ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31,
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June 30,
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2017
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2017
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(unaudited)
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(as adjusted)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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860,522
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$
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548,585
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Accounts receivable
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-
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85,000
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Inventory
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118,725
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143,136
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Total current assets
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979,247
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776,721
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Property and equipment, net
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123,374
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140,606
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Other assets
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9,500
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12,404
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Total assets
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$
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1,112,121
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$
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929,731
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
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Accounts payable and accrued expenses
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$
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344,317
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$
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245,452
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Accrued payroll and payroll taxes due to officers
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887,577
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994,033
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Related party payable
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1,147
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1,147
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Advances from distributor, net
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239,824
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-
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Total current liabilities
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1,472,865
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1,240,632
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Commitments and contingencies
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Stockholders' deficit:
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Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively
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-
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-
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Common stock, $0.001 par value, 1,000,000,000 shares authorized, 197,197,906 and 196,797,906 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively
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197,198
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196,798
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Additional paid-in capital
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22,640,688
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22,625,088
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Accumulated deficit
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(23,198,630
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)
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(23,132,787
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)
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Total stockholders' deficit
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(360,744
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)
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(310,901
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)
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Total liabilities and stockholders' deficit
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$
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1,112,121
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$
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929,731
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See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
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For the Six Months Ended
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December 31,
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December 31,
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2017
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2016
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2017
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2016
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Revenue
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$
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337,855
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$
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35,000
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$
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677,855
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$
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120,000
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Cost of revenue
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14,466
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7,912
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33,206
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15,824
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Gross profit
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323,389
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27,088
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644,649
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104,176
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General and administrative expenses
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342,885
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287,493
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803,363
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606,974
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Research and development expenses
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5,245
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1,351
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8,101
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7,680
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Total operating expenses
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348,130
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288,844
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811,464
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614,654
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Gain on settlement of debt
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100,972
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-
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100,972
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-
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Net income (loss)
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$
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76,231
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$
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(261,756
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)
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$
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(65,843
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)
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$
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(510,478
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)
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Net income (loss) per share,
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Basic and Diluted
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$
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0.00
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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Weighted average shares outstanding,
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Basic and Diluted
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197,197,906
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193,997,906
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197,195,732
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193,997,906
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)
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Series A
Preferred
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Common Stock
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Additional Paid-
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Accumulated
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Shares
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Amount
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Shares
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Amount
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in Capital
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Deficit
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Total
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Balance at June 30, 2017
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-
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$
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-
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196,797,906
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$
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196,798
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$
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22,625,088
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$
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(23,966,606
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)
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$
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(1,144,720
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)
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Cumulative adjustment at June 30, 2017 upon adoption of ASC 606
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-
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-
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-
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-
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-
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833,819
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833,819
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Balance at June 30, 2017 (as adjusted)
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-
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-
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196,797,906
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196,798
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22,625,088
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(23,132,787
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)
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(310,901
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)
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Common stock issued to consultants
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400,000
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400
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15,600
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16,000
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Net Loss
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(65,843
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)
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(65,843
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)
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Balance at December 31, 2017
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-
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$
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-
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197,197,906
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$
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197,198
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$
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22,640,688
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$
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(23,198,630
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)
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$
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(360,744
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)
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See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Six Months Ended December 31,
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2017
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2016
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Operating activities:
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Net loss
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$
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(65,843
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)
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$
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(510,478
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)
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Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization
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20,136
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21,518
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Common stock issued to consultants
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16,000
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-
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Gain on settlement of debt
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(100,972
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)
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-
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Effect of changes in:
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Accounts receivable
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85,000
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-
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Inventory
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24,411
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(8,318
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)
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Accounts payable and accrued expenses
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98,865
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|
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(12,561
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)
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Accrued payroll and payroll taxes due to officers
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|
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(5,484
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)
|
|
|
-
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Advances from distributor
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239,824
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|
|
|
251,873
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Net cash provided by (used in) operating activities
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311,937
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(257,966
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)
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Cash, beginning of period
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548,585
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657,396
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Cash, end of period
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$
|
860,522
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$
|
399,430
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|
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
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$
|
-
|
|
|
$
|
1,600
|
|
See accompanying notes, which are an integral
part of these condensed consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended December 31, 2017 and 2016
Note 1 - Organization and Basis of Presentation
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 six months ended December 31, 2017 are not
indicative of the results that may be expected for the fiscal year ending June 30, 2018. 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, 2017 filed on November 3, 2017. The condensed consolidated balance sheet
as of June 30, 2017 has been derived from the audited financial statements included in the Form 10-K for that year.
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.
In July 1, 2017, the Company adopted the new
accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”)
to all contracts using the full retrospective method resulting in a change to previously reported balance sheet and statement of
stockholders’ deficit. There was no change in previously reported statement of operations for the three and six months ended
December 31, 2016 (see further discussion in Note 3).
Management Plan Regarding on Going Concerns
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 six months ended December 31, 2017, the Company posted a net loss of $65,843
and as had a working capital deficiency of $493,618 and a stockholders' deficit of $360,744. These factors, among others,
raise doubts about the Company's ability to continue as a going concern. In addition, our independent auditors, in their report
on our audited financial statements for the fiscal year ended June 30, 2017 expressed 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 December 31, we had cash and cash equivalents
on hand of $860,522 and are not generating sufficient funds to cover 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 partners, Desmet Ballestra Group (Desmet) and GEA Westfalia,
AG (GEA). Desmet has agreed to provide us monthly advances of $50,000 through August 2018 to be applied against gross profit share
from future sales pursuant to a January 2016 agreement. GEA has agreed to provide us monthly advances of $25,000 less applicable
taxes through January 2020, to be applied against gross profit share from future sales pursuant to January 2017 agreement.
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.
Note 2 - Significant Accounting Policies
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.
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:
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·
|
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 December 31, 2017 and June 30, 2017, the
fair values of cash and cash equivalents, inventory and accounts payable and accrued expenses approximate their carrying values
due to their short-term nature.
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 reserve for inventory
obsolescence, impairment analysis for fixed assets, accrual of potential liabilities, 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.
Share-Based Compensation
The Company periodically issues stock options
and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company
accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting
period. The Company accounts for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative
guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over
the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the
non-employee, option grants are immediately vested, and the total stock-based compensation charge is recorded in the period of
the measurement date.
The fair value of the Company's common stock
options and warrants grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to
risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense
is recorded based upon the value derived from the Black-Scholes option pricing model and based on actual experience. The assumptions
used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Dependence on Desmet Ballestra
Our revenue is almost entirely dependent on
Desmet Ballestra who is our exclusive distribution agent with regard to the
CTi Nano Neutralization® System
for edible
oils.
During the six months ended December 31, 2017
and 2016, 98% and 100%, respectively, of our revenues were derived from Desmet sales efforts (see Note 4).
Earnings( 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 December 31, 2017, the Company had 11,685,852
stock options and 75,926,510 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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 eliminated
transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach
for determining revenue recognition. ASU 2014-09 required that companies recognize revenue based on the value of transferred goods
or services as they occur in the contract. The ASU also required additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to obtain or fulfill a contract. ASU 201-09 became part of Accounting Standards Codification (ASC)
as Topic 606: Revenue from Contracts with Customers or ASC 606. We have adopted these changes using the full retrospective method
by presenting as if the new revenue standard had been applied to all prior period financial statements presented herein (see Note
3).
In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process
of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements issued
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future
consolidated financial statements.
Business and Credit Concentrations
The Company’s cash balances in a financial
institution at times may exceed federally insured limits. As of December 31, 2017, and June 30, 2017, before adjustments for outstanding
checks and deposits in transit, the Company had $860,522 and $548,585, respectively, deposited in one financial institution. The
deposits are federally insured up to $250,000. The Company believes that no significant concentration of credit risk exists with
respect to these cash balances because of its assessment of the creditworthiness and financial viability of this financial institution.
Recorded revenues during the six months ended
December 31, 2017 of $677,855 were attributable to two customers (see Note 4).
Note 3 - Adoption of ASC 606, Revenue from
Contracts with Customers
The Company has developed, patented, and commercialized
proprietary technology called
Nano Reactor®
that may be used in liquid processing applications. The Company generates
revenues from the sale of the
Nano Reactor®
to customers/distributors as well as share in gross profit from the sale
of such reactors by our distributors to their customers.
Through June 30, 2017, revenue from the sale
of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. We are also entitled to a gross profit share
from our distributor from the sale of the reactors to their customers. Such gross profit share was not fixed at the time of delivery,
and as such, revenue was recognized when the profit share was fixed and determinable, which was generally be upon delivery and
installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts. Sales revenue from the sale of our Nano Reactors continues to be recognized when products are shipped from our manufacturing
facilities. The Company now recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware in accordance
to ASC 606 as such shipment is deemed to be the only performance obligation and the Company has no more continuing obligation to
our distributor. In addition, the Company has no control with regards to the sale and installation of Nano Neutralization System,
between our distributor and the end customer.
The Company has determined that the gross profit
to be earned from its distributor as a variable consideration that requires estimation in determining the transaction price, and
as such all or a portion can be recognized using the most likely amount approach (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 a
variable revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual
amount of cash received under the contract which the Company has determined as not refundable and preclude any probable of future
revenue reversal. Further, Company has been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements of
ASC 606, the Company adopted the full retrospective method. Under the full retrospective method, the Company is required to retrospectively
apply the new revenue standard to all period presented as if the new revenue standards had been applied to all prior period. There
were no changes to the previously reported statement of operations for the three and six months ended December 31, 2016 as the
gross profit share of $833,819 was incurred during the third quarter of fiscal 2017.
The effect of the changes made to our previously
reported consolidated June 30, 2017 balance sheet for the adoption of ASC 606, were as follows:
|
|
Balance as
|
|
|
|
|
|
Adjusted
|
|
|
|
reported June
|
|
|
Adjustments Due to
|
|
|
balance at
|
|
Balance Sheet
|
|
30, 2017
|
|
|
adoption of ASC 606
|
|
|
June 30, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
548,585
|
|
|
|
|
|
|
$
|
548,585
|
|
Accounts receivable
|
|
|
-
|
|
|
$
|
85,000
|
(A)
|
|
|
85,000
|
|
Inventory, net
|
|
|
143,136
|
|
|
|
|
|
|
|
143,136
|
|
Property and equipment, net
|
|
|
140,606
|
|
|
|
|
|
|
|
140,606
|
|
Other assets
|
|
|
12,404
|
|
|
|
|
|
|
|
12,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
245,452
|
|
|
|
|
|
|
|
245,452
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
994,033
|
|
|
|
|
|
|
|
994,033
|
|
Related party payable
|
|
|
1,147
|
|
|
|
|
|
|
|
1,147
|
|
Advances from distributor, net
|
|
|
748,819
|
|
|
|
(748,819
|
)(A)(B)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Common stock
|
|
|
196,798
|
|
|
|
|
|
|
|
196,798
|
|
Additional paid-in-capital
|
|
|
22,625,088
|
|
|
|
|
|
|
|
22,625,088
|
|
Accumulated deficit
|
|
|
(23,966,606
|
)
|
|
|
833,819
|
(B)
|
|
|
(23,132,787
|
)
|
A – To record accounts receivable as
of June 30, 2017 from the sale of nano reactors to a distributor. For financial reporting purposes, this amount was deducted from
the outstanding advances totaling $833,819 as of June 30, 2017, also received from the same distributor.
B – To record gross profit revenues amounting
to $833,819 in accordance with the new revenue standards.
Note 4 - Agreement with Distributors
Desmet Ballestra Agreement
On January 22, 2016, the Company signed a three-year
agreement with Desmet effective August 1, 2015 for the sale and marketing of the Company’s Nano reactor system. As part of
the agreement, Desmet will provide, under certain conditions, limited monthly advance payments of $50,000 against future gross
profit share to CTi through August 2018. The agreement may be terminated in case the Company loses ownership of patents and patent
applications being used in the
NANO Neutralization System.
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 addition, 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 margin or profit from the sale of Desmet’s
integrated neutralization system to its customer of which the reactors are an integral component, however, such amount is subject
to adjustment based on certain factors including costs over run. The Company recognizes the gross profit at the time of shipment
of the Nano reactor hardware in accordance to ASC 606 as such shipment is deemed to be the only performance obligation and the
Company has no more continuing obligation to Desmet. In addition, the Company has no control with regards to the sale and installation
of Nano Neutralization System, between our distributor and the end customer. The Company has determined that the gross profit to
be earned from Desmet as a variable consideration that requires estimation in determining the transaction price, and as such all
or a portion can be recognized using the most likely amount approach (subject to the variable consideration constraint). Estimates
are available from Desmet which are considered in the determination of the most likely amount. However, given the lack of control
over the sale to the end customer and the lack of history of prior sales, the Company considered these as a variable revenue constraint
that required consideration. Thus, the amount of revenue recognized is being limited to the actual amount of cash received under
the contract which the Company has determined as not refundable and preclude any probable of future revenue reversal. Further,
Company has been able to develop an expectation of the actual collection based on its historical experience.
During the six months ended December 31, 2017
and 2016, the Company recognized revenue of $450,130 and $120,000, respectively, related to the shipment and acceptance of reactors
to Desmet. In addition, during the six months ended December 31, 2017, we recognized revenues of $215,000 from our share in gross
margin or profit. There were no gross margin or profit revenues recognized during the six months ended December 31, 2016.
GEA Westfalia Agreement
In January
2017 we entered into a global technology license, R&D and marketing agreement with respect to our patented Nano Reactor™
technology, processes and applications. Under the agreement, GEA has been granted a worldwide exclusive license to integrate our
patented technology into water treatment application, milk and juice pasteurization, and certain food related processes. The license
agreement between us and GEA has a three-year term and provides for the payment of $300,000 per year in advanced license fees or
share in gross margin or profit to us.
GEA Westfalia
Separator manufactures filtration and equipment such as separators, clarifiers, decanters and membrane filtration systems. This
equipment is used for the purification of suspensions, the separation of fluid mixtures with simultaneous removal of solids, extraction
and concentration or removal of liquids from solids. The technological dominance of the company is based on over one hundred fifteen
years of innovation, first-class engineering solutions and comprehensive processing capabilities. The company was founded in 1893
in Oelde, Germany, and since 1994 has been a part of the
GEA Group AG
and is a business unit within the GEA Mechanical Equipment
segment. In 1950, Westfalia Separator established US and Canadian corporations to serve as sales and marketing arms to compete
in the North American market for centrifuges.
During
the period ended December 31, 2017, we received advances totaling $252,549 from GEA,
recognized revenue of $12,725 related
to the shipment and acceptance of reactors to GEA and
recorded $239,824 in advances from
GEA as deferred revenue as the reactors have not been delivered.
There were no gross profit or margin revenue recognized
as such amount has not yet been finalized with GEA.
Note 5 - Property and Equipment
Property and equipment consisted of the following
as of December 31, 2017 and June 30, 2017:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,475
|
|
|
$
|
2,475
|
|
Furniture
|
|
|
26,837
|
|
|
|
26,837
|
|
Office equipment
|
|
|
1,499
|
|
|
|
1,499
|
|
Equipment
|
|
|
68,380
|
|
|
|
68,380
|
|
Systems
|
|
|
408,155
|
|
|
|
408,155
|
|
|
|
|
507,346
|
|
|
|
507,346
|
|
Less: accumulated depreciation and amortization
|
|
|
(383,972
|
)
|
|
|
(366,740
|
)
|
Property and Equipment, net
|
|
$
|
123,374
|
|
|
$
|
140,606
|
|
Depreciation expense for the six months ended
December 31, 2017 amounted to $17,232.
Note 6 - Accrued Payroll and Payroll Taxes
As of June 30, 2017, the Company had accrued
salaries to current and former officers of the Company amounting to $994,033. Included in this accrual was approximately $131,000
due to a former officer of the Company.
In October 2017, the Company paid $30,000 to the
former officer as settlement of the unpaid salary of $131,000. As a result, the Company recorded a gain of $100,972 to extinguish
the remaining accrual.
As of December 31, 2017, the Company had accrued
salaries to current and former officers of the Company amounting to $887,577.
Note 7 - Stockholders' Deficit
Common Stock
During the period ended December 31, 2017,
the Company granted a total of 400,000 shares of common stock with a fair value of $16,000 to consultants for services rendered.
The shares of common stock were deemed earned upon issuance and valued at the respective date of the agreement.
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 December 31, 2017 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2017
|
|
|
11,685,852
|
|
|
$
|
0.37
|
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
11,685,852
|
|
|
$
|
0.37
|
|
|
|
1.91
|
|
Exercisable and vested at December 31, 2017
|
|
|
11,685,852
|
|
|
$
|
0.37
|
|
|
|
1.91
|
|
There was no intrinsic value of the outstanding
options as of December 31, 2017 as the exercise price of these options were greater than the market price at December 31, 2017.
The following table summarizes additional information
concerning options outstanding and exercisable at December 31, 2017.
|
|
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
|
|
|
|
4.71
|
|
|
|
0.03
|
|
|
|
11,000,000
|
|
|
|
4.71
|
|
0.33
|
|
|
174,022
|
|
|
|
0.39
|
|
|
|
0.33
|
|
|
|
174,022
|
|
|
|
0.39
|
|
0.67
|
|
|
511,830
|
|
|
|
0.47
|
|
|
|
0.67
|
|
|
|
511,830
|
|
|
|
0.47
|
|
|
|
|
11,685,852
|
|
|
|
|
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
Warrants
A summary of the Company's warrant activity
and related information for the six months ended on December 31, 2017 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
75,926,510
|
|
|
$
|
0.08
|
|
|
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2017
|
|
|
75,926,510
|
|
|
$
|
0.08
|
|
|
|
4.31
|
|
Vested and exercisable at December 31, 2017
|
|
|
75,926,510
|
|
|
$
|
0.08
|
|
|
|
4.31
|
|
As of December 31, 2017, all warrants granted
were vested. There was no intrinsic value of the outstanding warrants as of December 31, 2017 as the exercise price of these warrants
were greater than the market price at December 31, 2017. The following table summarizes additional information concerning warrants
outstanding and exercisable at December 31, 2017.
|
|
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
|
|
|
55,599,851
|
|
|
|
6.50
|
|
|
$
|
0.05
|
|
|
|
55,599,851
|
|
|
$
|
0.05
|
|
0.12
|
|
|
20,326,659
|
|
|
|
1.50
|
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
$
|
0.12
|
|
|
|
|
75,926,510
|
|
|
|
|
|
|
|
|
|
|
|
75,926,510
|
|
|
|
|
|
Note 8 - 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 Technology Development Supervisor both waived their rights to receive royalty
payments that have accrued, or that may accrue, on any gross revenue generated through December 31, 2017.
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 December 31,
2017, 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.
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.
During the six months ended December 31, 2017, we recorded revenue
of $677,855 and net loss of $65,843.
In July 1, 2017, the Company adopted the new
accounting standard ASC 606, Revenue from Contracts with Customers (ASC 606) and all the related amendments (“new revenue
standard”) to all contracts using the full retrospective method resulting in a change to previously reported balance sheet
and statement of stockholders’ deficit. As a result, all amounts in prior periods have been adjusted in the accompanying
discussion as if ASC 606 was adopted as of the earliest period presented. There was no change in previously reported statement
of operations for the three and six months ended December 31, 2016. See further discussion at Note 3 in the accompanying financial
statements.
Management's Plan
We are engaged in manufacturing our Neutralization
System, which is designed to help refine vegetable oils such as soybean, canola, sunflower and rapeseed. Our near-term
goal is to continue to sell our systems through our partners, Desmet Ballestra and GEA. During the six months ended December 31,
2017, we recorded revenues of $677,855 and incurred a net loss of $65,843. As of December 31, 2017, the Company had a working
capital deficiency of $493,618 and a stockholders' deficit of $360,744. The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern.
As of December 31, 2017, we had cash and cash
equivalents on hand of $860,522 and are not generating sufficient funds to cover 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 market our technology and products globally through our strategic partner, Desmet Ballestra and
GEA Group.
Desmet and GEA are providing monthly advances
of $50,000 and $25,000 respectively, however, we anticipate that we may need additional funding, and we may attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that
we will be successful in obtaining such financing will be or obtained sufficient amounts necessary to meet our business needs,
or that we will be able to meet our future contractual obligations. 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 our inability to continue as a going concern. As a result of the aforementioned
factors, our independent auditors, in their report on our audited financial statements for the fiscal ended June 30, 2017, expressed
substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
CTi's critical accounting policies and estimates
are included in its Annual Report on Form 10-K for the year ended June 30, 2017 and did not change for the six months ended December
31, 2017, except for the adaption of ASC 606, Revenue from Contracts with Customers and all the related amendments to all contracts
(see Note 3) of the accompanying financial statements).
Results of Operations
Results of Operations for the Three Months Ended December 31,
2017 and 2016
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
337,855
|
|
|
$
|
35,000
|
|
|
$
|
302,855
|
|
|
|
865
|
%
|
Cost of revenue
|
|
|
14,466
|
|
|
|
7,912
|
|
|
|
6,554
|
|
|
|
83
|
%
|
Gross profit
|
|
|
323,389
|
|
|
|
27,088
|
|
|
|
296,301
|
|
|
|
1,094
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
342,885
|
|
|
|
287,493
|
|
|
|
55,392
|
|
|
|
19
|
%
|
Research and development expenses
|
|
|
5,245
|
|
|
|
1,351
|
|
|
|
3,894
|
|
|
|
288
|
%
|
Total operating expenses
|
|
|
348,130
|
|
|
|
288,844
|
|
|
|
59,286
|
|
|
|
21
|
%
|
Loss from operations
|
|
|
(24,741
|
)
|
|
|
(261,756
|
)
|
|
|
237,015
|
|
|
|
(91
|
)%
|
Gain on settlement of debt
|
|
|
100,972
|
|
|
|
-
|
|
|
|
100,972
|
|
|
|
100
|
%
|
Net income (loss)
|
|
|
76,231
|
|
|
|
(261,756
|
)
|
|
|
337,987
|
|
|
|
(129
|
)%
|
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.
Through June 30, 2017, revenue from the sale
of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. We are also entitled to a gross profit share
from our distributor from the sale of the reactors to their customers. Such gross profit share was not fixed at the time of delivery,
and as such, revenue was recognized when the profit share was fixed and determinable, which was generally be upon delivery and
installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts. Sales revenue from the sale of our Nano Reactors continues to be recognized when products are shipped from our manufacturing
facilities. The Company now recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware in accordance
to ASC 606 as such shipment is deemed to be the only performance obligation and the Company has no more continuing obligation to
our distributor. In addition, the Company has no control with regards to the sale and installation of Nano Neutralization System,
between our distributor and the end customer.
The Company has determined that the gross profit
to be earned from its distributor as a variable consideration that requires estimation in determining the transaction price, and
as such all or a portion can be recognized using the most likely amount approach (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 a
variable revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual
amount of cash received under the contract which the Company has determined as not refundable and preclude any probable of future
revenue reversal. Further, Company has been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements of
ASC 606, the Company adopted the full retrospective method. Under the full retrospective method, the Company is required to retrospectively
apply the new revenue standard to all period presented as if the new revenue standards had been applied to all prior period. There
were no changes to the previously reported results of operations for the three months ended December 31, 2016.
During the three months ended December 31,
2017 we recorded $222,855 in revenue from sale of reactors to our distributors, Desmet and GEA pursuant to four purchase orders.
In addition, we also recorded revenues of $115,000 to account for our share in gross margin or profit.
During the three months ended December 31,
2016 we recorded $35,000 in revenue from sale of reactors to our distributor, Desmet pursuant to one purchase order. There were
no revenues recognized from gross margin or profit
.
Cost of Revenue
During the three months ended December 31,
2017, our cost of sales amounted to $14,466, and to $7,912 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
December 31, 2017 amounted to $348,130 compared with $288,844 for the same period in 2016, an increase of $59,286, or 21%. In the
second quarter of fiscal 2018, compensation amounted to 151,788 or 44% of total costs compared with $127,884 or 44% of total costs
in the second quarter of fiscal 2017.
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.
Gain on Settlement of Debt
During the three months ended December 31,
2017,
the Company settled a lawsuit with a former officer of the Company for $30,000.
As a result, the Company recorded a gain of $100,972 to extinguish the remaining accrual upon payment of the settled amount of
$30,000. There was no similar transaction in the prior period.
Results of Operations for the Six Months Ended December 31, 2017
and 2016
|
|
For the Six Months Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
677,855
|
|
|
$
|
120,000
|
|
|
$
|
557,855
|
|
|
|
465
|
%
|
Cost of revenue
|
|
|
33,206
|
|
|
|
15,824
|
|
|
|
(17,382
|
)
|
|
|
110
|
%
|
Gross profit
|
|
|
644,649
|
|
|
|
104,176
|
|
|
|
540,473
|
|
|
|
519
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
803,363
|
|
|
|
606,974
|
|
|
|
201,277
|
|
|
|
33
|
%
|
Research and development expenses
|
|
|
8,101
|
|
|
|
7,680
|
|
|
|
(4,809
|
)
|
|
|
(37
|
)%
|
Total operating expenses
|
|
|
811,464
|
|
|
|
614,654
|
|
|
|
196,468
|
|
|
|
32
|
%
|
Loss from operations
|
|
|
(166,815
|
)
|
|
|
(510,478
|
)
|
|
|
344,005
|
|
|
|
(67
|
)%
|
Gain on settlement of debt
|
|
|
100,972
|
|
|
|
-
|
|
|
|
100,972
|
|
|
|
100
|
%
|
Net loss
|
|
|
(65,843
|
)
|
|
|
(510,478
|
)
|
|
|
444,977
|
|
|
|
(87
|
)%
|
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.
Through June 30, 2017, revenue from the sale
of our
Nano Reactor® systems
was recognized when persuasive evidence of an agreement exists; shipment has occurred,
including transfer of title and risk of loss for product sales, services have been rendered for service revenues; the price to
the buyer is fixed or determinable; and collectability was reasonably assured. We are also entitled to a gross profit share
from our distributor from the sale of the reactors to their customers. Such gross profit share was not fixed at the time of delivery,
and as such, revenue was recognized when the profit share was fixed and determinable, which was generally be upon delivery and
installation of the NANO Neutralization System by the distributor to its customer.
On July 1, 2017, we adopted the new accounting
standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to
all contracts. Sales revenue from the sale of our Nano Reactors continues to be recognized when products are shipped from our manufacturing
facilities. The Company now recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware in accordance
to ASC 606 as such shipment is deemed to be the only performance obligation and the Company has no more continuing obligation to
our distributor. In addition, the Company has no control with regards to the sale and installation of Nano Neutralization System,
between our distributor and the end customer.
The Company has determined that the gross profit
to be earned from its distributor as a variable consideration that requires estimation in determining the transaction price, and
as such all or a portion can be recognized using the most likely amount approach (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 a
variable revenue constraint that required consideration. Thus, the amount of revenue recognized is being limited to the actual
amount of cash received under the contract which the Company has determined as not refundable and preclude any probable of future
revenue reversal. Further, Company has been able to develop an expectation of the actual collection based on its historical experience.
Pursuant to the transition requirements of
ASC 606, the Company adopted the full retrospective method. Under the full retrospective method, the Company is required to retrospectively
apply the new revenue standard to all period presented as if the new revenue standards had been applied to all prior period. There
were no changes to the previously reported results of operations for the three months ended December 31, 2016.
During the six months ended December 31, 2017
we recorded $462,855 in revenue from sale of reactors to our distributors, Desmet and GEA pursuant to six purchase orders. In addition,
we also recorded revenues of $215,000 to account for our share in gross margin or profit.
During the six months ended December 31, 2016
we recorded $120,000 in revenue from sale of reactors to our distributor, Desmet pursuant to two purchase order. There were no
revenues recognized from gross margin or profit.
Cost of Revenue
During the six months ended December 31, 2017,
our cost of sales amounted to $33,206, and to $15,824 during the same period in prior year, which was the result of the revenue
transactions described above.
Operating Expenses
Operating expenses for the six months ended
December 31, 2017 amounted to $811,464 compared with $614,996 for the same period in 2016, an increase of $196,468, or 32%. The
increase in operating expenses was due to increase in stock-based compensation of $16,000, professional fees such as accounting,
legal and consulting of $108,000 and payroll of $57,000.
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.
Gain on Settlement of Debt
During the six months ended December 31, 2017,
the Company settled a lawsuit with a former officer of the Company for $30,000. As
a result, the Company recorded a gain of $100,972 to extinguish the remaining accrual upon payment of the settled amount of $30,000.
There was no similar transaction in the prior period.
Liquidity and Capital Resources
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. As of December 31, 2017, the Company had a working capital deficiency of $493,618 and a
stockholders' deficit of $360,744. Furthermore, we have been dependent on most of our funding from technology agreements with
our distributors. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our independent
auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2017 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 us to continue as a going concern.
Management's plan is to generate income from
operations by licensing our technology globally through our strategic partners, the Desmet Ballestra Group (Desmet) and GEA Westfalia
(GEA). In January 2016, we signed a marketing and research and development agreement with Desmet which include among others, a
monthly advance of $50,000 through August 2018 that will be applied to gross profit share from future sales. In January 2017, we
signed a similar marketing and research and development agreement with GEA which include among others, a monthly advance of $25,000
through January 2020, that will be applied to gross profit share from future sales. We will need additional funding, and we will
attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However,
there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's
needs, 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.
At December 31, 2017, we had cash on hand in
the amount of $860,522. In addition to the funds on hand, we will require additional funds to continue to operate our business.
This includes expenses we will incur in connection with costs to manufacture and ship our products; costs to design and implement
an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company
by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual
commitments for salaries to our executive officers. In light of our financial commitments over the next several months and its
liquidity constraints, we have implemented cost reduction measures in all areas of operations. We intend to review these measures
on an ongoing basis and make additional decisions as may be required.
Cash Flow
Net cash provided by operating activities during
the six months ended December 31, 2017 amounted to $311,937, compared to net cash used of $257,966 for the same period in fiscal
2016. Funding for the operating activities was provided primarily by sales of our systems to Desmet and advances from distributors.
During the six months ended December 31, 2017, we paid $316,305 in employees' compensation, compared to $259,307 in the prior period