Table of Contents

 

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

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended September 30, 2020

 

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)

 

 

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

NONE

 

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

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

 

Indicate by check mark 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 3, 2020, the issuer had 196,997,906 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' 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	20
Item 4.		Controls and Procedures	20
PART II		OTHER INFORMATION	21
Item 1.		Legal Proceedings	21
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.		Defaults Upon Senior Securities	21
Item 4.		Mine Safety Disclosure	21
Item 5.		Other Information	21
Item 6.		Exhibits	22
Signatures			23
Certifications

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - Condensed Consolidated Financial Statements

 

CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

		September 30,				June 30,
		2020				2020
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	722,000			$	759,000
Accounts receivable			242,000				104,000
Inventory			36,000				47,000
Total current assets			1,000,000				910,000
Property and equipment, net			143,000				76,000
Operating lease right of use asset, net			292,000				308,000
Other assets			10,000				10,000
Total assets		$	1,445,000			$	1,304,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses		$	322,000			$	316,000
Accrued payroll and payroll taxes due to officers			677,000				693,000
Related party payable			1,000				1,000
Operating lease liability, current portion			55,000				54,000
Advances from distributor			292,000				368,000
Total current liabilities			1,347,000				1,432,000
Notes payable, non-current			254,000				104,000
Operating lease liability, non-current portion			243,000				258,000
Total liabilities			1,844,000				1,794,000
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively			–				–
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,997,906 shares issued and outstanding as of September 30, 2020 and June 30, 2020, respectively			197,000				197,000
Additional paid-in capital			23,291,000				23,291,000
Accumulated deficit			(23,887,000	)			(23,978,000	)
Total stockholders' deficit			(399,000	)			(490,000	)
Total liabilities and stockholders' deficit		$	1,445,000			$	1,304,000

 

See accompanying notes, to the condensed consolidated financial statements

 

 

 

 

 

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

 

 

		For the Three Months Ended
		September 30,
		2020				2019
Revenue		$	418,000			$	351,000
Cost of revenue			(11,000	)			(12,000	)
Gross profit			407,000				339,000
General and administrative expenses			310,000				299,000
Research and development expenses			6,000				2,000
Total operating expenses			316,000				301,000
Income before income tax			91,000				38,000
Provision for income taxes			–				–
Net income		$	91,000			$	38,000
Net income per share,
Basic and Diluted		$	(0.00	)		$	(0.00	)
Weighted average shares outstanding,
Basic and Diluted			196,997,906				196,997,906

 

See accompanying notes to the condensed consolidated financial statements

 

 

 

 

 

 

 

 

CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)
AS OF SEPTEMBER 30, 2020 AND 2019

 

 

		Three Months Ended September 30, 2020 (unaudited)
		Common Stock								Additional Paid-				Accumulated
		Shares				Amount				in 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	)

 

 

		Three Months Ended September 30, 2019 (unaudited)
		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	)
Net income			–				–				–				38,000				38,000
Balance at September 30, 2019			196,997,906			$	197,000			$	23,090,000			$	(24,068,000	)		$	(781,000	)

 

See accompanying notes to the condensed consolidated financial statements

  

 

 

 

 

 

 

 

 

 

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

 

 

		Three Months Ended September 30,
		2020				2019
Operating activities:
Net income		$	91,000			$	38,000
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			8,000				10,000
Amortization of right of use Asset			16,000				12,000
Effect of changes in:
Accounts receivable			(138,000	)			136,000
Inventory			11,000				12,000
Accounts payable and accrued expenses			6,000				(86,000	)
Accrued payroll and payroll taxes due to officers			(16,000	)			–
Advances from distributor			(76,000	)			181,000
Operating lease liability			(14,000	)			(11,000	)
Net cash provided by (used in) operating activities			(112,000	)			292,000
Cash flow from investing activities:
Purchase of property and equipment			(75,000	)			–
Net cash used in investing activities			(75,000	)			–
Cash flow from financing activities:
Proceeds from note payable			150,000				–
Net cash provided by financing activities			150,000				–
Net increase (decrease) in cash and cash equivalents			(37,000	)			292,000
Cash and cash equivalents, beginning of period			759,000				649,000
Cash and cash equivalents, end of period		$	722,000			$	941,000
Supplemental disclosures of cash flow information:
Cash paid for interest		$	–			$	–
Cash paid for income taxes		$	–			$	1,600

 

See accompanying notes to the condensed consolidated financial statements

 

 

 

 

 

 

 

 

CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended September 30, 2020 and 2019

 

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. CTi's patented Nano Reactor® is the critical component of CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in refining vegetable oils. CTi has two patented systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, wastewater treatment, biodiesel, algae oil extraction, and alcoholic beverage enhancement.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") as promulgated in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September 30, 2020 are not indicative of the results that may be expected for the fiscal year ending June 30, 2021. 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, 2020 filed on October 13, 2020. The condensed consolidated balance sheet as of June 30, 2020 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 and as of September 30, 2020, the Company used cash in operating activities of $112,000, had a working capital deficiency of $347,000 and a stockholders' deficit of $399,000. 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, 2020, 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 2020 we had cash and cash equivalents on hand of $722,000 and are not generating sufficient funds to cover operations. 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, including the extension or renewal of our existing global R and D, Marketing and Technology License Agreement with 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.

 

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, 2020, 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, 2020, 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.

 

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, 2020 and 2019 due to available Federal net operating loss (NOL) carryforwards of approximately $9 million that are available to reduce taxable income.

 

Earnings Per Share

 

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, 2020, the Company had 11,000,000 stock options and 87,696,511 stock warrants outstanding (and out of the money) to purchase shares of common stock that were not included in the diluted net income 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, 2020 and June 30, 2020, were all due from Desmet.

 

Accounts Payable and Accrued Expenses – two vendors accounted 63% and 13% of accounts payable and accrued expenses as of September 30, 2020. Two vendors accounted 64% and 14% of accounts payable and accrued expenses as of June 30, 2020 .

 

Revenues – revenues during the three months period ended September 30, 2020 and 2019, 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.

 

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, 2020 and June 30, 2020, 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, including interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company.

 

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 R and D, Marketing and Technology License Agreement with Desmet for the sale and licensing of our reactors. This agreement is a continuation of an original agreement we signed with Desmet in fiscal 2012 and amended in fiscal 2016. As part of the October 2018 agreement, Desmet agreed to provide us monthly advances of $50,000 through October 1, 2021 to be applied against our gross profit share from future sales.

 

The Company recognizes revenue from sale of reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet other than the reactor’s two-year standard warranty. In accordance with ASC 606, the Company recognizes the revenue from the sale of reactors at the time of shipment of the Nano reactor hardware as such shipment is deemed to be the Company’s only performance obligation and the Company has no more continuing obligation. Desmet pays for such reactors on credit terms and the amount of the sale is recorded as a receivable upon acceptance by Desmet.

 

The Company also receives a share in gross profit, as defined, from the sale of Desmet’s integrated neutralization system to its 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, the Company has not been able to develop an expectation of the actual collection based on its historical experience.

 

 

 

 

 

During the three months ended September 30, 2020, the Company recorded sales of $242,000 from Nano Reactor® sales and $176,000 from gross profit share for a total revenue of $418,000 from Desmet.

 

During the three months ended September 30, 2019, the Company recorded sales of $207,000 from Nano Reactor® sales and $144,000 from gross profit share for a total revenue of $351,000.

 

As of September 30, 2020 and June 30, 2020 and 2019, accounts receivable from Desmet related to the sale of Nano Reactor®  amounted to $242,000 and $104,000, respectively.

 

As of September 30, 2020 and June 30, 2020 and 2019, advances received from Desmet related to the Company’s share in gross profit amounted to $292,000 and $368,000, 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 condensed 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, 2020
Lease costs:
Operating lease (included in general and administrative in the Company’s condensed 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)			4.4
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		$	292,000
Short-term operating lease liabilities		$	55,000
Long-term operating lease liabilities			243,000
Total operating lease liabilities		$	298,000

 

 

 

 

 

Maturity of the Company’s lease liabilities are as follows:

 

Year Ending June 30:		Operating Lease
2021 (9 months remaining)		$	53,000
2022			72,000
2023			75,000
2024			78,000
2025 and thereafter			47,000
Total lease payments			325,000
Less: Imputed interest/present value			(27,000	)
Present value of lease liabilities		$	298,000

 

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, 2020 and June 30, 2020, total accrued payroll and payroll taxes-related parties amounted to $677,000 and $693,000, respectively.

 

Note 5 – Notes Payable

 

		September 30, 2020				June 30,  2020
A.      Note Payable – PPP		$	104,000			$	104,000
B.      Note Payable - EIDL			150,000				–
Total		$	254,000			$	104,000

 

 

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 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 Company applied ASC 470, Debt, to account for the PPP loan. 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.

 

 

 

 

 

As of September 30, 2020 and June 30, 2020, the outstanding balance of the note payable amounted to $104,000. The Company is currently in the process of applying for forgiveness of the entire PPP loan with respect to these qualifying expenses, however, the Company cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded.

 

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, 2020, the outstanding balance of the note payable amounted to $150,000.

 

Note 6 - 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 three months ended September 30, 2020 is as follows:

 

Weighted-

Average

Weighted-

Remaining

Average

Contractual

Exercise

Life

Options

Price

(Years)

Outstanding at June 30, 2020

11,000,000

$

0.03

6.07

- Granted

–

–

–

- Forfeited

–

–

–

- Exercised

–

–

–

- Expired

–

–

–

Outstanding at September 30, 2020

11,000,000

$

0.03

5.82

Exercisable and vested at September 30, 2020

11,000,000

$

0.03

5.82

 

As of September 30, 2020, all outstanding options are fully vested. There was no intrinsic value of the outstanding options as of September 30, 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 September 30, 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

5.82

$

0.03

11,000,000

5.82

 

 

 

 

 

Warrants

 

A summary of the Company's warrant activity and related information for the three months ended on September 30, 2020 is as follows.

 

Weighted-

Average

Weighted-

Remaining

Average

Contractual

Exercise

Life

Warrants

Price

(Years)

Outstanding at June 30, 2020

87,696,511

$

0.07

5.64

Granted

–

–

–

Exercised

–

–

–

Expired

–

–

–

Outstanding at September 30, 2020

87,696,511

0.07

5.39

Vested and exercisable at September 30, 2020

87,696,511

$

0.07

5.39

 

As of September 30, 2020, all outstanding warrants are fully vested. There was no intrinsic value of the outstanding warrants as of September 30, 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 September 30, 2020.

 

		Warrants Outstanding												Warrants Exercisable
						Weighted				Weighted								Weighted
Range of						Average				Average								Average
Exercise		Number				Remaining				Exercise				Number				Exercise
Prices		of Shares				Life (Years)				Price				of Shares				Price
$0.03 - 0.05			68,736,518				7.55			$	0.04				68,736,518			$	0.04
$0.12			18,959,993				3.24			$	0.12				18,959,993			$	0.12
			87,696,511												87,696,511

 

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, 2020 and in the foreseeable future.

 

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, 2020, no patents have been granted in which this person is the legally named inventor.

 

 

 

 

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). Desmet have been providing monthly advances of $50,000. 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.

 

 

 

 

 

Results of Operations

 

Results of Operations for the Three Months Ended September 30, 2020 and 2019

 

		For the Three Months Ended
		September 30,
		2020				2019				$ Change				% Change
Revenue		$	418,000			$	351,000			$	67,000				19	%
Cost of revenue			(11,000	)			(12,000	)			(1,000	)			(8	)%
Gross profit			407,000				339,000				68,000				20	%
General and administrative expenses			310,000				299,000				11,000				4	%
Research and development expenses			6,000				2,000				4,000				200	%
Total operating expenses			316,000				301,000				15,000				5	%
Net income		$	91,000			$	38,000			$	53,000				139	%

 

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, 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.

 

During the three months ended September 30, 2019, the Company recognized revenues of $351,000 from sale of reactors and the corresponding share in gross profit pursuant to three purchase orders received from Desmet.

 

Cost of Revenue

 

During the three months ended September 30, 2020, our cost of sales amounted to $11,000, and to $12,000 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, 2020 amounted to $310,000 compared with $299,000 for the same period in 2019, an increase of $15,000, or 5%. The increase in operating expenses was due to increase in professional and consulting fees, offset by decrease in salaries and wages.

 

Research and development (R&D) expenses remained relatively low as we continued to rely on Desmet and GEA for support in R&D and development of new applications for our technology. It is our intention to pursue R&D as our cash position permits.

 

 

 

 

 

Liquidity and Capital Resources

 

During the three months ended September 30, 2020, the Company realized a net income of $91,000 compared to a net income of $38,000 in September 30, 2019, had a working capital deficiency of $347,000 and a stockholders' deficit of $399,000. 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, 2020 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern.

 

As of September 30, 2020, we had cash and cash equivalents on hand of $722,000 and are not generating sufficient revenues to fund operations. In addition to the funds on hand, management believes we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic 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, 2020 amounted to $122,000 compared to net cash provided in operating activities of $292,000 during the three months ended September 30, 2019.

 

Net cash used in investing activities during the three months ended September 30, 2020 amounted to $75,000 as a result our purchase of property and equipment. There was none in fiscal 2019.

 

Net cash provided in financing activities during the three months ended September 30, 2020 amounted 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 in light of the impact of the coronavirus (Covid-19) pandemic on the Company's business. There was none in fiscal 2019.

 

 

 

 

 

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.

 

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, 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 September 30, 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.

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

			Incorporated by Reference
Exhibit		Filed
Number	Exhibit Description	Herewith	Form	Pd. Ending	Exhibit	Filing Date
3(i)(a)	Articles of Incorporation - original name of Bioenergy, Inc.		SB-2	N/A	3.1	October 19, 2006
3(i)(b)	Articles of Incorporation - Amended and Restated		10-Q	December 31, 2008	3-1	February 17, 2009
3(i)(c)	Articles of Incorporation - Amended and Restated		10-Q	June 30, 2009	3-1	May 14, 2009
3(i)(d)	Articles of Incorporation - Amended; increase in authorized shares		8-K	N/A	N/A	October 29, 2009
3(i)(e)	Articles of Incorporation - Certificate of Amendment; forward split		10-Q	December 31, 2009	3-1	November 16, 2009
10.1	Patent Assignment Agreement between the Company and Roman Gordon dated July 1, 2008.		8-K	June 30, 2009	10.1	May 18, 2010
10.2	Patent Assignment Agreement between the Company and Igor Gorodnitsky dated July 1, 2008.		8-K	June 30, 2009	10.2	May 18, 2010
10.3	Assignment of Patent Assignment Agreement between the Company and Roman Gordon		8-K	June 30, 2009	10.3	May 18, 2010
10.4	Assignment of Patent Assignment Agreement between the Company and Igor Gorodnitsky		8-K	June 30, 2009	10.4	May 18, 2010
10.5	Employment Agreement between the Company and Roman Gordon date March 17, 2008		10K/A	June 30, 2009	10.3	October 20, 2011
10.6	Employment Agreement between the Company and Igor Gorodnitsky dated March 17, 2008		10K/A	June 30, 2009	10.4	October 20, 2011
10.7	Employment and Confidentiality and Invention Assignment Agreement between the Company and Varvara Grichko dated April 30, 2008		10-Q	December 31, 2010	10.3	February 11, 2011
10.8	Board of Director Agreement - James Fuller		10-Q	December 31, 2011	10.12	October 20, 2011
10.9	Technology and License Agreement with Desmet Ballestra dated 14 May 2012		10-K	June 30, 2012	10.1	October 15, 2012
10.10	Short Term Loan Agreement - CEO		10-K	June 30, 2012	10.11	October 15, 2012
10.11	Loan Agreement - Desmet Ballestra - Oct. 26, 2010
14.1	Code of Business Conduct and Ethics*		10-K	June 30, 2011	14.1	September 28, 2011
31.1	Certificate of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	X
31.2	Certificate of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002	X
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101.INS	XBRL Instance Document	X
101.SCH	XBRL Taxonomy Extension Schema	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase	X
101.LAB	XBRL Taxonomy Extension Label Linkbase	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	X

 

* In accordance with Regulation S-K 406 of the Securities Act of 1934, we undertake to provide to any person without charge, upon request, a copy of our "Code of Business Conduct and Ethics". A copy may be requested by sending an email to info@cavitationtechnologies.com.

 

 

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 10, 2020
Igor Gorodnitsky		(Principal Executive Officer)
/s/ N. Voloshin		Chief Financial Officer		November 10, 2020
N. Voloshin		(Principal Financial Officer)
/s/ Jim Fuller		Audit Committee Chairman,		November 10, 2020
Jim Fuller		Independent Financial Expert