Attached files
| file | filename |
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| EX-32.2 - CERTIFICATION - Cavitation Technologies, Inc. | cavitation_10q-ex3202.htm |
| EX-32.1 - CERTIFICATION - Cavitation Technologies, Inc. | cavitation_10q-ex3201.htm |
| EX-31.2 - CERTIFICATION - Cavitation Technologies, Inc. | cavitation_10q-ex3102.htm |
| EX-31.1 - CERTIFICATION - Cavitation Technologies, Inc. | cavitation_10q-ex3101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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 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 ☒ 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 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 | ☐ | 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 Exchange Act). YES ☐ NO ☒
As of March 31, 2020, the issuer had 196,997,906 shares of common stock outstanding.
| Page | ||
| PART I. | FINANCIAL INFORMATION | 3 |
| Item 1. | Condensed Consolidated Financial Statements (unaudited) | 3 |
| Condensed Consolidated Balance Sheets | 4 | |
| Condensed Consolidated Statements of Operations | 4 | |
| Condensed Consolidated Statement of Changes in Stockholders 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 | 18 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 |
| Item 4. | Controls and Procedures | 22 |
| PART II | OTHER INFORMATION | 23 |
| Item 1. | Legal Proceedings | 23 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 |
| Item 3. | Defaults Upon Senior Securities | 23 |
| Item 4. | Mine Safety Disclosures | 23 |
| Item 5. | Other Information | 23 |
| Item 6. | Exhibits | 24 |
| Signatures | 25 | |
| Certifications | ||
| 2 |
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | June 30, | |||||||
| 2020 | 2019 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 834,000 | $ | 649,000 | ||||
| Account receivable | 23,000 | 240,000 | ||||||
| Inventory | 60,000 | 57,000 | ||||||
| Total current assets | 917,000 | 946,000 | ||||||
| Property and equipment, net of accumulated depreciation of $486,000 and $457,000, respectively | 36,000 | 65,000 | ||||||
| Operating lease right-of-use asset | 323,000 | – | ||||||
| Other assets | 10,000 | 10,000 | ||||||
| Total assets | $ | 1,286,000 | $ | 1,021,000 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 132,000 | $ | 187,000 | ||||
| Accrued payroll and payroll taxes due to officers | 889,000 | 892,000 | ||||||
| Related party payable | 1,000 | 1,000 | ||||||
| Advances from distributors | 1,137,000 | 760,000 | ||||||
| Operating lease liability, current portion | 54,000 | – | ||||||
| Total current liabilities | 2,213,000 | 1,840,000 | ||||||
| Operating lease liability, non-current portion | 273,000 | – | ||||||
| Total liabilities | 2,486,000 | 1,840,000 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' deficit: | ||||||||
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2020 and June 30, 2019, respectively | – | – | ||||||
| Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 shares issued and outstanding as of March 31, 2020 and June 30, 2019, respectively | 197,000 | 197,000 | ||||||
| Additional paid-in capital | 23,284,000 | 23,090,000 | ||||||
| Accumulated deficit | (24,681,000 | ) | (24,106,000 | ) | ||||
| Total stockholders' deficit | (1,200,000 | ) | (819,000 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 1,286,000 | $ | 1,021,000 | ||||
See accompanying notes to condensed consolidated financial statements
| 3 |
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenue | $ | 274,000 | $ | 252,000 | $ | 650,000 | $ | 692,000 | ||||||||
| Cost of revenue | 16,000 | 14,000 | 28,000 | 22,000 | ||||||||||||
| Gross profit | 258,000 | 238,000 | 622,000 | 670,000 | ||||||||||||
| General and administrative expenses | 313,000 | 250,000 | 1,187,000 | 1,368,000 | ||||||||||||
| Research and development expenses | 4,000 | 11,000 | 10,000 | 21,000 | ||||||||||||
| Total operating expenses | 317,000 | 261,000 | 1,197,000 | 1,389,000 | ||||||||||||
| Net Loss | $ | (59,000 | ) | $ | (23,000 | ) | $ | (575,000 | ) | $ | (719,000 | ) | ||||
| Net Loss per share, | ||||||||||||||||
| Basic and Diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Weighted average shares outstanding, | ||||||||||||||||
| Basic and Diluted | 196,997,906 | 196,997,906 | 196,997,906 | 196,997,906 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements
| 4 |
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)
Three Months Ended March 31, 2020
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2019 | 196,997,906 | $ | 197,000 | $ | 23,284,000 | $ | (24,622,000 | ) | $ | (1,141,000 | ) | |||||||||
| Net Loss | – | – | – | (59,000 | ) | (59,000 | ) | |||||||||||||
| Balance at March 31, 2020 | 196,997,906 | $ | 197,000 | $ | 23,284,000 | $ | (24,681,000 | ) | $ | (1,200,000 | ) | |||||||||
Nine Months Ended March 31, 2020
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2019 | 196,997,906 | $ | 197,000 | $ | 23,090,000 | $ | (24,106,000 | ) | $ | (819,000 | ) | |||||||||
| Fair value of warrants granted for services | – | – | 194,000 | – | 194,000 | |||||||||||||||
| Net Loss | – | – | – | (575,000 | ) | (575,000 | ) | |||||||||||||
| Balance at March 31, 2020 | 196,997,906 | $ | 197,000 | $ | 23,284,000 | $ | (24,681,000 | ) | $ | (1,200,000 | ) | |||||||||
Three Months Ended March 31, 2019
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2018 | 196,997,906 | $ | 197,000 | $ | 23,089,000 | $ | (24,079,000 | ) | $ | (793,000 | ) | |||||||||
| Net Loss | – | – | – | (23,000 | ) | (23,000 | ) | |||||||||||||
| Balance at March 31, 2019 | 196,997,906 | $ | 197,000 | $ | 23,089,000 | $ | (24,102,000 | ) | $ | (816,000 | ) | |||||||||
Nine Months Ended March 31, 2019
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2018 | 196,997,906 | $ | 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 | – | – | 333,000 | – | 333,000 | |||||||||||||||
| Net Loss | – | – | – | (719,000 | ) | (719,000 | ) | |||||||||||||
| Balance at March 31, 2019 | 196,997,906 | $ | 197,000 | $ | 23,089,000 | $ | (24,102,000 | ) | $ | (816,000 | ) | |||||||||
See accompanying notes to the condensed consolidated financial statements
| 5 |
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (575,000 | ) | $ | (719,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 29,000 | 31,000 | ||||||
| Fair value of warrants issued for services | 194,000 | 115,000 | ||||||
| Fair value of modified warrants | – | 333,000 | ||||||
| Amortization of operating lease right-of-use assets | 45,000 | – | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 217,000 | (207,000 | ) | |||||
| Inventory | (3,000 | ) | (30,000 | ) | ||||
| Accounts payable and accrued expenses | (55,000 | ) | (72,000 | ) | ||||
| Accrued payroll and payroll taxes due to officers | (3,000 | ) | (26,000 | ) | ||||
| Advances from distributor | 377,000 | 200,000 | ||||||
| Operating lease liability | (41,000 | ) | – | |||||
| Net cash provided by (used in) operating activities | 185,000 | (375,000 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | – | (15,000 | ) | |||||
| Cash used in investing activities | – | (15,000 | ) | |||||
| Net increase (decrease) in cash | 185,000 | (390,000 | ) | |||||
| Cash, beginning of period | 649,000 | 945,000 | ||||||
| Cash, end of period | $ | 834,000 | $ | 555,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | – | ||||
| Cash paid for income taxes | $ | – | $ | 1,600 | ||||
| Supplemental disclosures on non-cash investing and financing activities | ||||||||
| Initial recognition of operating lease right-of-use assets and operating lease obligations upon adoption of ASC Topic 842 | $ | 368,000 | – | |||||
See accompanying notes to the condensed consolidated financial statements
| 6 |
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of and for the nine months ended March 31, 2020 and 2019
Note 1 - Organization and Summary of Significant Accounting Policies
Cavitation Technologies, Inc. ("the Company," "CTi,") is a Nevada corporation originally incorporated under the name Bio Energy, Inc. The Company has developed, patented, and commercialized proprietary technology that can 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 nine months ended March 31, 2020 are not indicative of the results that may be expected for the fiscal year ending June 30, 2020. 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, 2019 filed on October 15, 2019. The condensed consolidated balance sheet as of June 30, 2019 has been derived from the audited financial statements included in the Form 10-K for that year.
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.
Going Concern
The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. During the nine months ended March 31, 2020, the Company recorded a net loss of $575,000, had a working capital deficiency of $1,296,000 and a stockholders' deficit of $1,200,000. These factors, among others, raise doubt about the Company's ability to continue as a going concern. In addition, our independent registered public accounting firm, in their report on our audited financial statements for the fiscal year ended June 30, 2019, expressed doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments that might be necessary if the Company is unable to continue as a going concern.
Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partner Desmet Ballestra Group (Desmet), and agreements with Enviro Watertek, LLC (EW) and Alchemy Beverages, Inc (ABI). Our Research and Development (R&D) Marketing and Technology License agreement with Desmet provides for advances of $50,000 per month through October 2021 to be applied against the Company’s gross profit share from future sales.
| 7 |
We also had a R&D Marketing and Technology License agreement with GEA Westfalia AG (GEA) that began in January 2017 and expired in March 2020. Under this agreement, GEA provided us advances of $25,000 per month to be applied against the Company’s gross profit share from future sales. The Company and GEA have agreed to enter into negotiations for a new agreement in the second half of our fiscal 2021.
In April 2019, the Company entered into a technology license and lease agreement with Enviro Watertek, LLC for the sale and licensing of the Company’s nano reactor system. In June 2018, we entered into two licensing agreements with ABI and anticipate to start receiving certain royalty payments and revenue in our fiscal 2021.
We may also attempt to raise additional debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in allowance for bad debts, reserve for inventory obsolescence, impairment analysis for fixed assets, accrual of potential liabilities, valuation of deferred tax assets and valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
Revenue Recognition
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.
| 8 |
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.
Leases
Prior to July 1, 2019, start of our fiscal year, the Company accounted for leases under Accounting Standards Codification (“ASC”) 840, Accounting for Leases. Effective July 1, 2019, the Company adopted the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its office lease as a single lease component. Lease expense is recognized on a straight-line basis over the lease term. The adoption of ASC 842 on July 1, 2019 resulted in the initial recognition of operating lease right-of-use assets of $368,000, lease liabilities for operating leases of $368,000, and a zero cumulative-effect adjustment to accumulated deficit (see Note 3).
Share-Based Compensation
The Company accounts for share-based awards to employees and nonemployees and consultants in accordance with the provisions of ASC 718, Compensation-Stock Compensation. Stock-based compensation cost is measured at fair value on the grant date and that fair value is recognized as expense over the requisite service, or vesting, period.
In periods through June 30, 2019, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.
On July 1, 2019, the Company adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements for the period ended March 31, 2020 or the previously reported financial statements.
The Company values its equity awards using the Black-Scholes option pricing model, and accounts for forfeitures when they occur. Use of the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate. The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable entities since the Company's common stock has limited trading history and limited observable volatility of its own. The expected term of the options is estimated by using the simplified method to estimate expected term. The risk-free interest rate is estimated using comparable published federal funds rates.
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Fair Value Measurement
FASB Accounting Standards Codification ("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy are as follows:
| · | Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
| · | Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
| · | Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
At March 31, 2020 and June 30, 2019, the fair values of cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses approximate their carrying values due to their short-term nature.
Net Loss Per Share
The Company’s computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net income (loss) available to common stockholders by the weighted average number of common shares during the period. Shares of restricted stock subject to vesting are included in basic weighted average common shares outstanding from the time they vest. Diluted EPS reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income (loss) of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised, and the proceeds are used to purchase common stock at the average market price and there were no instruments that would result in issuance of additional shares during the period.
As of March 31, 2020, the Company had 11,000,000 stock options and 87,696,511 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 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.
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The Company’s revenue was mainly derived from sales of its Nano Reactor® and Nano Neutralization® System to Desmet and reactor usage fee from Enviro Watertek, LLC (“EW”). During the three months ended March 31, 2020 and 2019, 92% and 100% of the recorded revenues, were derived from Desmet (see Note 2). During the nine months ended March 31, 2020 and 2019, 93% and 100% of recorded revenues, respectively, were derived from Desmet (see Note 2)
At March 31, 2020, 100% of accounts receivable was due from EW. At June 30, 2019, 100% of accounts receivable was due from Desmet.
As of March 31, 2020, three vendors accounted for 57%, 22% and 11% respectively, of accounts payable. As of June 30, 2019, three vendors accounted for 49%, 33% and 11%, respectively, of accounts payable.
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 July 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.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
Note 2 - Agreement with Distributors
Desmet Ballestra Agreement
In October 2018, we signed a three-year global R and D, Marketing and Technology License Agreement with Desmet Ballestra Group NV (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.
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During the nine months ended March 31, 2020, the Company recorded $380,000 from reactor sales and $224,000 from the share of gross profit for a total revenue of $604,000 from Desmet. During the three months ended March 31, 2020, the Company recorded $172,000 from reactor sales and $80,000 from the share of gross profit for a total revenue of $252,000.
During the nine months ended March 31, 2019, the Company recorded sales of $292,000 from reactor sales and share of gross profit of $400,000 for a total revenue of $692,000 from Desmet. During the three months ended March 31, 2019, the Company recorded $207,000 from reactor sales and the share of gross profit of $45,000 for a total revenue of $252,000 from Desmet.
As of June 30, 2019, outstanding advances from Desmet amounted to $34,000. During the nine months ended March 31, 2020, the Company received advances of $830,000 and recorded as revenues of $604,000. As of March 31, 2020, outstanding advances from Desmet totaled $260,000.
GEA Westfalia Agreement
In January 2017 we entered into a global technology license, R&D and marketing agreement with GEA with respect to our patented Nano Reactor™ technology, processes and applications. Under the agreement, GEA has been granted a worldwide exclusive license to integrate our patented technology into water treatment application, milk and juice pasteurization, and certain food related processes. The license agreement between us and GEA had a three-year term and provides for the payment of $300,000 per year in advanced license fees or share in gross margin or profit to us.
As of March 31, 2020 and June 30, 2019, outstanding advances from GEA amounted to $877,000 and $726,000, respectively. There were no reactor sales or share of gross profit revenue recognized during the periods ended March 31, 2020 and 2019.
Our agreement with GEA expired in March 2020. The Company and GEA have agreed to continue collaboration and will re-open negotiations on a new contract and applications in the second half of our fiscal 2021.
Enviro Watertek, LLC Agreement
In April 2019, we entered into a licensing and service contract agreement with Enviro Watertek, LLC (“EW”) that covers industrial treatment of produced and frack water. Our agreement with EW provides for sales of Nano Reactors® plus recurring revenue stream is based on produced and frack water volumes; and utilization of technology over a 15 years term. This agreement can be terminated by either party at each anniversary date.
During the three and nine months ended March 31, 2020, the Company recorded revenues of $22,000 and $46,000 from the sale of reactors and usage fees. There was no revenues recognized during the three and nine months ended March 31, 2019.
Alchemy Beverages, Inc. Agreement
In June 2018, the Company entered into licensing agreements with Alchemy Beverages Inc. (ABI). Pursuant to the licensing agreements, ABI has the exclusive global distribution rights for the Company’s patented and patent pending technology for the processing of alcoholic beverages. There was no revenue recognized during the periods ended March 31, 2020 and 2019 pursuant to these agreements. As of March 31, 2020, the Company owns 19.9% of ABI. The investment in ABI has no value assigned to it, which approximates its fair value.
| 12 |
Disaggregation of Revenues
The following table provides information about disaggregated revenue based on revenue by service lines:
| Nine Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
| Sale of reactors | $ | 393,000 | $ | 292,000 | ||||
| Share of gross profit | 224,000 | 400,000 | ||||||
| Usage fees | 33,000 | – | ||||||
| Total | $ | 650,000 | $ | 692,000 | ||||
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
| Sale of reactors | $ | 185,000 | $ | 207,000 | ||||
| Share of gross profit | 80,000 | 45,000 | ||||||
| Usage fees | 9,000 | – | ||||||
| Total | $ | 274,000 | $ | 252,000 | ||||
Advances from distributors
Our contracts include advances from certain distributors. For contracts where the performance obligation is not completed, advances are recorded for any payments received in advance of the performance obligation.
Changes in advances from distributors were as follows at March 31, 2020 and 2019:
| Nine Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Advances from distributors, beginning of period | $ | 760,000 | $ | 427,000 | ||||
| New contract liabilities | 981,000 | 892,000 | ||||||
| Performance obligations satisfied | (604,000 | ) | (692,000 | ) | ||||
| Advances from distributors, end of period | $ | 1,137,000 | $ | 627,000 | ||||
| 13 |
Note 3 - Operating Lease
The Company leases certain warehouse and corporate office space under 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:
Nine Months Ended March 31, 2020 | ||||
| Lease cost | ||||
| Operating lease cost (included in general and administrative in the Company’s unaudited condensed statement of operations) | $ | 55,000 | ||
| Other information | ||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 52,000 | ||
| Weighted average remaining lease term – operating leases (in years) | 4.8 | |||
| Average discount rate – operating leases | 4% | |||
The supplemental balance sheet information related to leases for the period is as follows:
| At March 31, 2020 | ||||
| Operating leases | ||||
| Long-term right-of-use assets | $ | 323,000 | ||
| Short-term operating lease liabilities | $ | 54,000 | ||
| Long-term operating lease liabilities | 273,000 | |||
| Total operating lease liabilities | $ | 327,000 | ||
| 14 |
Maturity of the Company’s lease liabilities are as follows:
| Year ending June 30 | Operating Lease | |||
| 2020 (remaining 3 months) | $ | 18,000 | ||
| 2021 | 71,000 | |||
| 2022 | 72,000 | |||
| 2023 | 75,000 | |||
| 2024 | 78,000 | |||
| 2025 and thereafter | 47,000 | |||
| Total lease payments | 361,000 | |||
| Less: Imputed interest/present value discount | (34,000 | ) | ||
| Present value of lease liabilities | $ | 327,000 | ||
Note 4 - Stockholders' Deficit
Stock Options
The Company has not adopted a formal stock option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity during the nine months ended March 31, 2020. is as follows:
| Weighted- | ||||||||||||
| Average | ||||||||||||
| Weighted- | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Exercise | Life | |||||||||||
| Options | Price | (Years) | ||||||||||
| Outstanding at June 30, 2019 | 11,000,000 | $ | 0.03 | 3.36 | ||||||||
| - Granted | – | – | – | |||||||||
| - Forfeited | – | – | – | |||||||||
| - Exercised | – | – | – | |||||||||
| - Expired | – | – | – | |||||||||
| Outstanding at March 31, 2020 vested and exercisable | 11,000,000 | $ | 0.03 | 2.86 | ||||||||
| 15 |
There was no intrinsic value of the outstanding options as of March 31, 2020 as the exercise price of these options were greater than the market price. The following table summarizes additional information concerning options outstanding and exercisable at March 31, 2020.
| 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 | 2.86 | $ | 0.03 | 11,000,000 | 2.86 | |||||||||||||||
Warrants
A summary of the Company's warrant activity and related information for the nine months ended on March 31, 2020 is as follows:
| Weighted- | ||||||||||||
| Average | ||||||||||||
| Weighted- | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Exercise | Life | |||||||||||
| Warrants | Price | (Years) | ||||||||||
| Outstanding at June 30, 2019 | 79,263,176 | $ | 0.08 | 4.36 | ||||||||
| Granted | 9,800,000 | 0.03 | – | |||||||||
| Exercised | – | – | – | |||||||||
| Expired | (1,366,665 | ) | – | – | ||||||||
| Outstanding at March 31, 2020 vested and exercisable | 87,696,511 | $ | 0.07 | 4.09 | ||||||||
During the nine months ended March 31, 2020 the Company granted employees warrants to purchase 9,800,000 shares of common stock for services rendered. The warrants were fully vested upon issuance, exercisable at $0.03 per share, and will expire in ten years. The total fair value of the warrants was determined to be $194,000 and was expensed immediately. The fair value of the warrants was based upon a Black-Scholes Option Pricing model using the following weighted-average assumptions:
| March 31, 2020 | ||||
| Risk-free interest rate | 1.72% | |||
| Expected term (years) | 5 | |||
| Expected volatility | 250% | |||
| Expected dividend yield | 0% | |||
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the award; the expected term represents the weighted-average period of time the awards granted are expected to be outstanding giving consideration to vesting schedules, contractual terms, and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s Common Stock; and the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.
| 16 |
There was no intrinsic value of the outstanding warrants as of March 31, 2020 as the exercise price of these warrants were greater than the market price. The following table summarizes additional information concerning warrants outstanding and exercisable at March 31, 2020.
| Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||||
| Price | of Shares | Life (Years) | Price | of Shares | Price | |||||||||||||||||
| $ | 0.03 - 0.08 | 68,103,184 | 4.88 | $ | 0.03-0.08 | 68,103,184 | $ | 4.88 | ||||||||||||||
| $ | 0.12 | 19,593,327 | 4.00 | $ | 0.12 | 19,593,327 | $ | 4.00 | ||||||||||||||
| 87,696,511 | 87,696,511 | |||||||||||||||||||||
Note 5 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, the Company entered into Patent Assignment Agreements with two parties, our President and Technology Development Supervisor, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and the Technology Development Supervisor have been assigned to the Subsidiary. In exchange, the Subsidiary agreed to pay a royalty of 5% of gross revenues to each of the President and Technology Development Supervisor for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from its subsidiary. The Company's President and Technology Development Supervisor both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through March 31, 2020.
On April 30, 2008 and as amended on November 22, 2010, our wholly owned subsidiary entered into an employment agreement with our former Director of Chemical and Analytical Department (the "Inventor") to receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of March 31, 2020 no patents have been granted in which this person is the legally named inventor.
Litigation
The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. There are no legal proceedings involving the company or its employees at this time.
Note 6 - Subsequent Events
On April 16, 2020, the Company received loan proceeds in the amount of $104,000 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”), which was enacted on March 27, 2020. The note is scheduled to mature in April 2022 and has a 1% interest rate and is subject to the terms and conditions applicable to loans administered by the Small Business Administration (SBA) under the CARES Act. The loan and accrued interest are forgivable as long as the Company uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. Forgiveness of the note is only available for principal that is used for the limited purposes that qualify for forgiveness under SBA requirements, and that to obtain forgiveness, the Company must request it and must provide documentation in accordance with the SBA requirements, and certify that the amounts the Company is requesting to be forgiven qualify under those requirements. The Company also understands that it shall remain responsible under the note for any amounts not forgiven, and that interest payable under the note will not be forgiven but that the SBA may pay the loan interest on forgiven amounts.
| 17 |
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, ABI and GEA.
During the past several years we have developed a number of new applications utilizing the core principal of our technology. Our low pressure non-reactors (LPN) can be utilized in multiple industries that process large volumes of fluids and we anticipate accelerated commercial sales in our fiscal 2020. Further, we have miniaturized our non-reactors to be utilized in various consumer oriented products, such as, processing and enhancing spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil.
We have agreements to license our technology globally through our strategic partners, Desmet Ballestra Group (Desmet) and Enviro Watertek, LLC (EW) and Alchemy Beverages, Inc (ABI), and our license agreement with GEA Westfalia (GEA) recently expired in March 2020. Desmet have been providing monthly advances of $50,000 and we have just started generating revenues from EW. We continuously collaborate with GEA and will open discussions regarding a new contract in the second half of 2020. 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.
| 18 |
Results of Operations
Results of Operations for the Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019
The following is a comparison of our results of operations for the three months ended March 31, 2020 and 2019.
|
For the Three Months Ended |
||||||||||||||||
| March 31, | ||||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| Revenue | $ | 274,000 | $ | 252,000 | $ | 22,000 | 9% | |||||||||
| Cost of revenue | 16,000 | 14,000 | (2,000 | ) | 14% | |||||||||||
| Gross profit | 258,000 | 238,000 | 20,000 | 8% | ||||||||||||
| General and administrative expenses | 313,000 | 250,000 | 63,000 | 25% | ||||||||||||
| Research and development expenses | 4,000 | 11,000 | (7,000 | ) | (64% | ) | ||||||||||
| Total operating expenses | 317,000 | 261,000 | 56,000 | 21% | ||||||||||||
| Net loss | $ | (59,000 | ) | $ | (23,000) | (36,000) | (157% | ) | ||||||||
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 and usage fees.
During the three months ended March 31, 2020, the Company recognized usage fees revenues of $9,000 from Enviro Watertek, LLC and $13,000 from reactors sold. We have also recognized $172,000 from reactor sale and $80,000 in gross profit from Desmet.
During the three months ended March 31, 2019 we recorded $207,000 in revenues from sale of reactors and corresponding share in gross profit of $45,000 from Desmet.
Cost of Revenue
During the three months ended March 31, 2020 and 2019, our cost of sales amounted to $16,000 and $14,000,respectively, which was the result of the revenue transactions described above.
Operating Expenses
Operating expenses for the three months ended March 31, 2020 amounted to $313,000 compared with $250,000 for the same period in fiscal 2019, an increase of $63,000. The increase was mainly due to increase in consulting and professional fees and salaries and wages.
Research and development (R&D) expenses remain low and it is our intention to pursue R&D as our cash position improves.
| 19 |
Results of Operations for the Nine Months Ended March 31, 2020 Compared to the Nine Months Ended March 31, 2019
The following is a comparison of our results of operations for the nine months ended March 31, 2020 and 2019.
| For the Nine Months Ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| Revenue | $ | 650,000 | $ | 692,000 | $ | (42,000 | ) | (6% | ) | |||||||
| Cost of revenue | 28,000 | 22,000 | 6,000 | 27% | ||||||||||||
| Gross profit | 622,000 | 670,000 | (48,000 | ) | (7% | ) | ||||||||||
| General and administrative expenses | 1,187,000 | 1,368,000 | (181,000 | ) | (13% | ) | ||||||||||
| Research and development expenses | 10,000 | 21,000 | (11,000 | ) | (52% | ) | ||||||||||
| Total operating expenses | 1,197,000 | 1,389,000 | (192,000 | ) | (14% | ) | ||||||||||
| Net loss | $ | (575,000 | ) | $ | (719,000 | ) | 144,000 | 20% | ||||||||
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 and usage fees.
During the nine months ended March 31, 2020 the Company recognized revenues of $393,000 from reactor sales, $224,000 from gross profit share and usage fee of $33,000 from Desmet and Enviro Watertek.
During the nine months ended March 31, 2019, the Company recognized revenues of $298,000 from sale of reactors and $400,000 from share in gross profit to Desmet. There were no sales to EW during this period.
Cost of Revenue
During the nine months ended March 31, 2020, our cost of sales amounted to $28,000 and $22,000 during the same period in prior year, which was the result of the revenue transactions described above.
Operating Expenses
Operating expenses for the nine months ended March 31, 2020 amounted to $1,187,000 compared to $1,368,000 for the same period in 2019, a decrease of $181,000 or 13%. The decrease in operating expenses were due to decrease in consulting and professional fees, offset by increase in salaries and wages.
Research and development (R&D) expenses remained low and it is our intention to pursue R&D as our cash position permits.
| 20 |
Liquidity and Capital Resource
During the nine months ended March 31, 2020 the Company incurred a net loss of $575,000 and at March 31, 2020 had a working capital deficiency of $1,296,000 and a stockholders' deficit of $1,200,000. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s June 30, 2019 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern.
As of March 31, 2020 we had cash and cash equivalents on hand of $834,000 and are not generating sufficient revenues to fund operations. In addition, 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), Enviro Watertek, LLC (EW) and Alchemy Beverages, Inc (ABI). Desmet has been providing us monthly advances of $50,000 through October 1, 2022 to be applied against gross profit share from future sales. We have signed a joint venture agreement with EW in April 2019 and have started recognizing revenues. In June 2018, we entered into two licensing agreements with ABI and anticipate to start receiving certain royalty payments and revenue stream from ABI in our fiscal 2021.
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 provided by operating activities during the nine months ended March 31, 2020 amounted to $185,000 compared to net cash used in operating activities of ($375,000) during the nine months ended March 31, 2019.
Critical Accounting Policies
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.
| 21 |
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.
Share-Based Compensation
The Company accounts for share-based awards to employees and nonemployees and consultants in accordance with the provisions of ASC 718, Compensation-Stock Compensation. Stock-based compensation cost is measured at fair value on the grant date and that fair value is recognized as expense over the requisite service, or vesting, period.
In periods through June 30, 2019, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.
On July 1, 2019, the Company adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions are measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements for the period ended March 31, 2020 or the previously reported financial statements.
The Company values its equity awards using the Black-Scholes option pricing model, and accounts for forfeitures when they occur. Use of the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate. The Company estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable entities since the Company's common stock has limited trading history and limited observable volatility of its own. The expected term of the options is estimated by using the simplified method to estimate expected term. The risk-free interest rate is estimated using comparable published federal funds rates.
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 March 31, 2020 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 March 31, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the third quarter of fiscal 2020 that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.
| 22 |
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
None
| 23 |
Item 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
* 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.
| 24 |
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 | May 20, 2020 | ||
| Igor Gorodnitsky | (Principal Executive Officer) | |||
| /s/ N. Voloshin | Chief Financial Officer | May 20, 2020 | ||
| N. Voloshin | (Principal Financial Officer) | |||
| /s/ Jim Fuller | Audit Committee Chairman, Independent Financial Expert | May 20, 2020 | ||
| Jim Fuller |
| 25 |