Cavitation Technologies, Inc. - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
Commission File Number: 0-29901
Cavitation Technologies,Inc.
(Exact name of Registrant as Specified in its Charter)
| Nevada | 20-4907818 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA
91311
(Address, including Zip Code, of Principal Executive Offices)
(818) 718-0905
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x NO ¨
Indicate by check mark whether the registrant has submitted electronically 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 x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ |
| Non-accelerated Filer | x | Small reporting company | x |
| 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 Exchange Act). YES ¨ No x
As of November 15, 2021, the issuer had shares of common stock outstanding.
TABLE OF CONTENTS
| Page | |||
| PART I. | FINANCIAL INFORMATION | 3 | |
| Item 1. | Condensed Consolidated Financial Statements (unaudited) | 3 | |
| Condensed Consolidated Balance Sheets | 3 | ||
| Condensed Consolidated Statements of Operations | 4 | ||
| Condensed Consolidated Statement of Stockholders' Equity (Deficit) | 5 | ||
| Condensed Consolidated Statements of Cash Flows | 6 | ||
| Notes to Condensed Consolidated Financial Statements | 7 | ||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 | |
| Item 4. | Controls and Procedures | 19 | |
| PART II | OTHER INFORMATION | 20 | |
| Item 1. | Legal Proceedings | 20 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 | |
| Item 3. | Defaults Upon Senior Securities | 20 | |
| Item 4. | Mine Safety Disclosure | 20 | |
| Item 5. | Other Information | 20 | |
| Item 6. | Exhibits | 21 | |
| Signatures | 22 | ||
| Certifications | |||
| 2 |
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,882,000 | $ | 1,363,000 | ||||
| Accounts receivable | 483,000 | 6,000 | ||||||
| Inventory | 3,000 | 25,000 | ||||||
| Total current assets | 2,368,000 | 1,394,000 | ||||||
| Property and equipment, net | 432,000 | 182,000 | ||||||
| Operating lease right of use asset, net | 229,000 | 245,000 | ||||||
| Other assets | 10,000 | 10,000 | ||||||
| Total assets | $ | 3,039,000 | $ | 1,831,000 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 329,000 | $ | 342,000 | ||||
| Accrued payroll and payroll taxes due to officers | 667,000 | 667,000 | ||||||
| Related party payable | 1,000 | 1,000 | ||||||
| Operating lease liability, current portion | 56,000 | 58,000 | ||||||
| Advances from distributor | 959,000 | 727,000 | ||||||
| Total current liabilities | 2,012,000 | 1,795,000 | ||||||
| Notes payable, non-current | 150,000 | 254,000 | ||||||
| Operating lease liability, non-current portion | 179,000 | 193,000 | ||||||
| Total liabilities | 2,341,000 | 2,242,000 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity (deficit): | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2021 and June 30, 2021, respectively | – | – | ||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding as of September 30, 2021 and June 30, 2021, respectively | 220,000 | 208,000 | ||||||
| Additional paid-in capital | 24,781,000 | 24,008,000 | ||||||
| Accumulated deficit | (24,303,000 | ) | (24,627,000 | ) | ||||
| Total stockholders' equity (deficit) | 698,000 | (411,000 | ) | |||||
| Total liabilities and stockholders' equity (deficit) | $ | 3,039,000 | $ | 1,831,000 | ||||
See accompanying notes, to the condensed consolidated financial statements
| 3 |
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 551,000 | $ | 418,000 | ||||
| Cost of revenue | (23,000 | ) | (11,000 | ) | ||||
| Gross profit | 528,000 | 407,000 | ||||||
| General and administrative expenses | 306,000 | 310,000 | ||||||
| Research and development expenses | – | 6,000 | ||||||
| Total operating expenses | 306,000 | 316,000 | ||||||
| Income from operations | 222,000 | 91,000 | ||||||
| Other income (expense): | ||||||||
| Gain on forgiveness of note payable | 104,000 | – | ||||||
| Interest expense | (2,000 | ) | – | |||||
| Total Other income (expense) | 102,000 | – | ||||||
| Provision for income taxes | – | – | ||||||
| Net income | $ | 324,000 | $ | 91,000 | ||||
| Net income per share, | ||||||||
| Basic and Diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Weighted average shares outstanding, | ||||||||
| Basic and Diluted | 218,906,958 | 196,997,906 | ||||||
See accompanying notes to the condensed consolidated financial statements
| 4 |
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
AS OF SEPTEMBER 30, 2021 AND 2020
| Three Months Ended September 30, 2021 (unaudited) | ||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2021 | 208,267,444 | $ | 208,000 | $ | 24,008,000 | $ | (24,627,000 | ) | $ | (411,000 | ) | |||||||||
| Common Stock issued for cash | 12,071,785 | 12,000 | 773,000 | 785,000 | ||||||||||||||||
| Net income | – | 324,000 | 324,000 | |||||||||||||||||
| Balance at September 30, 2021 | 220,339,229 | $ | 220,000 | $ | 24,781,000 | $ | (24,303,000 | ) | $ | 698,000 | ||||||||||
| Three Months Ended September 30, 2020 (unaudited) | ||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2020 | 196,997,906 | $ | 197,000 | $ | 23,291,000 | $ | (23,978,000 | ) | $ | (490,000 | ) | |||||||||
| Net income | – | 91,000 | 91,000 | |||||||||||||||||
| Balance at September 30, 2020 | 196,997,906 | $ | 197,000 | $ | 23,291,000 | $ | (23,887,000 | ) | $ | (399,000 | ) | |||||||||
See accompanying notes to the condensed consolidated financial statements
| 5 |
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 324,000 | $ | 91,000 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | – | 8,000 | ||||||
| Amortization of right of use Asset | 16,000 | 16,000 | ||||||
| Gain on forgiveness of note payable | (104,000 | ) | – | |||||
| Effect of changes in: | ||||||||
| Accounts receivable | (477,000 | ) | (138,000 | ) | ||||
| Inventory | 22,000 | 11,000 | ||||||
| Accounts payable and accrued expenses | (13,000 | ) | 6,000 | |||||
| Accrued payroll and payroll taxes due to officers | – | (16,000 | ) | |||||
| Advances from distributor | 232,000 | (76,000 | ) | |||||
| Operating lease liability | (16,000 | ) | (14,000 | ) | ||||
| Net cash provided by (used in) operating activities | (16,000 | ) | (112,000 | ) | ||||
| Cash flow from investing activities: | ||||||||
| Purchase of property and equipment | (250,000 | ) | (75,000 | ) | ||||
| Net cash used in investing activities | (250,000 | ) | (75,000 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Proceeds from note payable | – | 150,000 | ||||||
| Proceeds from sale of common stock with warrants | 785,000 | – | ||||||
| Net cash provided by financing activities | 785,000 | 150,000 | ||||||
| Net increase (decrease) in cash and cash equivalents | 519,000 | (37,000 | ) | |||||
| Cash and cash equivalents, beginning of period | 1,363,000 | 759,000 | ||||||
| Cash and cash equivalents, end of period | $ | 1,882,000 | $ | 722,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | – | ||||
| Cash paid for income taxes | $ | – | $ | – | ||||
See accompanying notes to the condensed consolidated financial statements
| 6 |
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended September 30, 2021 and 2020
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
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.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") as promulgated in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September 30, 2021 are not indicative of the results that may be expected for the fiscal year ending June 30, 2022. You should read these unaudited condensed consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2021 filed on October 13, 2021. The condensed consolidated balance sheet as of June 30, 2021 has been derived from the audited financial statements included in the Form 10-K for that year.
Going Concern
The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. During the three months ended September 30, 2021, the Company used cash in operations of $16,000 and has not been generating sufficient revenues to fund its operations. These factors, among others, raise doubt about the Company's ability to continue as a going concern. In addition, our independent registered public accounting firm, in their report on our audited financial statements for the fiscal year ended June 30, 2021, expressed substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.
As of September, 30 2021 we had cash and cash equivalents on hand of $1,882,000. In addition to the cash on hand, management believes we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partners, Desmet Ballestra Group (Desmet), agreement with Alchemy Beverages, Inc (ABI), and agreement with Enviro Watertek, LLC (EWT).
We may also attempt to raise additional debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
| 7 |
Covid-19
In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses. This outbreak could decrease spending, adversely affect demand for the Company’s products, and harm the Company’s business and results of operations. During the three months ended September 30, 2021, the Company believes the COVID-19 pandemic did not materially impact its operating results due to the nature of the Company’s business and its operations. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations, financial condition, or liquidity.
As of September 30, 2021, the Company has been following the recommendations of local health authorities to minimize exposure risk for its employees, including the temporary closure of its corporate office and having employees work remotely. Most vendors have transitioned to electronic submission of invoices and payments.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used for allowance for doubtful accounts, reserve for inventory obsolescence, impairment analysis for property and equipment, accrual of potential liabilities, valuation allowance for deferred tax assets, and assumption in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients
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.
The Company also recognizes revenue from its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using the most likely amount method. 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 amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined is not refundable and that a significant future reversal of cumulative revenue under the contract will not occur.
In addition, the Company also recognizes revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
| 8 |
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.
The Company recorded no provision for income taxes during the three months ended September 30, 2021 and 2020 due to available Federal net operating loss (NOL) carryforwards of approximately $9 million that are available to reduce taxable income.
The Company’s computation of earnings per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income available to common stockholders by the weighted average number of common shares during the period. Shares of restricted stock subject to vesting are included in basic weighted average common shares outstanding from the time they vest. Diluted EPS reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised, and the proceeds are used to purchase common stock at the average market price and there were no instruments that would result in issuance of additional shares during the period.
As of September 30, 2021, the Company had stock options and stock warrants outstanding to purchase shares of common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive.
Concentrations
Cash - cash is deposited in one financial institution. The balances held at this financial institution at times may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits of up to $250,000.
Accounts Receivable – accounts receivable at September 30, 2021 were all due from Desmet. At June 30, 2021, account receivable were all due from another customer, Enviro WaterTek.
Accounts Payable and Accrued Expenses – two vendors accounted 62% and 13% of accounts payable and accrued expenses as of September 30, 2021. Two vendors accounted 59% and 13% of accounts payable and accrued expenses as of June 30, 2021 .
Revenues – revenues during the three months period ended September 30, 2021 and 2020, were all from Desmet (see Note 2).
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.
| 9 |
The three levels of the fair value hierarchy are as follows:
| · | Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
| · | Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
| · | Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
On September 30, 2021 and June 30, 2021, the fair values of cash and cash equivalents, accounts receivable, inventory and accounts payable and accrued expenses approximate their carrying values due to their short-term nature.
Segments
The Company operates in one segment, its nano reactor technology business. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective July 1, 2024, for the Company. Early adoption is permitted, but no earlier than July 1, 2021. Effective July 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact our financial statements and related disclosures.
| 10 |
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. An issuer measures the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange. ASU 2021-04 introduces a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected to have a material impact on the Company’s financial statements or disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
Note 2 - Agreement with Distributor
Desmet Ballestra Agreement
In October 2018, we signed a three-year global Research and Development (R&D), Marketing and Technology License Agreement with Desmet for the sale and licensing of our reactors. This agreement was a continuation of an original agreement we signed with Desmet in fiscal 2012 and amended in fiscal 2016. As part of the October 2018 agreement, Desmet provided us monthly advances of $50,000 through October 1, 2021 to be applied against our gross profit share from future sales. The agreement expires in October 2021. The Company is currently in negotiations with Desmet for a similar three year agreement.
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 customers of which the reactors are an integral component. Such amount is subject to adjustment based on certain factors including cost overruns. The Company has no control with regards to the sale and installation of Nano Reactor® and CTi 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 Desmet 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 gross profit share 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.
During the three months ended September 30, 2021, the Company recorded revenues of $483,000 from Nano Reactor® sales and $ from gross profit share for a total revenue of $551,000 from Desmet.
| 11 |
During the three months ended September 30, 2020, the Company recorded revenues of $242,000 from Nano Reactor® sales and $ from gross profit share for a total revenue of $418,000.
As of September 30, 2021, accounts receivable from Desmet related to the sale of Nano Reactor® amounted to $483,000.
As of September 30, 2021 and June 30, 2021, advances received from Desmet related to the Company’s share in gross profit amounted to $959,000 and $727,000, respectively. These advances will only be recognized as revenues once the condition for revenue recognition have been met.
Note 3 – Operating Lease
The Company leases certain warehouse and corporate office space under an operating lease agreement. We determine if an arrangement is a lease at inception. Lease assets are presented as operating lease right-of-use assets and the related liabilities are presented as lease liabilities in our consolidated balance sheets.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in lease arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
| September 30, 2021 | ||||
| Lease costs: | ||||
| Operating lease (included in general and administrative in the Company’s consolidated statement of operations) | $ | 18,000 | ||
| Other information | ||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 18,000 | ||
| Weighted average remaining lease term – operating leases (in years) | 3.4 | |||
| Average discount rate – operating leases | 4% | |||
The supplemental balance sheet information related to leases for the period is as follows:
| Long-term right-of-use assets | $ | 229,000 | ||
| Short-term operating lease liabilities | 56,000 | |||
| Long-term operating lease liabilities | 179,000 | |||
| Total operating lease liabilities | $ | 235,000 |
| 12 |
Maturity of the Company’s lease liabilities are as follows:
| Year Ending June 30: | Operating Lease | |||
| 2022 (9 months remaining) | $ | 54,000 | ||
| 2023 | 75,000 | |||
| 2024 | 78,000 | |||
| 2025 and thereafter | 47,000 | |||
| Total lease payments | 254,000 | |||
| Less: Imputed interest/present value | (19,000 | ) | ||
| Present value of lease liabilities | $ | 235,000 | ||
Note 4 – Related Party Transactions
Accrued Payroll and Payroll Taxes
In prior periods, the Company accrued salaries and estimated payroll taxes due to current and former officers of the Company. As of September 30, 2021 and June 30, 2021, total accrued payroll and payroll taxes-related parties amounted to $667,000, respectively.
Note 5 – Notes Payable
| September 30, 2021 | June 30, 2021 | |||||||
| A. Note Payable – PPP | $ | – | $ | 104,000 | ||||
| B. Note Payable - EIDL | 150,000 | 150,000 | ||||||
| Total | $ | 150,000 | $ | 254,000 | ||||
| A. | On April 16, 2020, the Company received loan proceeds in the amount of $104,000 pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”), which was enacted on March 27, 2020. The note was scheduled to mature in April 2022 and had a 1% interest rate and was subject to the terms and conditions applicable to loans administered by the Small Business Administration (SBA) under the CARES Act. As of June 30, 2021, outstanding balance of the PPP note payable amounted to $104,000 |
During the period ended September 30, 2021, pursuant to the provisions of the PPP, the entire note payable of $104,000 was forgiven by the SBA and was accounted as gain on extinguishment of debt.
| B. | In July 2020, the Company received a loan of $150,000 from the Small Business Association under its Economic Injury Disaster Loan (EIDL) assistance program. The EIDL loan is payable over 30 years, bears interest at a rate of 3.75% per annum and secured by all tangible and intangible property of the Company. As of September 30, 2021 and June 30, 2021, the outstanding balance of the note payable amounted to $150,000, respectively. |
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Note 6 - Stockholders' Equity (Deficit)
Common Stock
During the period ended September 30, 2021, the Company issued shares of common stock and fully vested warrants to purchase common stock over a period of five years with an exercise price of $0.09 per share in exchange for net cash proceeds of $785,000 or a selling price of $0.065 per unit.
Stock Options
The Company has not adopted a formal stock option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity during the three months ended September 30, 2021 is as follows:
| Weighted- | ||||||||||||
| Average | ||||||||||||
| Weighted- | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Exercise | Life | |||||||||||
| Options | Price | (Years) | ||||||||||
| Outstanding at June 30, 2021 | 11,000,000 | $ | 0.03 | |||||||||
| - Granted | – | – | ||||||||||
| - Forfeited | – | – | ||||||||||
| - Exercised | – | – | ||||||||||
| - Expired | – | – | ||||||||||
| Outstanding at September 30, 2021 | 11,000,000 | $ | 0.03 | |||||||||
| Exercisable and vested at September 30, 2021 | 11,000,000 | $ | 0.03 | |||||||||
As of September 30, 2021, all outstanding options are fully vested with an intrinsic value of $. The following table summarizes additional information concerning options outstanding and exercisable at September 30, 2021.
| 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 | $ | 0.03 | 11,000,000 | |||||||||||||||||
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Warrants
A summary of the Company's warrant activity and related information for the three months ended on September 30, 2021 is as follows.
| Weighted- | ||||||||||||
| Average | ||||||||||||
| Weighted- | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Exercise | Life | |||||||||||
| Warrants | Price | (Years) | ||||||||||
| Outstanding at June 30, 2021 | 98,966,049 | $ | 0.07 | |||||||||
| - Granted | 12,071,785 | – | ||||||||||
| - Exercised | – | – | ||||||||||
| - Expired | – | – | ||||||||||
| Outstanding at September 30, 2021 | 111,037,834 | $ | 0.07 | |||||||||
| Vested and exercisable at September 30, 2021 | 111,037,834 | $ | 0.07 | |||||||||
As of September 30, 2021, all outstanding warrants are fully vested with an intrinsic value of $. The following table summarizes additional information concerning warrants outstanding and exercisable at September 30, 2021.
| 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 | 68,736,518 | $ | 0.04 | 68,736,518 | $ | 0.04 | ||||||||||||||
| $0.09 | 23,341,323 | $ | .09 | 23,341,323 | $ | 0.09 | ||||||||||||||
| $0.12 | 18,959,993 | $ | 0.12 | 18,959,993 | $ | 0.12 | ||||||||||||||
| 111,037,834 | 111,037,834 | |||||||||||||||||||
Note 7 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two parties, our President and Technology Development Supervisor, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and the Technology Development Supervisor have been assigned to the Subsidiary. In exchange, the Subsidiary agreed to pay a royalty of 5% of gross revenues to each of the President and Technology Development Supervisor for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from its subsidiary. The Company's President and Global Technology Manager both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through September 30, 2021.
On April 30, 2008 and as amended on November 22, 2010, our wholly owned subsidiary entered into an employment agreement with our former Director of Chemical and Analytical Department (the "Inventor") to receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of September 30, 2021, no patents have been granted in which this person is the legally named inventor.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. ("CTi"), a Nevada corporation, was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized proprietary technology that can be used for processing of industrial fluids. CTi's patented Nano Reactor® is the critical components of the CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano Reactor® systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
We are engaged in manufacturing our Nano-Reactors, which are designed to help refine vegetable oils, biodiesel transesterification and treatment of produced and frack water. Our near-term goal is to continue to sell our systems through our partner Desmet Ballestra, EW and ABI.
During the past several years we have developed a number of new applications utilizing the core principal of our technology. Our low pressure non-reactors (LPN) can be utilized in multiple industries that process large volumes of fluids, such as produced and frack water treatment and anticipate accelerated commercial sales in our fiscal 2022. Further, we have miniaturized our non-reactors to be utilized in various consumer oriented products, such as, processing and enhancing spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil.
We had an agreement to license our technology globally through our strategic partner, Desmet Ballestra Group (Desmet) and existing agreements with Enviro Watertek, LLC (EW) and Alchemy Beverages, Inc (ABI). Desmet have been providing monthly advances of $50,000. Our license agreement with Desmet has ended on October 1. 2021, however, we are finalizing a new three years license agreement and should announce it shortly. Additionally, we are working with ABI on expansion of our alcoholic beverages license agreement with a new strategic partner and anticipate to announce in November-December 2021. We may need additional funding, and may attempt to raise additional debt and/or equity financing to fund operations and additional working capital. However, there is no assurance that we will be successful in obtaining such financing or obtained sufficient amounts necessary to meet our business needs, or that we will be able to meet our future contractual obligations.
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time.
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Results of Operations
Results of Operations for the Three Months Ended September 30, 2021 and 2020
| For the Three Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| Revenue | $ | 551,000 | $ | 418,000 | $ | 133,000 | 32% | |||||||||
| Cost of revenue | (23,000 | ) | (11,000 | ) | 12,000 | 109% | ||||||||||
| Gross profit | 528,000 | 407,000 | 121,000 | 30% | ||||||||||||
| General and administrative expenses | 306,000 | 310,000 | (4,000 | ) | (1% | ) | ||||||||||
| Research and development expenses | – | 6,000 | (6,000 | ) | (100% | ) | ||||||||||
| Total operating expenses | 306,000 | 316,000 | (10,000 | ) | 3% | |||||||||||
| Other income, net | 102,000 | – | 102,000 | 100% | ||||||||||||
| Net income | $ | 324,000 | $ | 91,000 | $ | 233,000 | 256% | |||||||||
Revenue
The Company generates revenues from the sale of the Nano Reactor® to customers/distributor as well as share in gross profit from the sale of such reactors by our distributors to their customers.
During the three months ended September 30, 2021, the Company recognized revenues of $551,000 from sale of reactors and the corresponding share in gross profit pursuant to two purchase orders received from Desmet.
During the three months ended September 30, 2020, the Company recognized revenues of $418,000 from sale of reactors and the corresponding share in gross profit pursuant to two purchase orders received from Desmet.
Cost of Revenue
During the three months ended September 30, 2021, our cost of sales amounted to $23,000, and to $11,000 during the same period in prior year, which was the result of the revenue transactions described above.
Operating Expenses
Operating expenses for the three months ended September 30, 2021 amounted to $306,000 compared with $316,000 for the same period in 2020, a decrease of $10,000, or 3%. The slight decrease in operating expenses was primarily due to reduction in cost associated with R&D expenses.
Liquidity and Capital Resources
During the three months ended September 30, 2021, the Company used cash in operations of $16,000 and has not been generating sufficient revenues to fund its operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s June 30, 2021 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern.
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As of September 30, 2021, we had cash and cash equivalents on hand of $1,882,000. In addition to the funds on hand, management believes we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partner Desmet Ballestra Group (Desmet), and existing agreements with Alchemy Beverages, Inc. (ABI) and Enviro Watertek (EW).
We may also attempt to raise additional debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time.
Cash Flow
Net cash used in operating activities during the three months ended September 30, 2021 amounted to $16,000 compared to net cash used in operating activities of $122,000 during the three months ended September 30, 2020.
Net cash used in investing activities during the three months ended September 30, 2021 amounted to $250,000 as a result of a deposit made for a purchase of an equipment compared to $75,000 for the period ended September 30,2020.
Net cash provided in financing activities during the three months ended September 30, 2021 amounted to $785,000 as a result of the sale of our common stock, compared to $150,000 as a result of a note payable obtained from the Small Business Association under its Economic Injury Disaster Loan (EIDL) assistance program.
Critical Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used for allowance for doubtful accounts, reserve for inventory obsolescence, impairment analysis for property and equipment, accrual of potential liabilities, valuation allowance for deferred tax assets, and assumption in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
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Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.
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.
The Company also recognizes revenue from its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using the most likely amount method. 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 amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined is not refundable and it is probable that a significant revenue reversal of cumulative product revenue under the contract will not occur.
In addition, the Company also recognizes revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
Recently Issued Accounting Standards
See Note 1 of the accompanying Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable for smaller reporting companies.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with rule 13a-15(a), CTi management must maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, or the Exchange Act, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Rule 13a-15(b) and (c), management must also evaluate the effectiveness of these disclosure control and procedures at the end of each fiscal year. As of September 30, 2021, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that these disclosure controls and procedures were not effective as of September 30, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the first quarter of fiscal 2021 that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1 Legal Proceedings
We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Mine Safety Disclosures
None
Item 5 - Other Information
None
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Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| 21 |
SIGNATURES
Pursuant to the requirements of the securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIGNATURE | TITLE | DATE | ||
| /s/ Igor Gorodnitsky | President; Member of Board of Directors | November 22, 2021 | ||
| Igor Gorodnitsky | (Principal Executive Officer) | |||
| /s/ N. Voloshin | Chief Financial Officer | November 22, 2021 | ||
| N. Voloshin | (Principal Financial Officer) | |||
| /s/ Jim Fuller | Audit Committee Chairman, | November 22, 2021 | ||
| Jim Fuller | Independent Financial Expert | |||
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