See accompanying notes to the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

See accompanying notes, which are an integral part of these consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes which are an integral part of theseto the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

YEARS ENDED JUNE 30, 20182020 AND 2017 (as adjusted)2019

See accompanying notes which are an integral part of theseto the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS 

See accompanying notes which are an integral part of theseto the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 20182020 AND 20172019

Note 1 – Organization and Summary of Significant Accounting Policies

Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as “the(“the Company,” “CTi,” “we,” “us,” and “our”) is a Nevada corporation originally incorporated in January 2007 under the name Bio Energy, Inc. CTiThe Company has developed, patented, and commercialized proprietary technology that may be used in liquid processing applications. CTi’s patentedNano Reactor® is the critical component of CTiNano Neutralization® System which has commercially been shown to reduce operating costs and increase yields in refining vegetable oils. We have four US and one international patented systems, as well as twelve US approved patents for various processes, and have filed another seven US and international patents to employ our proprietary technology in applications including vegetable and oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.

In addition, we have commercialized ourCTi Nano Neutralization® Systemin the refining process of certain vegetable oils which has proven to reduce costs and increase yields for our customers.

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company ason a going concern.  Duringconcern basis, which contemplates the year ended June 30, 2018,realization of assets and the Company incurred a net losssettlement of $250,000liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, at June 30, 2018,2020, the Company had a stockholders’ deficit of $545,000. The Company has also been dependent on certain aspects$490,000 and a working capital deficiency of its funding from a technology and license agreement with its distributors, GEA Westfalia (GEA) and Desmet Ballestra (Desmet), whose agreement expired in August 2018. Desmet and CTi have extended their current license agreement until October 1, 2018, while a new three-year license agreement is under negotiations.$522,000. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements do not include any 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. Management’s

At June 30, 2020, the Company had cash in the amount of $759,000. The Company’s ability to continue as a going concern is dependent upon its ability to continue to implement its business plan. Currently, management’s plan is to generate income from operationsincrease revenues by continuing to license its technology globally through our strategic partner withglobally. While the Desmet Ballestra Group (Desmet). PursuantCompany believes in the viability of its strategy to increase revenues, there can be no assurances to that effect. Currently, we have a R&D, Marketing and Technology License agreement with Desmet that was signed in January 2016,which Desmet has providedprovides advances to the Company with monthly advances of $50,000 which started in January of 2016 and continuedper month through expiration of the technology and license agreement in August 2018. These advances were applied against sales to Desmet. During the year ended June 30, 2018 advances received from Desmet that were applied against sales amounted to $700,000.

In January 2017, the Company signed a three-year global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications. This agreement provides the Company with $25,000 monthly advances against future sales. This agreement may be terminated by either party on each anniversary date. As of June 30, 2018, the Company has received $427,000 in advances from GEA and recorded approximately $13,000 in revenues under this agreement.October 2021.

The Company may also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing will be available in the future or obtained in sufficient amounts necessary to meet the Company’s needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

COVID-19

In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses. This outbreak could decrease spending, adversely affect demand for the Company’s products, and harm the Company’s business and results of operations. During the year ended June 30, 2020, the Company believes the COVID-19 pandemic did not materially impact its operating results due to the nature of the Company’s business and its operations. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations, financial condition, or liquidity.

As of June 30, 2020, the Company has been following the recommendations of local health authorities to minimize exposure risk for its employees, including the temporary closure of its corporate office and having employees work remotely. Most vendors have transitioned to electronic submission of invoices and payments.

Principles of Consolidation

The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Intercompany 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 include estimates for allowance for doubtful accounts, reserves for inventory obsolescence, assumptions used in valuing our stock options, stock warrants and common stock issued for services, the valuation allowance for our deferred tax asset, and the accrual of potential liabilities. 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.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.

The Company maintains its cash with one domestic financial institution. From time to time, cash balances in this domestic bank may exceed federally insured limits provided by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000.

As of June 30, 2020, and 2019, Company had deposits in excess of federally insured limit with one bank. The Company believes that no significant concentration of credit risk exists with respect to this cash balances because of its assessment of the creditworthiness and financial viability of this financial institution.

Accounts Receivable

The Company evaluates the collectability of our trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of past due trade accounts receivable outstanding.

As of June 30, 2020, the Company recorded an allowance for doubtful accounts of $5,000. There was no allowance for doubtful accounts recorded as of June 30, 2019.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost is determined on a specific item basis. Inventory is composed of finished goods and represents costs incurred to manufacture the Company’s Nano Reactor® systems and LPN™.

There was no recorded allowance for excess quantities and obsolescence as of June 30, 2020 and 2019.

Property and Equipment

Property and equipment is presented at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations.

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives.

Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value.

For the years ended June 30, 2020 and 2019, the Company did not recognize any impairment for its property and equipment.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes.  The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

Leases

Prior to July 1, 2019, 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).

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.

In addition to defining fair value, the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2 - inputs are based upon significant observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

As of June 30, 2018,2020, and 2017,2019, the carrying value of certain accounts such as accounts receivable, inventory, accounts payable, accrued expenses and accrued payroll approximates their fair value due to the short-term nature of such instruments.

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 reserves for inventory obsolescence, valuing our stock options, stock warrants and common stock issued for services and realization of our deferred tax asset, among other items. Actual results could differ from these estimates.

Revenue Recognition

Through June 30, 2017, revenue from the sale of ourNano 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 profit share from our distributor upon their ultimate sale of the reactors to their customers.  Pursuant to the January 2016 agreement with the Company’s distributor, the profit share is 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 as this is our sole performance obligation under these contracts and we have no continuing obligation to the customer. Accordingly, the Company now estimates and recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware, subject to variable consideration constraints, in accordance to ASC 606.

Specifically, 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 and as such, 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 has concluded that future revenue reversal of such amount is not probable.

The adoption of this standard resulted in a material impact on our previously reported statement of operations and balancesheet as of and for the year ended June 30, 2017.Pursuant to the transition requirements of ASC 606, the Company adopted the full retrospective method and retrospectively applied the new revenue standard to all periods presented as if the new revenue standards had been applied to all prior periods (see Note 2).

Cash

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value. 

The Company maintains its cash with one domestic financial institution. From time to time, cash balance in this domestic bank may exceed federally insured limits provided by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000. As of June 30, 2018, and 2017, Company had approximately $945,000 and $549,000 respectively, on deposit with one bank. The Company believes that no significant concentration of credit risk exists with respect to this cash balances because of its assessment of the creditworthiness and financial viability of this financial institution.

Accounts Receivable

The Company evaluates the collectability of our trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of past due trade accounts receivable outstanding. Accounts receivable as of June 30, 2017 of $85,000 were subsequently collected in fiscal 2018. There were no account receivables outstanding as of June 30, 2018.

Inventory

Inventory, net of an allowance for excess quantities and obsolescence, is stated at the lower of cost or market. Cost is determined on a specific item basis. Inventory is composed of finished goods and represents costs incurred to manufacture the Company’sNano Reactor®systems.

Property and Equipment

Property and equipment is presented at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations.

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives.

Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended June 30, 2018 and 2017, the Company did not recognize any impairment for its property and equipment.

Share-Based Compensation

The Company periodically issues stock options and warrantsaccounts for share-based awards to employees and non-employees in non-capital raising transactions for servicesnonemployees 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-employeesconsultants in accordance with the authoritative guidanceprovisions of ASC 718, Compensation-Stock Compensation. Stock-based compensation cost is measured at fair value on the Financial Accounting Standards Board whereasgrant 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 stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached,goods or b) at the date at which the necessary performance to earnservices received; or (b) 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.

issued. The final fair value of the Company’s common stock option and warrant grantsshare-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 year ended June 30, 2020 or the previously reported financial statements.

The Company values its equity awards using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected lifeand accounts for forfeitures when they occur. Use of the options and warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected term, and based on actual experience.a risk-free interest rate. The assumptions used inCompany estimates volatility using a blend of its own historical stock price volatility as well as that of market comparable entities since the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.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.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10,Income Taxes.  The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.

The Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.

Advertising Costs

Advertising costs, including marketing expense, incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $23,000$20,000 and $31,000$16,000 for the years ended June 30, 20182020 and 20172019 respectively and was reported as part of General and administrative expenses in the accompanying Consolidated Statements of Operations.

Research and Development Costs

Research and development expenses relate primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the years ended June 30, 20182020 and 20172019 amounted to $18,000 and $25,000, and $27,000, respectively.

Warranty Policy

The Company provides a limited warranty with every set of reactors sold, typically 2 to 5 years. The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at June 30, 20182020 and 2017.2019.

Net LossIncome (Loss) Per Share

The Company’s computation of lossnet income (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income (loss) per share 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 income of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income per share, the treasury stock method assumes that outstanding options and warrants arewere exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

The following table sets forth the computation of basic and diluted loss per common share.

There were no adjustments to net loss required for purposes of computing diluted earnings per share. At June 30, 20182020 and 2017,2019, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of its diluted earnings per share, as their effect would have been anti-dilutive.

Concentrations

During the year ended June 30, 2020 we recorded revenues of 53% from GEA, 45% Desmet and 2% EW, compared to 97% of recorded revenues from Desmet an 3% EW in Fiscal 2019. from (see Note 2).

At June 30, 2020, 100% of accounts receivable were due from Desmet.

Segment

As of June 30, 2020, the Company operated one reportable business segment. 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, 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 February 2016, the FASB issued Accounting Standards Update 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.

In JanuaryJune 2016, the FASB issued ASU 2016-01, Recognition andNo. 2016-13, Credit Losses - Measurement of Credit Losses on Financial AssetsInstruments (“ASC 326”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and Financial Liabilities (ASU 2016-01), which requires equity investmentsearly adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not accountedclearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for undera scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity method ofto reduce form-over-substance-based accounting toconclusions. ASU 2020-06 will be measured at fair value with changes recognized in net income and updates certain presentation and disclosure requirements. ASU 2016-01 is effective beginning after December 15, 2017. The Company will adopt this guidance on July 1, 2018 and2024, for the Company. Early adoption is permitted, but no earlier than July 1, 2021, including interim periods within that year. Management is currently evaluating the impacteffect of the adoption of ASU 2016-01 will have2020-06 on itsthe consolidated financial statements, and associated disclosures.but currently does not believe ASU 2020-06 will have a significant impact on the Company.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Dependence on Desmet Ballestra

The Company’s revenue is entirely dependent on Desmet Ballestra who is its distribution agent with regard to theCTi Nano Neutralization® System for edible oils. During the year ended June 30, 2018 and 2017, almost all of the Company’s revenue was derived from Desmet (see Note 3).

Reclassification

An amount of $28,000 related to write-off of inventory reflected in prior years as general and administrative expenses has been reclassified to cost of revenue to conform to the current year presentation. Such reclassification did not change the reported net loss during those periods.

Note 2 – Adoption of ASC 606, Revenue from Contracts with Customers

The Company has developed, patented, and commercialized proprietary technology calledNano Reactor®Desmet Ballestra Agreement that may be used in liquid processing applications. The Company generates revenues from the sale of theNano Reactor® to customers/distributor as well as share in gross profit from the sale of such reactors by our distributors to their customers.

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

Through June 30, 2017,

The Company recognizes revenue from sale of reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet other than the reactor’s two-year standard warranty. In accordance with ASC 606, the Company recognizes the revenue from the sale of ourNano 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.  The Company is 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, 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. Sales revenue from the sale of our Nano Reactors continues to be 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. Accordingly, the Company now estimates and recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware subjectas such shipment is deemed to variable consideration constraints, in accordance to ASC 606.be the Company’s only performance obligation and the Company has no more continuing obligation. Desmet pays for such reactors on credit terms and the amount of the sale is recorded as a receivable upon acceptance by Desmet.

Specifically,

The Company also receives a share in gross profit, as defined, from the sale of Desmet’s integrated neutralization system to its customers of which the reactors are an integral component. Such amount is subject to adjustment based on certain factors including cost overruns. The Company has no control with regards to the sale and installation of Nano Reactor® and CTi Nano Neutralization® System, between Desmet and the end customer. In accordance with ASC 606, the Company has determined that the gross profit to be earned from its distributorDesmet is a variable consideration, and evaluates the amount of the potential payments and the likelihood that requires estimation in determining the transaction price, and as such all or a portion canpayments will be recognizedreceived 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 considerationconstraints, and as such, the amount of revenue recognized is being limited to the actual amount of cash received under the contract which the Company has determined asis not refundable and has concludedprobable that futurea significant revenue reversal of such amount iswould not probable.

Pursuantoccur. Further, Company has been able 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.

The effectdevelop an expectation of the changes made to our previously reported consolidated June 30, 2017 balance sheet for the adoption of ASC 606, were as follows:

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 $834,000 as of June 30, 2017, also received from the same distributor.

B – To record gross profit revenues amounting to $834,000 in accordance with the new revenue standards.

Note 3 - Agreement with Distributors

Desmet Ballestra Agreement

On January 22, 2016, the Company signed a three-year globalResearch and Development, Marketing and Technology License Agreementwith the n.v. Desmet Ballestra Group s.a. (Desmet), a Belgian company that is actively marketing theNANO Neutralization System, the key component of which is the Company’s reactor to soybean and other vegetable oil refiners. The agreement provided Desmet (licensee) a limited, exclusive license and right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devicesactual collection based on a global basis but is limited to oils and fats and oleo chemical applications. The Company (licensor) remains owner of the current patents and patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet provided, under certain conditions, limited monthly advance payments of $50,000 to be applied against gross profit share earned by the Company on installation of the nano reactors by Desmet to its customers. The agreement expired in August 2018. Desmet and CTi have extended current license agreement until October 1, 2018, while a new three-year license agreement is still under the negotiations.

Through June 30, 2017, revenue from the sale of ourNano 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.  The Company is also entitled to a profit share from our distributor upon their ultimate sale of the reactors to their customers.  Pursuant to the January 2016 agreement with the Company’s distributor, the profit share is 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, 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. Sales revenue from the sale of our Nano Reactors continues to be 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. Accordingly, the Company now estimates and recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware, subject to variable consideration constraints, in accordance to ASC 606.

Specifically, 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 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 and as such, 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 has concluded that future revenue reversal of such amount is not probable.historical experience.

During the year ended June 30, 2017,2020, the Company recorded revenuessales of $895,000$483,000 from reactorNano Reactor® sales and $1,002,000$266,000 from gross profit share for a total revenue of $1,897,000. As of June 30, 2017, $85,000 of the recorded revenues was outstanding and was collected in fiscal 2018.$749,000 from Desmet.

During the year ended June 30, 2018,2019, the Company recorded revenuessales of $590,000$533,000 from reactorNano Reactor® sales and $700,000$517,000 from gross profit share for a total revenue of $1,290,000.$1,050,000.

As of June 30, 2020 and 2019, advances received from Desmet related to the Company’s share in gross profit amounted to $367,000 and $33,000, respectively. These advances will only be recognized as revenues once the condition for revenue recognition have been met.

GEA Westfalia Agreement

In January 2017 the Company entered into a global technology license, R&D and marketing agreement with GEA Westfalia (GEA) with respect to our patented Nano Reactor™ technology, processes and applications.. Under the agreement, GEA has beenwas 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 uswith GEA was for three years, and GEA has a three-year term and providesprovided for the paymentnon-refundable payments of $300,000 per year in advancedthat were to be applied to future license fees, or the Company’s share inof gross profit from the sale of GEA’s system 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.

As of June 30, 2018,its customers. From January 2017 through December 2019, the Company received $427,000 intotal non-refundable payments of $877,000 from GEA. For the years ending June 30, 2017 through June 30, 2019, the Company accounted for these payments as advances from distributors in the consolidated balance sheet as they represent deferred profit sharing revenue in anticipation of future sales of the Company’s reactors to GEA. The agreement with GEA expired in December 2019 and during the term of the agreement, the Company did not sell any reactors to GEA. The Company determined that its performance obligation to provide reactors to GEA had expired based on terms of the agreement. Accordingly, for the year ending June 30, 2020, the Company recognized the $877,000 of non-refundable payments received in 2017 to 2019 as revenue.

Enviro Watertek, LLC Agreement

In April 2019, the Company entered into a licensing and service contract agreement with Enviro Watertek, LLC (“EW”). This agreement covers the Company’s industrial treatment process for produced and frack water. The Company’s Low Pressure Nano Reactor (LPN™), was specifically developed to be integrated into frack water treatment system along with proprietary chemical formulations, and has recorded such amount as deferreddepicted measurable and quantifiable advantages over industry standard processes and equipment. The agreement with EW provides for sales on Nano Reactors® plus recurring revenue asstream based on processing frack water volumes and utilization or usage fees. Our agreement with EW is for a period of 15 years but can be terminated by either party every anniversary.

Revenues from sale of reactors is recognized upon shipment of the reactors have not been delivered. In addition,while usage fees from processing of frack water volumes and utilization will only be recognized upon actual usage and collectability is deemed certain.

During the year ended June 30, 2020, the Company also recorded revenuesrecognized $5,000 from sale of $13,000reactors and usage fees of $33,000 for a total of $38,000. During the year ended June 30, 2019, the Company recognized $40,000 from reactor sales.sale of reactors. There were no advances received or revenues recordedusage fees recognized in fiscal 2017.2019.

Note 3 – Operating Lease

The Company leases certain warehouse and corporate office space under an operating lease agreement. We determine if an arrangement is a lease at inception. Lease assets are presented as operating lease right-of-use assets and the related liabilities are presented as lease liabilities in our consolidated balance sheets.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in lease arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

The components of lease expense and supplemental cash flow information related to leases for the period are as follows:

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

Note 4 - Property and Equipment

Property and equipment consist of the following as of June 30, 20182020 and 2017:2019:

Depreciation expense for the years ended June 30, 20182020 and 20172019 amounted to $51,000$39,000 and $38,000,$41,000, respectively and was recorded as part of General and Administrative expenses in the accompanying Consolidated Statements of Operations.

Note 5 - – Related Party Transactions

Accrued Payroll and Payroll Taxes

In prior periods, the Company accrued salaries and estimated payroll taxes due to current and former officers of the Company. As of June 30, 2018,2019, total accrued payroll and 2017, the Company had accrued unpaid salariespayroll taxes-related parties amounted to officers and former officers amounting to $889,000 and $994,000 respectively.$892,000. During the year ended June 30, 2018,2020, the Company reduced accrued salary of $131,000payroll by $3,000. In addition, $196,000 due to a former directorofficer was settledacquired from the former officer by Strategic IR (SIR), an unrelated party. The former officer, SIR, and the Company agreed that the amount of the accrued payroll $204,000, and the Company recorded a loss on the transfer of the liability to SIR of $8,000. As of June 30, 2020, accrued payroll and payroll taxes-related parties totaled $693,000.