statements do not include any adjustments that may result from an inability of the Company to continue as a going concern.

 

Management’s plan is to generate income from operations by continuing to license its technology globally. Currently, we have a R&D Marketing and Technology License agreement with Desmet that was signed in October 2018, in which Desmet provides advances to the Company of $50,000 through October 2021 to be applied to future gross profit revenues. In addition, we have a R&D, Marketing and Technology License Agreement with GEA signed in January 2017, in which, GEA provides advances to the Company of $25,000 per month through January 2020 to be applied to future sales. At June 30, 2018, advances from Desmet and GEA totaled $427,000. During the year ended June 30, 2019, the Company received advances of $850,000, of which, $517,000 was recorded as revenues. As of June 30, 2019, advances from Desmet and GEA totaled $760,000.

 

 

 

 24 

 

 

The Company may also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing will be available in the future or obtained in sufficient amounts necessary to meet the Company’s needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

 

Principles of Consolidation

 

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

 

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 include estimates for reserves for inventory obsolescence, assumptions used in valuing our stock options, stock warrants and common stock issued for services and valuation allowance for our deferred tax asset, 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 Topic 606, Revenue from Contracts with Customers. Revenue from 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.

 

In addition, the Company recognizes revenue from its share of gross profit, as defined, to be earned from distributors. In accordance with ASC 606, 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. 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 limited to the actual amount of cash received under the contract which the Company has determined is not refundable and probable that a significant revenue reversal would not occur.

 

 

 

 25 

 

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.

 

The Company maintains its cash with one domestic financial institution. From time to time, cash balances in this domestic bank may exceed federally insured limits provided by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000.

 

As of June 30, 2019, and 2018, Company had deposits in excess of federally insured limit with one bank. The Company believes that no significant concentration of credit risk exists with respect to this cash balances because of its assessment of the creditworthiness and financial viability of this financial institution.

 

Accounts Receivable

 

The Company evaluates the collectability of our trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of past due trade accounts receivable outstanding.

 

Accounts receivable as of June 30, 2019 were $240,000 and were subsequently collected in full in July 2019. There was no account receivable outstanding as of June 30, 2018.

 

Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined on a specific item basis. Inventory is composed of finished goods and represents costs incurred to manufacture the Company’s Nano Reactor® systems. There was no recorded allowance for excess quantities and obsolescence as of June 30, 2019 and 2018.

 

Property and Equipment

 

Property and equipment is presented at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations.

 

 

 

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Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives.

 

Leasehold improvements  Shorter of life of asset or lease term
Furniture  5-7 Years
Office equipment  5 Years
Lab equipment  4 Years
Skid systems  4 Years

 

Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended June 30, 2019 and 2018, the Company did not recognize any impairment for its property and equipment.

 

Fair Value Measurement

 

FASB Accounting Standards Codification (“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

 

 In addition to defining fair value, the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

  

Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

 

Level 2 - inputs are based upon significant observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

As of June 30, 2019, and 2018, the carrying value of certain accounts such as accounts receivable, inventory, accounts payable, accrued expenses and accrued payroll approximates their fair value due to the short-term nature of such instruments.

 

 

 

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Share-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company’s common stock option and warrant grants is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the options and warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

 

Income Taxes

 

The Company follows the asset and liability method of accounting for 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.

 

Advertising Costs

 

Advertising costs, including marketing expense, incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $16,000 and $23,000 for the years ended June 30, 2019 and 2018 respectively and was reported as part of General and administrative expenses in the accompanying Consolidated Statements of Operations.

 

 

 

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Research and Development Costs

 

Research and development expenses relate primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the years ended June 30, 2019 and 2018 amounted to $25,000 and $25,000, respectively.

 

Warranty Policy

 

The Company provides a limited warranty with every set of reactors sold, typically 2 to 5 years. The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at June 30, 2019 and 2018.

 

Net Loss Per Share

 

The Company’s computation of loss per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 

The following table sets forth the computation of basic and diluted loss per common share.

 

   June 30, 
   2019   2018 
         
Net loss  $(723,000)  $(250,000)
           
Weighted average common shares – basic   196,997,906    197,148,043 
Dilutive effect of outstanding stock options and warrants        
Weighted average shares – diluted  $196,997,906   $197,148,043 
           
Net loss per common share:          
Basic and Diluted  $(0.00)  $(0.00)

 

 

 

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There were no adjustments to net loss required for purposes of computing diluted earnings per share. At June 30, 2019 and 2018, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of its diluted earnings per share, as their effect would have been anti-dilutive.

 

    June 30, 2019   June 30, 2018 
          
Options    11,000,000    11,378,754 
Warrants    79,263,176    75,926,510 

 

Concentrations

 

The Company’s revenue was mainly derived from sales Nano Reactor® and Nano Neutralization® System to Desmet. During the year ended June 30, 2019 and 2018, 96% and 100% of recorded revenues, respectively, were derived from Desmet (see Note 2).

 

At June 30, 2019, 100% of accounts receivable were due from Desmet.

 

As of June 30, 2019, three vendors and/or professional consultants accounted 49%, 33% and 11%, respectively, of accounts payable. As of June 30, 2018, three vendors and/or professional consultants accounted 51%, 18% and 10%, respectively, of accounts payable.

 

Segment

 

As of June 30, 2019, the Company operated one reportable business segment. 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, 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 No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company will adopt this provision on July 1, 2019 and will record approximately $327,000 in right of use assets and liabilities.

 

 

 

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In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to nonemployee share-based payment accounting. This ASU simplifies the accounting and reporting for share-based payments issued to nonemployees by expanding the scope of ASC 718,Compensation – Stock Compensation, which currently only includes share-based compensation to employees, to also include share-based payments to nonemployees for goods and services. The standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of ASC 606. The Company plans to adopt ASU 2018-07 on July 1, 2019. The adoption of ASU 2018-07 is not expected to have an impact on the Company’s financial statements and related 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 – Contracts with Customers

 

Desmet Ballestra Agreement

 

In October 2018, we signed a three-year global R and D, Marketing and Technology License Agreement with Desmet for the sale and licensing of our reactors. This agreement is a continuation of an original agreement we signed with Desmet in 2012, and amended in 2016. As part of the October 2018 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 accordance with ASC 606, the Company recognizes the revenue from the sale of reactors at the time of shipment of the Nano reactor hardware as such shipment is deemed to be the Company’s only performance obligation and the Company has no more continuing obligation. 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 profit, as defined, from the sale of Desmet’s integrated neutralization system to its customer of which the reactors are an integral component. Such amount is subject to adjustment based on certain factors including costs over run. The Company has no control with regards to the sale and installation of Nano Neutralization System, between Desmet and the end customer. In accordance with ASC 606, the Company has determined that the gross profit to be earned from its distributor is variable consideration, and evaluates the amount of the potential payments and the likelihood that the payments will be received 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 variable revenue constraints, and as such, the amount of revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined is not refundable and probable that a significant revenue reversal would not occur. Further, Company has been able to develop an expectation of the actual collection based on its historical experience.

 

 

 

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During the year ended June 30, 2019, the Company recorded sales of $533,000 from reactor sales and $517,000 from gross profit share for a total revenue of $1,050,000 from Desmet. As of June 30, 2019, advances received from Desmet amounted to $33,000 and recorded such amount as advances from distributor as the corresponding reactors have not been delivered.

 

During the year ended June 30, 2018, the Company recorded sales of $603,000 from reactor sales and $700,000 from gross profit share for a total revenue of $1,303,000.

 

GEA Westfalia Agreement

 

In January 2017 the Company entered into a global technology license, R&D and marketing agreement with GEA Westfalia (GEA) with respect to our patented Nano Reactor™ technology, processes and applications. Under the agreement, GEA has been granted a worldwide exclusive license to integrate our patented technology into water treatment application, milk and juice pasteurization, and certain food related processes. The license agreement between us and GEA has a three-year term and provides for the payment of $300,000 per year in advances to be applied to future license fees or share of gross profit, as defined.

 

GEA Westfalia Separator manufactures filtration and equipment such as separators, clarifiers, decanters and membrane filtration systems. This equipment is used for the purification of suspensions, the separation of fluid mixtures with simultaneous removal of solids, extraction and concentration or removal of liquids from solids.

 

As of June 30, 2018, advances received from GEA amounted to $427,000. During the year ended June 30, 2019, the Company received advances from GEA of $300,000. As of June 30, 2019, total advances received from GEA amounted to $727,000 and have been recorded as advances from distributors as the corresponding reactors have not been delivered.

 

Enviro Watertek, LLC Agreement

 

In April 2019, the Company entered into a licensing and service contract agreement with Enviro Watertek, LLC (“EW”). This agreement covers the Company’s industrial treatment process for produced and frack water. The Company’s Low Pressure Nano Reactor (LPN), was specifically developed to be integrated into frack water treatment system along with proprietary chemical formulations, and has depicted measurable and quantifiable advantages over industry standard processes and equipment. The agreement with EW provides for sales on Nano Reactors® plus recurring revenue stream based on processing frack water volumes and utilization. Our agreement with EW is for a period of 15 years but can be terminated by either party every anniversary.

 

During the year ended June 30, 2019, the Company sold Nano Reactor® system and recognized revenues of $40,000. Revenues from processing of frack water volumes and utilization will only be recognized upon collection from EW.

 

 

 

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Note 3 - Property and Equipment

 

Property and equipment consist of the following as of June 30, 2019 and 2018:

 

   June 30,   June 30, 
   2019   2018 
         
Leasehold improvement  $2,000   $2,000 
Furniture   27,000    27,000 
Office equipment   2,000    2,000 
Equipment   306,000    290,000 
Systems   187,000    187,000 
    524,000    508,000 
Less: accumulated depreciation and amortization   (459,000)   (418,000)
Property and equipment, net  $65,000   $90,000 

 

Depreciation expense for the years ended June 30, 2019 and 2018 amounted to $41,000 and $51,000, respectively and was recorded as part of General and Administrative expenses in the accompanying Consolidated Statements of Operations.

 

Note 4 - Accrued Payroll and Payroll Taxes

 

In prior periods, officers and former officers of the Company agreed to defer payment of their respective salaries. As of June 30, 2019, and 2018, the Company had accrued salaries and estimated payroll taxes to these officers and former officers amounting to $892,000 and $889,000 respectively.

 

During the year ended June 30, 2018, accrued salary of $131,000 due to a former director was settled for a payment of $30,000 resulting in a gain on settlement of $101,000 (see Note 7).

  

Note 5 - Stockholders’ Deficit

 

Preferred Stock

 

On March 17, 2009, the Company filed an Amended and Restated Articles of Incorporation and created two new series of preferred stock, the first of which is designated Series A Preferred Stock and the second of which is designated as Series B Preferred Stock. The total number of shares of Common Stock which this corporation has authority to issue is 1,000,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors. Each share of Common Stock and Preferred Stock has a par value of $0.001. As of June 30, 2019, and 2018, there are no shares of Series A or Series B Preferred Stock issued and outstanding.

 

 

 

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Common Stock

 

During the year ended June 30, 2019, the Company did not issue any shares of common stock.

 

During the year ended June 30, 2018, the Company issued 400,000 shares of common stock with fair value of $16,000 for services rendered. These shares were valued at fair value at the date of issuance.

 

During the year ended June 30, 2018, the Company cancelled 200,000 shares of common stock issued to a member of the Company’s Board of Director in prior period.

 

Stock Options

 

The Company has not adopted a formal stock option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic Technology, Inc. In addition, the Company has made periodic non-plan grants. A summary of the stock option activity from June 30, 2019 and 2018 is as follows:

 

            Weighted- 
            Average 
        Weighted-   Remaining 
        Average   Contractual 
        Exercise   Life 
    Options   Price   (Years) 
              
Outstanding at June 30, 2017    11,685,852   $0.37    2.41 
- Granted             
- Forfeited             
- Exercised             
- Expired    (307,098)        
Outstanding at June 30, 2018    11,378,754   $0.31    2.23 
- Granted             
- Forfeited             
- Exercised             
- Expired    (378,754)        
Outstanding at June 30, 2019    11,000,000   $0.03    3.36 

 

 

 

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As of June 30, 2019, all outstanding options were fully vested and exercisable. The intrinsic value of the outstanding options as of June 30, 2019 was zero. The following table summarizes additional information concerning options outstanding and exercisable at June 30, 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    3.36   $0.03    11,000,000    3.36 
      11,000,000              11,000,000      

 

Warrants

 

A summary of the Company’s warrant activity and related information from as of June 30, 2019 and 2018 is as follows.

  

           Weighted- 
           Average 
       Weighted-   Remaining 
       Average   Contractual 
       Exercise   Life 
   Warrants   Price   (Years) 
             
Outstanding at June 30, 2017   75,926,510   $0.06    4.81 
Granted            
Exercised            
Expired            
Outstanding at June 30, 2018   75,926,510   $0.06    3.81 
Granted   4,336,666   $0.03    4.49 
Exercised            
Expired   (1,000,000)        
Outstanding at June 30, 2019   79,263,176   $0.07    4.45 

    

 

 

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As of June 30, 2019, all outstanding warrants were fully vested and exercisable. The intrinsic value of the outstanding warrants as of June 30, 2019 was none. The following table summarizes additional information concerning warrants outstanding and exercisable at June 30, 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 - $0.05   58,936,518    5.38   $0.04    58,936,518   $0.04 
$0.08 - $0.12   20,326,658    3.39   $0.12    20,326,658   $0.12 
    79,263,176              79,263,176      

 

During the year ended June 30, 2019, the Company granted warrants to purchase 4,336,666 shares of common stock to consultants 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 year ended June 30, 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 $334,000 to account for 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 warrant awards was estimated using the Black-Scholes method based on the following weighted-average assumptions:

 

   June 30, 
   2019 
     
Risk-free interest rate   2.60% 
Contractual terms (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.

 

 

 

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Note 6 - Income Taxes

 

For the years ended June 30, 2019 and 2018, the Company has no provision for current income taxes due to net losses incurred. Deferred income taxes result from temporary differences in the recognition of income and expenses for the financial reporting purposes and for tax purposes. The components of deferred tax assets are presented below:

 

At June 30, 2019, the Company had available Federal net operating loss (NOL) carryforwards of approximately $9.8 million that are available to reduce future taxable income. The Federal carryforward expires in 2036. The NOL is subject to statutory limitations under Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carry forwards.

 

During the year ended June 30, 2019 and 2018, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards due to recurring operating losses. Based on their evaluation, the Company determined that the net deferred tax assets, do not meet the requirements to realize, and as such, the Company has provided a full valuation allowance against them.

 

At June 30, 2019 and 2018, significant component of the Company’s deferred tax assets and liabilities are as follows:

 

   June 30,   June 30, 
   2019   2018 
         
Net Operating loss carryforwards  $2,827,000   $2,607,000 
Stock compensation expense    783,000    658,000 
Amortization of patents    48,000    48,000 
Reserve for obsolete inventory    46,000    46,000 
Total net deferred tax assets    3,704,000    3,359,000 
Less valuation discount    (3,704,000)   (3,359,000)
Net deferred tax assets  $   $ 

 

A reconciliation of the effective income tax to statutory US federal income tax is as follows:

 

   June 30,   June 30, 
   2019   2018 
         
Federal statutory rate    (21)%    (28)% 
State income taxes, net of Federal benefit    (7)%    (7)% 
Net operating loss/carryforward    28%    35% 
Income tax provision         

 

 

 

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On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements, such as the reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions.

 

Accounting rules 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.

 

The following summarizes the open tax years for each major jurisdiction:

 

Jurisdiction   Open Tax Years
     
Federal   2014 – 2018
California   2014 – 2018

 

The Company’s net operating loss carry forwards are subject to IRS examination until they are utilized and such tax years are closed.

 

Note 7 – Commitments and Contingencies

 

Lease Agreement

 

The Company leases approximately 5,000 square feet of office and warehouse space under a non-cancellable operating lease agreement through February 1, 2019 with monthly payments of approximately $5,600 per month. In January 2019, the Company signed a new lease agreement for the Company's office. The lease started in February 2019 and will end in February 2025, or 73 months, with a monthly lease starting at $6,000 up to $7,000 over the term of the lease.

 

Total rent expense was $65,000 and $62,000 for the years ended June 30, 2019 and 2018, respectively, and was reported as part of General and administrative expenses in the accompanying Consolidated Statements of Operations.

 

 

 

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Pursuant to ASU 2016-02 and ASC 842, the Company will record the corresponding Right of Used Asset and Liabilities of approximately $327,000 on July 1, 2019, the start of the Company’s fiscal year 2020. Below is the Company’s minimum lease commitment:

 

Fiscal Year End  June 30, 
   2019 
     
2020  $68,000 
2021   70,000 
2022   72,000 
2023   75,000 
2024 and thereafter   132,000 
Total  $417,000 

 

Royalty Agreements

 

On July 1, 2008, the Company’s wholly owned subsidiary entered into Patent Assignment Agreements with two parties, its President as well as its former Chief Executive Officer (CEO) and current Technology Senior Manager, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and former CEO/ current Technology Senior Manager have been assigned to the Company.  In exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the President and former CEO/ current Technology Senior Manager for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company’s former CEO/ current Technology Senior Manager and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2019 and 2018.

 

On April 30, 2008 (as amended November 22, 2010), the Company’s wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical Department (the “Inventor”) providing that the Inventor shall receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of June 30, 2019, and 2018, no patents have been granted in which this person is the legally named inventor.

 

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 years ended June 30, 2019 and 2018 pursuant to these agreements. As of June 30, 2019, the Company owns 19.9% of ABI. The investment in ABI has no value assigned to it, which approximates its fair value.

 

 

 

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Litigation

 

The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.

 

In August 2014, a former employee and former Director (Plaintiff) filed an administrative Complaint for approximately $179,000 in unpaid wages, plus penalties and interest, with the California Labor Commissioner’s Office (CLCO).  In January 2016, the CLCO ruled in favor of the Company and dismissed the case. The Company had accrued approximately $134,000 for its estimated obligation to the Plaintiff. In February 2016, the Plaintiff appealed this ruling to the Los Angeles County Superior Court.  In addition to defending itself, the Company also has filed a cross-complaint against the Plaintiff.  In August 2017, the Plaintiff filed a notice of appeal of the trial court’s ruling granting the Company’s anti-SLAPP motion. The Court of Appeal dismissed Plaintiff’s appeal for failing to timely to designate the record on appeal. In March 2018, the Company has reached a settlement agreement with the Plaintiff, resulting in removal of all claims by both parties. As a result of this settlement, during the year ended June 30, 2018, the Company recorded a gain of $101,000 to extinguish the previously recorded accrued salary.

 

 

 

 

 

 

 

 

 

 

 

 

 40 

 

 

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

In accordance with rule 13a-15(a), our 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 us in reports that we file or submit 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 our management, including our 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 June 30, 2019, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were not effective as of June 30, 2019.

 

Report of Management on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed under the supervision of our principal executive and principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

 

 

 41 

 

 

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal controls and procedures, (as defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the year ended June 30, 2019. Management conducted as assessment of our internal control over financial reporting based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our internal controls over financial reporting are ineffective. Our management discovered certain conditions that we deemed to be material weaknesses and significant deficiencies in our internal controls, as follows:

 

A lack of accounting and finance resources as well as effective oversight by those in charge of governance resulted in insufficient controls over timely financial statement preparation and review as well as the preparation and review around accounting for certain complex transactions.

 

The design of monitoring controls used to assess the design and operating effectiveness of our internal controls is inadequate. We also do not have an adequate internal process to report deficiencies in internal control to management on a timely basis.

 

We are in the continuous process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort is needed to fully remedy these deficiencies. We intend to hire the necessary staff to address the weaknesses once additional capital is obtained which will allow full operations to commence. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

We have taken numerous steps to address the underlying causes of the internal control deficiencies, primarily through the development and implementation of policies, improved processes and documented procedures, the retention of third-party experts and contractors, and the hiring of additional accounting personnel with technical accounting and inventory accounting experience.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Attestation

 

Pursuant to Item 308(b) of Regulation S-K, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Wall Street Reform Act), this report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. The Wall Street Reform Act permanently exempts small public companies from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls.

 

ITEM 9B.Other Information

 

None.

 

 

 

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PART III

 

ITEM 10.Directors, Executive Officers and Corporate Governance.

 

Person  Age   Position
        
Igor Gorodnitsky   59   President, PEO, Secretary and Director
Naum Voloshin   56   Principal Accounting Officer
James Fuller   79   Director

 

Audit committee standing members consisted of Igor Gorodnitsky and James Fuller as of June 30, 2019. We anticipate forming compensation, governance, and other committees as necessary.

 

Igor Gorodnitsky. Mr. Gorodnitsky has been our President and member of the Board of Directors since September 26, 2008, and he became the Company's Secretary and Principal Executive Officer in November of 2012. Mr. Gorodnitsky developed expertise in handling and processing hazardous waste material. As a Senior Haz-Mat Specialist, he coordinated and successfully completed more than 500 emergency response Haz-mat clean-ups over the past 20 years. He coordinated and supervised Haz Mat projects, emergency and routine spill clean-ups, and confined space entry tasks. He coordinated and scheduled manpower and purchased and scheduled equipment and materials for containment and treatment of spills. He successfully managed, coordinated and supervised projects including Hazscanning, sampling, lab-packing, manifesting, profiling, labeling, and other special procedures for a variety of commercial clients and municipalities. He is a chemist by training and holds numerous certifications and licenses including Hazwoper Training Program, Confined Space Entry and Gas Vapour HazCating, Certified Uniform Waste Manifest Training, Basic and Intermediate HazCating, On-Scene Incident Commander Emergency, Site Remediation Methods, Underground Storage Tank Removal, Health & Safety Supervisor Certification, Hazardous Certification, and Tosco Refinery Safety. Mr. Gorodnitsky was president of Express Environmental Corp. since its inception in 1980 until he sold his interest in January 2009. Based on his significant industry experience and management skills it was determined that Mr. Gorodnitsky should serve on the Company’s Board.

 

James Fuller. Mr. Fuller is an independent director, and has been Chairman of our Audit Committee and Independent Financial Expert since February 2010. He was formerly a Vice President of the New York Stock Exchange and director of the Securities Investor Protection Corporation. In addition to his over 30 years of experience in the securities markets, Mr. Fuller sat on the Board of Trustees of the University of California, Santa Cruz and previously served as Chairman of their Audit Committee and Independent Financial Expert. Jim is a partner at Baytree Capital Associates, LLC. He received his BS in Political Science from San Jose State University and his MBA from California State University - Fresno. Mr. Fuller also served as a Director of Propell Technologies Group, Inc (OTCQB: Propell), a public company engaged in oil and gas exploration from October 14, 2011 until February 17, 2015. Based on Mr. Fuller’s extensive experience in finance as well as his prior public company experience it was determined that Mr. Fuller should serve on the Company’s Board.

 

 

 

 43 

 

 

Naum Voloshin. Mr. Voloshin has over 20 years of experience in investment banking, business operations and marketing. Prior to joining CTi, Mr. Voloshin has worked for several developmental stage companies in US, Europe and Asia. The scope of his duties was to provide management, supervision, business experience and marketing skills.

 

Family Relationships

 

Roman Gordon is a founder and current Global Technology Manger of the Company. He was a former member of the Company’s Board of Directors and Chief Technology Officer up to July 15, 2016. He is also the brother of Mr. Igor Gorodnitsky, President, Principal Executive Officer and member of the Company’s Board of Directors.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors, persons who own more than 10% of our common stock, and immediate family members living in the same household to file an Initial Statement of Beneficial Ownership on Form 3 and changes in ownership on Form 4 with the Securities and Exchange Commission (the "SEC"). Such "insiders" are required by SEC rules to furnish us with copies of all Section 16(a) forms they file.

 

Based on a review of Forms 3, 4, and 5 and amendments thereto furnished to us during fiscal 2019 ended June 30, 2018, there were no delinquent forms filed during the year.

 

Director Independence

 

Although our common stock is not listed on a national securities exchange, for purposes of independence we use the definition of independence applied by the NASDAQ stock market. The Board has determined that Mr. Fuller is an” independent” in accordance with such definition. Mr. Gorodnitsky is not independent due to his current positions with the Company.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to all officers, directors and employees. A copy may also be obtained free of charge by mailing a request in writing to: Cavitation Technologies, Inc., 10019 Canoga Ave., Chatsworth, CA 91311 USA. If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver in a current report on Form 8-K.

 

 

 

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ITEM 11.Executive Compensation.

 

Summary Compensation Table

 

The following table sets forth a summary of cash and non-cash compensation awarded, earned or paid for services rendered to us during the years ended June 30, 2019 and 2018 by our “named executive officers,” consisting of (i) each individual serving as principal executive officer, and (ii) our Chief Financial Officer/Chief Operating Officer, our other executive officer.

 

             Stock  Warrant  Non-Equity Incentive Plan  Changes in Pension
Value and Non-Qualified Deferred
  All
Other
    
   Year  Salary   Bonus  Awards (1)  Awards  Compensation  Compensation  Compensation  Totals 
                              
Igor Gorodnitsky   2019   173,800   $     $  $  $  $  $173,800 
President, Principal Executive Officer   2018   169,000   $     $  $  $  $  $169,000 
                                       
Naum Voloshin   2019   173,800   $     $  $  $  $  $173,800 
Principal Accounting Officer   2018   169,000   $     $   $  $  $  $169,000 

 

Outstanding Equity Awards at Fiscal Year-End

 

The table below reflects all outstanding equity awards made to each of the named executive officers that are outstanding as of June 30, 2019.

  

         Option Awards      
         Number    Number           
         of securities    of securities           
         Underlying    Underlying           
    Option/warrant    Unexercised    Unexercised    Option/warrant    Option/warrant 
   grant    Options/warrants    Option/warrant    Exercise    Expiration 
Name   date    # Exercisable    # Unexercisable    Price    Date 
                          
Igor Gorodnitsky   12/18/2012    4,250,000       $0.05    12/18/2022 
President and   3/20/2013    5,000,000       $0.04    3/20/2023 
Principal Executive Officer   1/13/2017    3,000,000       $0.03    1/13/2027 
                          
Naum Voloshin   10/10/2013    3,000,000       $0.04    10/10/2023 
Principal Accounting Officer   1/13/2017    3,000,000       $0.03    1/13/2027 

 

 

 

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The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. Expected volatility is calculated based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury yield for a term equal to the expected life of the options at the time of grant.

 

Employment Agreements

 

Our executive officers work as at-will employees.

 

Code Section 162(m) Provisions

 

Section 162(m) of the U.S. Internal Revenue Code, or the Code, generally disallows a tax deduction to public companies for compensation in excess of $1 million paid to the Chief Executive Officer or any of the four most highly compensated officers. Performance-based compensation arrangements may qualify for an exemption from the deduction limit if they satisfy various requirements under Section 162(m). Although we consider the impact of this rule when developing and implementing our executive compensation programs, we believe it is important to preserve flexibility in designing compensation programs. Accordingly, we have not adopted a policy that all compensation must qualify as deductible under Section 162(m) of the Code. While our stock options are intended to qualify as “performance-based compensation” (as defined by the Code), amounts paid under our other compensation programs may not qualify as such. 

 

2019 Director Compensation

 

The following table sets forth information for the fiscal year ended June 30, 2018 regarding the compensation of our directors who at June 30, 2019 were not also named executive officers.

 

    Fees              Non-equity                
    Earned              inventive    Non-qualified           
    or paid    Stock    Option    plan    deferred    All other      
   in cash    Awards    Awards    compensation    compensation    compensation    Total 
Name   ($)    ($)    ($)    ($)    Earnings    ($)    ($) 
                                    
James Fuller (1)  $   $   $   $   $   $   $ 

 

As of June 30, 2019, the following table sets forth the number of aggregate outstanding option awards held by each of our directors who were not also named executive officers:

 

Name  

Aggregate

Number of

Option Awards

     
   

 

 

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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table provides information regarding the beneficial ownership of our common stock as of October 3, 2019, (the “Evaluation Date”) by: (i) each of our current directors, (ii) each of our named executive officers, and (iii) all such directors and executive officers as a group. We know of no other person or group of affiliated persons who beneficially own more than five percent of our common stock. The table is based upon information supplied by our officers, directors and principal stockholders and a review of Schedules 13D and 13G, if any, filed with the SEC. Unless otherwise indicated in the footnotes to the table and subject to community property laws where applicable, we believe that each of the stockholders named in the table has sole voting and investment power with respect to the shares indicated as beneficially owned.

 

Applicable percentages are based on 196,997,906 shares outstanding as of the Evaluation Date, adjusted as required by rules promulgated by the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of our common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable within 60 days of the Evaluation Date. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

Amount and        Amount and     
Nature of        Nature of     
Title of     Title of  Beneficial     
Name of Beneficial Owner     Class  Ownership   Class (1) 
               
Igor Gorodnitsky   (1)  Common Stock   17,250,000    8.75% 
President, Principal Executive Officer, Director                 
                  
James Fuller   (1)  Common Stock   2,837,500    1.44% 
Chairman of Audit Committee, Director                 
                  
Naum Voloshin   (1)  Common Stock   6,000,0000    3% 
Principal Accounting Officer                 
                  
Directors and Officers   (1)  Common Stock   26,087,500    13.9%   
(as a group, three individuals)                 

_____________

  (1) Unless otherwise set forth below, the mailing address of Executive Officers, Directors and 5% or greater holders is in care of the Company,

 

Igor Gorodnitsky

James Fuller

 

 

 

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ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Certain Related Party Transactions

 

Since the beginning of our last fiscal year , there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years and in which any of our directors, executive officers, holders of more than five percent of any class of our voting securities or any member of the immediate family of the foregoing persons had or will have a direct or indirect material interest.

 

Accrued Payroll and Payroll Taxes

 

As of June 30, 2019, and 2018, the Company had accrued unpaid salaries to officers and former officers amounting to $889,000 and $889,000 respectively. During the year ended June 30, 2018, accrued salary of $131,000 due to a former director was settled for a payment of $30,000.

 

Cameo USA LLC

 

In fiscal 2014, Roman Gordon, one of the Company’s shareholders and a former officer, formed a company called Cameo USA LLC (Cameo). Since its formation, Cameo has had no revenue, no operations, and has had no assets or liabilities. On June 4, 2018, Mr. Gordon contributed his 100% interest in Cameo to the Company. As Mr. Gordon had no basis in his investment in Cameo, there was no value assigned to the contribution of Cameo. Subsequent to the contribution of Cameo to the Company, Cameo was sold to Alchemy Beverages Inc.

 

Director Independence

 

As our common stock is currently traded on the OTC Bulletin Board, we are not subject to the rules of any national securities exchange which require that a majority of a listed company's directors and specified committees of the board of directors meet independence standards prescribed by such rules. For the purpose of preparing the disclosures in this Report on Form 10-K regarding director independence, we have used the definition of "independent director" set forth in the Marketplace Rules of The NASDAQ, which defines an "independent director" generally as a person other than an executive officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these standards, we believe that James Fuller is an Independent Financial Expert.

 

 

 

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ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Independent Registered Public Accounting Firm’s Fee Summary

 

The following table provides information regarding the fees billed to us by Weinberg & Company, P.A. for the years ended June 30, 2019 and 2018. All fees described below were approved by the Board:

   

  

June 30,

2019

  

June 30,

2018

 
         
Audit Fees and Expenses (1)  $77,000   $83,000 
Audit Related Fees (2)  $   $ 
All Other Fees  $7,000   $13,000 

___________

  (1) Audit fees and expenses were for professional services rendered for the audit and reviews of the consolidated financial statements of the Company, professional services rendered for issuance of consents and assistance with review of documents filed with the SEC.

 

  (2) The audit related fees were for professional services rendered for additional filing for registration statements and forms with the SEC.

 

Pre-Approval Policies and Procedures

 

Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm.

 

Prior to the engagement of the independent registered public accounting firm for the next year’s audit, management will submit a list of services and related fees expected to be rendered during that year for audit services, audit-related services, tax services and other fees to the Audit Committee for approval.

 

 

 

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PART IV

 

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a) The following documents are filed as part of this annual report on Form 10-K:

 

1.   Financial Statements

 

The financial statements are filed as part of this report under Item 8 “Financial Statements and Supplementary Data”.

 

2.   Financial Statement Schedules

 

All other schedules are omitted because they are not applicable or the required information is presented in the financial statements and notes thereto.

 

3.   Exhibits

 

The exhibits required by Item 601 of Regulation S-K are included in Item 15(b) below.

 

(b) - Exhibits.

 

Exhibit       Filed       Incorporated by Reference
Number   Exhibit Description   Herewith   Form   Period Ended   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   September 30, 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.       10-K/A   June 30, 2009   10.3   October 20, 2011
10.6   Employment Agreement between the Company and Igor Gorodnitsky dated March 17, 2008.       10-K/A   June 30, 2009   10.4   October 20, 2011
10.7   Employment Agreement with R.L. Hartshorn dated Sept. 22, 2009.       10-Q   December 31, 2011   10.70   February 10, 2012
10.8   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
10.9   Board of Director Agreement - James Fuller.       10-Q   December 31, 2011   10.12   October 20, 2011

 

 

 

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10.10   Technology and License Agreement with Desmet Ballestra dated May 14, 2012.       10-K   June 30, 2012   10.10   October 12, 2012
10.11   Convertible Note Payable - Prolific Group LLC - $25,000.       10-Q   December 31, 2011   10.40   February 10, 2012
10.12   Convertible Note Payable - Tripod Group LLC - $30,000.       10-Q   December 31, 2011   10.41   February 10, 2012
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 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   X                
32.2   Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   X                
99.1   Loan Agreement - Desmet Ballestra - Oct. 26, 2010       10-Q   September 30, 2010   99.1   November 12, 2010
                         
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.                    

 

(c) - Financial Statement Schedules

 

See Item (a) 2 above.

 

ITEM 16.SUMMARY. FORM 10-K SUMMARY

 

Not applicable.

 

 

 

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SIGNATURES

 

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED

 

SIGNATURE   TITLE   DATE
         
/s/ Igor Gorodnitsky                                              President; Member of Board of Directors   October 15, 2019
Igor Gorodnitsky   (Principal Executive Officer)    
         
/s/ N. Voloshin                                                       Chief Financial Officer   October 15, 2019
N. Voloshin   (Principal Financial Officer)    
         
/s/ James Fuller                                                      Audit Committee Chairman,   October 15, 2019
James Fuller   Independent Financial Expert    

 

 

 

 

 

 

 

 

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