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
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
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
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
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.
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.
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.
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.
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.
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.
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
|
|
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
|
|
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
|
|
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.
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.
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.
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.
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.
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.
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.