UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
Commission File Number: 000-532390-29901
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
| Nevada | 20-4907818 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of Principal Executive Offices)
(818) 718-0905
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
YESYes ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YESYes ☒ NO ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated | ☒ | ||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NONo ☒
As of May 16,November 11, 2022, the issuer had shares of common stock outstanding.
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | June 30, | September 30, | June 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2022 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 779,000 | $ | 1,363,000 | $ | 367,000 | $ | 441,000 | ||||||||
| Account receivable | 36,000 | 6,000 | ||||||||||||||
| Accounts receivable | 18,000 | 1,000 | ||||||||||||||
| Inventory | 50,000 | 25,000 | 48,000 | 48,000 | ||||||||||||
| Prepaid expenses | – | 38,000 | ||||||||||||||
| Total current assets | 865,000 | 1,394,000 | 433,000 | 528,000 | ||||||||||||
| Property and equipment, net | 182,000 | 182,000 | 4,000 | 4,000 | ||||||||||||
| Equity method investment | 1,260,000 | 0 | 1,131,000 | 1,149,000 | ||||||||||||
| Operating lease right-of-use asset | 197,000 | 245,000 | ||||||||||||||
| Operating lease right of use asset, net | 163,000 | 180,000 | ||||||||||||||
| Other assets | 10,000 | 10,000 | 10,000 | 10,000 | ||||||||||||
| Total assets | $ | 2,514,000 | $ | 1,831,000 | $ | 1,741,000 | $ | 1,871,000 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 97,000 | $ | 342,000 | $ | 139,000 | $ | 135,000 | ||||||||
| Accrued payroll and payroll taxes due to officers | 280,000 | 667,000 | 280,000 | 280,000 | ||||||||||||
| Customer advances | 1,039,000 | 727,000 | ||||||||||||||
| Related party payable | 0 | 1,000 | ||||||||||||||
| Operation lease liability, current portion | 61,000 | 58,000 | ||||||||||||||
| Operating lease liability, current portion | 63,000 | 63,000 | ||||||||||||||
| Advances from distributor | 36,000 | 80,000 | ||||||||||||||
| Total current liabilities | 1,477,000 | 1,795,000 | 518,000 | 558,000 | ||||||||||||
| Operation lease liability | 145,000 | 193,000 | ||||||||||||||
| Notes payable, non-current | 150,000 | 254,000 | 150,000 | 150,000 | ||||||||||||
| Operating lease liability, non-current portion | 110,000 | 127,000 | ||||||||||||||
| Total liabilities | 1,772,000 | 2,242,000 | 778,000 | 835,000 | ||||||||||||
| Commitments and contingencies | – | – | – | – | ||||||||||||
| Stockholders’ equity (deficit): | ||||||||||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of March 31, 2022, and June 30, 2021, respectively | 0 | 0 | ||||||||||||||
| Common stock, $ par value, shares authorized, shares issued and outstanding and shares issued and outstanding as of March 31, 2022, and as of June 30, 2021, respectively | 272,000 | 208,000 | ||||||||||||||
| Stockholders' equity: | ||||||||||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2022 and June 30, 2021, respectively | – | – | ||||||||||||||
| Common stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2022 and June 30, 2022 | 277,000 | 277,000 | ||||||||||||||
| Additional paid-in capital | 25,810,000 | 24,008,000 | 26,005,000 | 26,005,000 | ||||||||||||
| Accumulated deficit | (25,340,000 | (24,627,000 | ) | (25,319,000 | ) | (25,246,000 | ) | |||||||||
| Total stockholders’ equity (deficit) | 742,000 | (411,000 | ) | |||||||||||||
| Total liabilities and stockholders’ equity (deficit) | $ | 2,514,000 | $ | 1,831,000 | ||||||||||||
| Total stockholders' equity | 963,000 | 1,036,000 | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 1,741,000 | $ | 1,871,000 | ||||||||||||
See accompanying notes which are an integral part of theseto the condensed consolidated financial statements
| 3 |
CAVITATION TECHNOLOGIES, INC.
CAVITATION TECHNOLOGIES, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenue | $ | 0 | $ | 137,000 | $ | 660,000 | $ | 626,000 | ||||||||
| Revenue – related party | 38,000 | 11,000 | 42,000 | 11,000 | ||||||||||||
| Total revenue | 38,000 | 148,000 | 702,000 | 637,000 | ||||||||||||
| Cost of revenue | 0 | (3,000 | ) | (26,000 | ) | (15,000 | ) | |||||||||
| Cost of revenue – related party | (16,000 | ) | 0 | (16,000 | ) | 0 | ||||||||||
| Gross profit | 22,000 | 145,000 | 660,000 | 622,000 | ||||||||||||
| General and administrative expenses | 270,000 | 285,000 | 1,122,000 | 878,000 | ||||||||||||
| Research and development expenses | 14,000 | 16,000 | 11,000 | |||||||||||||
| Total operating expenses | 284,000 | 285,000 | 1,138,000 | 889,000 | ||||||||||||
| Loss from operations | (262,000 | ) | (140,000 | ) | (478,000 | ) | (267,000 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Gain on forgiveness of PPP note payable | 0 | 0 | 104,000 | 0 | ||||||||||||
| Loss on settlement of liabilities | (371,000 | ) | – | (371,000 | ) | – | ||||||||||
| Income from equity method investment | 37,000 | 0 | 37,000 | 0 | ||||||||||||
| Interest expense | (2,000 | ) | 0 | (5,000 | ) | (3,000 | ) | |||||||||
| Net Loss | $ | (598,000 | ) | $ | (140,000 | ) | $ | (713,000 | ) | $ | (270,000 | ) | ||||
| Net Loss per share, | ||||||||||||||||
| Basic | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00) | |||||
| Diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| Weighted average shares outstanding, | ||||||||||||||||
| Basic | 268,618,159 | 196,997,906 | 239,868,345 | 196,997,906 | ||||||||||||
| Diluted | 268,618,159 | 196,997,906 | 239,868,345 | 196,997,906 | ||||||||||||
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 244,000 | $ | 551,000 | ||||
| Revenue – related party | 17,000 | – | ||||||
Total revenues | 261,000 | 551,000 | ||||||
| Cost of revenue | (50,000 | ) | (23,000 | ) | ||||
| Gross profit | 211,000 | 528,000 | ||||||
| General and administrative expenses | 265,000 | 306,000 | ||||||
| Income (loss) from operations | (54,000 | ) | 222,000 | |||||
| Other income (expense): | ||||||||
| Gain on forgiveness of note payable | – | 104,000 | ||||||
| Loss from equity method investment | (18,000 | ) | – | |||||
| Interest expense | (1,000 | ) | (2,000 | ) | ||||
| Total other income (expense) | (19,000 | ) | 102,000 | |||||
| Net (loss) income | $ | (73,000 | ) | $ | 324,000 | |||
| Net income per share, | ||||||||
| Basic and Diluted | $ | ) | $ | ) | ||||
| Weighted average shares outstanding, | ||||||||
| Basic and Diluted | ||||||||
See accompanying notes which are an integral part of theseto the condensed consolidated financial statements
| 4 |
CAVITATION TECHNOLOGIES, INC.
CAVITATION TECHNOLOGIES, INC.CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
AS OF SEPTEMBER 30, 2022 AND 2021
| Three Months Ended September 30, 2022 (unaudited) | ||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2022 | 276,698,831 | $ | 277,000 | $ | 26,005,000 | $ | (25,246,000 | ) | $ | 1,036,000 | ||||||||||
| Net loss | – | – | – | (73,000 | ) | (73,000 | ) | |||||||||||||
| Balance at September 30, 2022 | 276,698,831 | $ | 277,000 | $ | 26,005,000 | $ | (25,319,000 | ) | $ | 963,000 | ||||||||||
Three Months Ended March 31, 2022
| Three Months Ended September 30, 2021 (unaudited) | ||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2021 | 208,267,444 | $ | 208,000 | $ | 24,008,000 | $ | (24,627,000 | ) | $ | (411,000 | ) | |||||||||
| Common stock issued for cash | 12,071,785 | 12,000 | 773,000 | – | 785,000 | |||||||||||||||
| Net income | – | – | – | 324,000 | 324,000 | |||||||||||||||
| Balance at September 30, 2021 | 220,339,229 | $ | 220,000 | $ | 24,781,000 | $ | (24,303,000 | ) | $ | 698,000 | ||||||||||
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2021 | 254,697,965 | $ | 254,000 | $ | 24,866,000 | $ | (24,742,000 | ) | $ | 378,000 | ||||||||||
| Common stock issued upon exercise of warrants | 6,316,919 | 6,000 | 1,000 | – | 7,000 | |||||||||||||||
| Fair value of common stock issued for services | 500,000 | 1,000 | 24,000 | – | 25,000 | |||||||||||||||
| Fair value of stock issued to settle liabilities | 11,186,960 | 11,000 | 919,000 | – | 930,000 | |||||||||||||||
| Net loss | – | – | – | (598,000 | ) | (598,000 | ) | |||||||||||||
| Balance at March 31, 2022 | 272,701,844 | $ | 272,000 | $ | 25,810,000 | $ | (25,340,000 | ) | $ | 742,000 | ||||||||||
Nine Months Ended March 31, 2022
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2021 | 208,267,444 | $ | 208,000 | $ | 24,008,000 | $ | (24,627,000 | ) | $ | (411,000 | ) | |||||||||
| Common stock issued for cash | 12,071,785 | 12,000 | 773,000 | – | 785,000 | |||||||||||||||
| Common stock issued upon exercise of warrants | 34,407,709 | 34,000 | 43,000 | – | 77,000 | |||||||||||||||
| Common stock issued upon exercise of options | 6,267,946 | 6,000 | 3,000 | – | 9,000 | |||||||||||||||
| Fair value of warrants granted for services | – | – | 40,000 | – | 40,000 | |||||||||||||||
| Fair value of common stock issued for services | 500,000 | 1,000 | 24,000 | – | 25,000 | |||||||||||||||
| Fair value of stock issued to settle liabilities | 11,186,960 | 11,000 | 919,000 | – | 930,000 | |||||||||||||||
| Net loss | (713,000 | ) | (713,000 | ) | ||||||||||||||||
| Balance at March 31, 2022 | 272,701,844 | $ | 272,000 | $ | 25,810,000 | $ | (25,340,000 | ) | $ | 742,000 | ||||||||||
Three Months Ended March 31, 2021
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at December 31, 2020 | 196,997,906 | $ | 197,000 | $ | 23,291,000 | $ | (23,887,000 | ) | $ | (399,000 | ) | |||||||||
| Net loss | – | – | – | (140,000 | ) | (140,000 | ) | |||||||||||||
| Balance at March 31, 2021 | 196,997,906 | $ | 197,000 | $ | 23,291,000 | $ | (24,248,000 | ) | $ | (760,000 | ) | |||||||||
Nine Months Ended March 31, 2021
| Common Stock | Additional Paid- | Accumulated | ||||||||||||||||||
| Shares | Amount | in Capital | Deficit | Total | ||||||||||||||||
| Balance at June 30, 2020 | 196,997,906 | $ | 197,000 | $ | 23,291,000 | $ | (23,978,000 | ) | $ | (490,000 | ) | |||||||||
| Net loss | – | – | – | (270,000 | ) | (270,000 | ) | |||||||||||||
| Balance at March 31, 2021 | 196,997,906 | $ | 197,000 | $ | 23,291,000 | $ | (24,248,000 | ) | $ | (760,000 | ) | |||||||||
See accompanying notes to the condensed consolidated financial statements
| 5 |
CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (713,000 | ) | $ | (270,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 0 | 17,000 | ||||||
| Fair value of shares issued for stock compensation | 151,000 | 0 | ||||||
| Gain on forgiveness of PPP note payable | (104,000 | ) | 0 | |||||
| Loss on settlement of liabilities | 371,000 | 0 | ||||||
| Income from equity method investment | (37,000 | ) | 0 | |||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (30,000 | ) | (10,000 | )) | ||||
| Inventory | (25,000 | ) | (17,000 | ) | ||||
| Prepaid expenses | (2,000 | ) | ||||||
| Operating lease right-of-use assets | 48,000 | 47,000 | ||||||
| Accounts payable and accrued expenses | (30,000 | ) | (15,000 | ) | ||||
| Accrued payroll and payroll taxes due to officers | (44,000 | ) | (26,000 | ) | ||||
| Advances from distributors | 312,000 | 270,000 | ||||||
| Operating lease liability | (45,000 | ) | (44,000 | ) | ||||
| Net cash used in operating activities | (146,000 | ) | (50,000 | ) | ||||
| Investing Activities | ||||||||
| Capital contribution equity method investment | (1,223,000 | ) | (125,000 | ) | ||||
| Cash used in investing activities | (1,223,000 | ) | (125,000 | ) | ||||
| Financing activities | ||||||||
| Proceeds from issuance of common stock | 785,000 | 0 | ||||||
| Proceeds from notes payable | 0 | 254,000 | ||||||
| Cash provided by financing activities | 785,000 | 254,000 | ||||||
| Net change in cash | (584,000 | ) | 79,000 | |||||
| Cash, beginning of period | $ | 1,363,000 | $ | 759,000 | ||||
| Cash, end of period | $ | 779,000 | $ | 838,000 | ||||
| Non-cash Financing activities | ||||||||
| Settlement of debt for common stock | $ | 559,000 | $ | 0 | ||||
| Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities: | ||||||||
| Net income (loss) | $ | (73,000 | ) | $ | 324,000 | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Loss from equity method investment | 18,000 | 16,000 | ||||||
| Gain on forgiveness of note payable | – | (104,000 | ) | |||||
| Effect of changes in: | ||||||||
| Accounts receivable | (17,000 | ) | (477,000 | ) | ||||
| Inventory | – | 22,000 | ||||||
| Prepaid expenses | 38,000 | – | ||||||
| Operating lease right-of-use assets | 17,000 | – | ||||||
| Accounts payable and accrued expenses | 4,000 | (13,000 | ) | |||||
| Advances/distributions from distributor | (44,000 | ) | 232,000 | |||||
| Operating lease liability | (17,000 | ) | (16,000 | ) | ||||
| Net cash (used in) operating activities | (74,000 | ) | (16,000 | ) | ||||
| Cash flow from investing activities: | ||||||||
| Purchase of property and equipment | – | (250,000 | ) | |||||
| Net cash used in investing activities | – | (250,000 | ) | |||||
| Cash flow from financing activities: | ||||||||
| Proceeds from sale of common stock with warrants | – | 785,000 | ||||||
| Net cash provided by financing activities | – | 785,000 | ||||||
| Net increase (decrease) in cash and cash equivalents | (74,000 | ) | 519,000 | |||||
| Cash and cash equivalents, beginning of period | 441,000 | 1,363,000 | ||||||
| Cash and cash equivalents, end of period | $ | 367,000 | $ | 1,882,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | – | ||||
| Cash paid for income taxes | $ | – | $ | – | ||||
See accompanying notes which are an integral part of theseto the condensed consolidated financial statements
| 6 |
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)As of and for the nineThree months ended March 31,September 30, 2022 and 2021
Note 1 - Organization and Summary of Significant Accounting Policies
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.
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 ninethree months ended March 31,September 30, 2022 are not indicative of the results that may be expected for the fiscal year ending June 30, 2022. 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, 20212022 filed on October 13, 2021.2022. The condensed consolidated balance sheet as of JuneSeptember 30, 20212022 has been derived from the audited financial statements included in the Form 10-K for that year.
Going Concern
The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplates continuation of the Company as a going concern. During the ninethree months ended March 31,September 30, 2022, the Company incurred a loss of $(713,00073,000), used cash in operating activities of $74,000and at March 31,September 30, 2022, the Company had a working capital deficit of $612,00085,000. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. In addition, our independent registered public accounting firm, in their report on our audited financial statements for the fiscal year ended June 30, 2021,2022, raised substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments that might be necessary if the Company is unable to continue as a going concern.
As of March, 31September 30, 2022 we had cash and cash equivalents on hand of $779,000367,000 and are not generating sufficient funds to cover operations. In addition to the cash on hand, management believes we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partners, including the extension or renewal of our existing global R and D, Marketing and Technology License Agreement with Desmet Ballestra Group (Desmet), agreement with Alchemy Beverages, Inc (ABI), and agreement with Enviro Watertek, LLC (EWT).
We may also attempt to raise additional debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
| 7 |
Covid-19
During the ninethree months ended March 31,September 30, 2022, 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 March 31,September 30, 2022, 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.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in allowance for bad debts, reserve for inventory obsolescence, impairment analysis for fixed assets, accrual of potential liabilities, deferred tax assets and valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”).
Revenue from the sale of the Company’s 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.
Revenue from the Company’s share of gross profit to be earned from distributors, as defined, which the Company treatstreated as variable consideration, iswas recognized using the most likely amount method. Estimates are available from our distributor which are considered inPursuant to the determinationOctober 2021 agreement with Desmet, the Company is no longer entitled to share of the most likely amount.gross profit.
Revenue from usage fees is recognized by the Company based on actual usage by the customer.
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 March 31,September 30, 2022 or June 30, 2021.
Equity Method Investment
The Company accounts for investments in entities in which the Company has significant influence over the entity’s financial and operating policies, but does not control, using the equity method of accounting. The equity method investments are initially recorded at cost, and subsequently increased for capital contributions and allocations of net income, and decreased for capital distributions and allocations of net loss. Equity in net income (loss) from the equity method investment is allocated based on the Company’s economic interest. The Company assesses its investment in equity method investments for recoverability, and if it is determined that a loss in value of the investment is other than temporary, the Company writes down the investment to its fair value. The Company does not believe that
Management reviews the value of its equity method investment was impaired asfor impairment at least annually or whenever events or circumstances indicate a potential impairment and when circumstances indicate that their carrying values may not be recoverable.
At September 30, 2022, management concluded that there were no impairment indicators. If economic uncertainty increases and/or the global economy worsens, the Company's business, financial condition and results of March 31, 2022.operations may be sufficiently impacted to result in future impairment charges in the short-term. Management will continue to monitor the effects that macroeconomic conditions have on its business and operations, and will review impairment indicators to the extent necessary in the upcoming months.
| 8 |
The Company’s computation of loss per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s net 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 loss of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants are exercised, and the proceeds are used to purchase common stock at the average market price and there were no instruments that would result in issuance of additional shares during the period.
As of March 31,September 30, 2022, the Company had stock options and stock warrants outstanding to purchase shares of common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive.
Concentrations
Cash - cash is deposited in one financial institution. The balances held at this financial institution at times may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits of up to $250,000.
Accounts Receivable – accounts receivable at March 31,September 30, 2022 and June 30, 2021,2022, were due from DesmetEW (see Note 2)3).
Accounts Payable and Accrued Expenses – one vendor accounted 88100%, and 8958% of accounts payable and accrued expenses as of March 31,September 30, 2022, respectively. Two vendorsOne vendor accounted 6488% and 1467% of accounts payable and accrued expenses as of June 30, 2021.2022.
Revenues – revenues during the ninethree months period ended March 31,September 30, 2022 and 2021, were 9593% and 94100% of revenues, respectively, were from Desmet
Fair Value Measurement
FASB Accounting Standards Codification ("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The three levels of the fair value hierarchy are as follows:
| · | Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
| · | Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
| · | Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
On March 31,September 30, 2022 and June 30, 2021,2022, the fair values of cash and cash equivalents, accounts receivable, inventory and accounts payable and accrued expenses approximate their carrying values due to their short-term nature.
| 9 |
Segments
The Company operates in one segment, its nano reactor technology business. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASBFinancial Accounting Standards Board (the "FASB") issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments ("ASC 326”(“ASU 2016-13”). 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 JanuaryJuly 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows. In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify fora scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective July 1, 2024, for the Company. Early adoption is permitted, but no earlier than July 1, 2021. Effective July 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact our financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity classified written call options (such as warrants) that remain equity classified after modification or exchange. An issuer measures the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange. ASU 2021-04 introduces a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt ASU 2021-04 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2021-04 is not expected to have a material impact on the Company’s financial statements or 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.
Note 2 - Contracts with Desmet Ballestra Group
The Company has the following agreements with Desmet Ballestra (Desmet), a company located in Europe:
| ||
| This agreement replaced an earlier agreement which provided the Company
|
During the three months ended March 31, 2022, the Company did not record any revenue from Desmet for sales of reactors or for the Company’s gross profit share of sales. During the nine months ended March 31,September 30, 2022, the Company recorded total revenue from Desmet of $660,000244,000 from reactor sales.
During the three months ended September 30, 2021, the Company recorded total revenue from Desmet of $551,000, made up of $592,000483,000 from reactor sales and $ from the Company’s share of gross profit.
During the three months ended March 31, 2021, the Company recorded total revenue from Desmet of $137,000, made up of $69,000 from reactor sales and $ from the Company’s share of gross profit. During the nine months ended March 31, 2021, the Company recorded total revenue from Desmet of $626,000, made up of $346,000 from reactor sales and $ from the Company’s share of gross profit.
As of March 31,September 30, 2022, the Company has recorded customer advances of $959,000 to account for cash received from Desmet under the October 2018 agreement,related to be appliedfuture sales of reactors amounted to the Company’s share of future gross profits. As the October 2018 agreement with Desmet expired in October 2021, the Company is in discussions with Desmet with regards to the treatment of these outstanding advances. Also as of March 31, 2022, the Company has recorded customer advances of $80,00036,000 under the October 2021 agreement, to account for cash received from Desmet to be applied to the Company’s share of future sales..
Note 3 - Investment in equity method investment
In 2019, the Company and Delaware Water Company, LLC (Delaware) formed a limited liability company called Enviro WaterTek LLC (“Enviro”). Enviro is owned 50% by the Company and 50% by Delaware, and the Company accounts for its investment in Enviro under the equity method. From 2019 to 2021, Enviro had no operations.
In September 2021, the Company and Delaware entered into a separate agreement under Enviro for a specific project (referred to as “Ameredev”). Delaware has certain contracts in place to provide recycled water to operators of certain active oil and gas wells. Under the agreement, the Company contributed $1.2 million that was used by Ameredev to increase the capacity of certain pipelines and water treatment facilities operated by Delaware. Pursuant to the agreement, for each barrel of recycled water that Ameredev sells, Delaware will receive $0.10 per barrel, and the Company will receive $0.05 per barrel (referred to as usage fees), with the balance of net income (loss) from Ameredev being allocated 70% to Delaware and 30% to the Company. The Ameredev agreement will terminate the earlier of three years (unless extended by unanimous agreement of the Board and Members of Ameredev) from the date of the agreement or by unanimous agreement of the Board and Members of Ameredev.
During the three months ended March 31,September 30, 2022, the Company recorded total revenues from Ameredev of $38,000, made up of $32,000 from the sale of reactors, and $6,000 from usage fees. During the nine months ended March 31, 2022, the Company recorded total revenues from Ameredev of $42,000, made up of $32,000 from the sale of reactors, and $10,00017,000 from usage fees.
Also during the three and nine months ended March 31,September 30, 2022, the Company recognized a loss of $37,000 of18,000 to account for its 30% share of earnings ofin the net loss from the equity method investment.
During the three and nine months ended March 31, 2021, the Company recorded revenues of $11,000investment from the usage fee. During the three and nine months ended March 31, 2021, there was no share of earnings or losses of the equity method investment..
The following table summarizes the activity of the Company’s equity method investment:
| Investment in equity method investment | ||||||||
| March 31, 2022 | September 30, 2022 | |||||||
| Balance at beginning of period | $ | – | $ | 1,149,000 | ||||
| Contributions to equity method investment | 1,223,000 | – | ||||||
| Equity in earnings of equity method investment | 37,000 | |||||||
| Equity in earnings and losses of the equity method investment | (18,000 | ) | ||||||
| Balance at end of period | $ | 1,260,000 | $ | 1,131,000 | ||||
A summarized balance sheet as of March 31,September 30, 2022, for Ameredev, and a summarized statement of operations for the nine-monthsthree-months ended March 31,September 30, 2022, for Ameredev is presented below:
Balance Sheet:
| Equity Method Investments | ||||||||
| Amount | Amount | |||||||
| Property and equipment | $ | 1,223,000 | ||||||
| Cash | $ | 21,000 | ||||||
| Accounts receivable | 128,000 | |||||||
| Property and equipment, net of depreciation | 1,212,000 | |||||||
| Total assets | $ | 1,223,000 | $ | 1,361,000 | ||||
| Partners equity | $ | 1,223,000 | $ | 1,361,000 | ||||
| Total liabilities and equity | $ | 1,223,000 | $ | 1,361,000 | ||||
Income Statement:
| Amount | Amount | |||||||
| Revenue | $ | 160,000 | $ | 24,000 | ||||
| Usage fees paid to Cavitation and Delaware | (36,000 | ) | (52,000 | ) | ||||
| Net income | $ | 124,000 | ||||||
| Operating expenses | (30,000 | ) | ||||||
| Net loss | $ | (58,000 | ) | |||||
Note 4 – Operating Lease
The Company leases certain warehouse and corporate office space under operating lease agreement. We determine if an arrangement is a lease at inception. Lease assets are presented as operating lease right-of-use assets and the related liabilities are presented as lease liabilities in our consolidated balance sheets.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in lease arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
| Lease cost tables | ||||||||
Nine Months Ended March 31, 2022 | Three Months Ended September 30, 2022 | |||||||
| Lease cost | ||||||||
| Operating lease cost (included in general and administrative in the Company’s unaudited condensed statement of operations) | $ | 59,000 | $ | 19,000 | ||||
| Other information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 54,000 | $ | 19,000 | ||||
| Weighted average remaining lease term – operating leases (in years) | 2.8 | 2.3 | ||||||
| Average discount rate – operating leases | 4% | 4% | ||||||
The supplemental balance sheet information related to leases for the period is as follows:
| At March 31, 2022 | At September 30, 2022 | |||||||
| Operating leases | ||||||||
| Long-term right-of-use assets | $ | 197,000 | $ | 163,000 | ||||
| Short-term operating lease liabilities | $ | 61,000 | $ | 63,000 | ||||
| Long-term operating lease liabilities | 145,000 | 110,000 | ||||||
| Total operating lease liabilities | $ | 206,000 | $ | 173,000 | ||||
| Schedule of lease liability maturities | ||||||||
| Period ending March 31 | Operating Lease | |||||||
| Period ending September 30 | Operating Lease | |||||||
| 2022 (remaining 3 months) | $ | 19,000 | ||||||
| 2023 | 75,000 | |||||||
| 2023 (remaining 9 months) | $ | 62,000 | ||||||
| 2024 | 78,000 | 78,000 | ||||||
| 2025 | 47,000 | 47,000 | ||||||
| Total lease payments | 219,000 | 187,000 | ||||||
| Less: Imputed interest/present value discount | (13,000 | ) | (14,000 | ) | ||||
| Present value of lease liabilities | $ | 206,000 | $ | 173,000 | ||||
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 JuneSeptember 30, 2021, total accrued payroll and payroll taxes-related parties amounted to $677,000.
In December 2021 and March 2022, two former officers of the Company agreed to transfer accrued payroll due them totaling $356,000 to an unrelated entity, Sandra Investment (“Sandra”). Sandra assumed the liabilities and the Company issued two promissory notes aggregating $356,000 to Sandra to facilitate the transfer. In January 2022 and March 2022, the Company issued a total of shares of its common stock with a fair value of $ to settle in full the two promissory notes aggregating $356,000, and recorded a loss on settlement of the liabilities of $166,000 (see note 7).
As of March 31,June 30, 2022, total accrued payroll and payroll taxes-related parties amounted to $280,000., respectively.
Note 6 – Notes Payable - EIDL
| Schedule of notes payable | ||||||||
March 31, 2022 | June 30, 2021 | |||||||
| A. Note Payable – PPP | $ | – | $ | 104,000 | ||||
| B. Note Payable - EIDL | 150,000 | 150,000 | ||||||
| Total | $ | 150,000 | $ | 254,000 | ||||
In July 2020, the Company received a loan of $150,000 from the Small Business Association under its Economic Injury Disaster Loan (EIDL) assistance program. The EIDL loan is payable over 30 years, bears interest at a rate of 3.75% per annum and secured by all tangible and intangible property of the Company. As of September 30, 2022 and June 30, 2022, the outstanding balance of the note payable amounted to $150,000, respectively.
Note 7 - Stockholders' DeficitEquity
Common Stock
Shares issued for cash
During the period ended March 31, 2022,September 30, 2021, the Company sold shares of common stock and warrants to purchase shares of common stock in a private placement for $0.065 per unit, for net proceeds of $785,000. The warrants have an exercise price of $0.09 per share, were fully vested upon issuance, and have a term of five years.
Shares issued upon exercise of options and warrants
During the period ended March 31, 2022, the Company issued shares of common stock upon the cashless exercise of stock options exercisable into 8,500,000 shares of common stock. As a result of the exercise the Company also recognized stock compensation of $ to account the fair value of 86,128 additional shares of common stock issued to the option holders.
During the period ended March 31, 2022, the Company issued shares of common stock upon the cashless exercise of warrants exercisable into 50,110,000 shares of common stock. As a result of the exercise, the Company also recognized stock compensation of $ to account the fair value of 543,447 additional shares of common stock issued to the warrant holders.
Shares issued for services
In March 2022, the Company issued shares to a consultant for services for a total fair value of $25,000. The fair value was based on the closing price of the Company’s common stock on the date the shares were granted.
Shares issued for the settlement of liabilities
In January 2022 and March 2022, the Company issued a total of shares of its common stock with a fair value of $ to settle in full two promissory notes aggregating $356,000 (see Note 5), and recorded a loss on settlement of the liabilities of $166,000.
In January 2022, the Company issued shares of common stock with a fair value of $ to settle accounts payable of $203,849, and recorded a loss on settlement of the liability of $205,000.
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 ninethree months ended March 31,September 30, 2022 is as follows:
| Stock Option activity table | ||||||||||||||||||||||||
| Stock Option activity | ||||||||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||
| Weighted- | Remaining | Weighted- | Remaining | |||||||||||||||||||||
| Average | Contractual | Average | Contractual | |||||||||||||||||||||
| Exercise | Life | Exercise | Life | |||||||||||||||||||||
| Options | Price | (Years) | Options | Price | (Years) | |||||||||||||||||||
| Outstanding at June 30, 2021 | 11,000,000 | $ | 0.03 | |||||||||||||||||||||
| Outstanding at June 30, 2022 | 1,250,000 | $ | 0.03 | |||||||||||||||||||||
| - Granted | 0 | 0 | – | – | – | – | ||||||||||||||||||
| - Forfeited | 0 | 0 | – | – | – | – | ||||||||||||||||||
| - Exercised | (8,500,000 | ) | 0.03 | – | – | – | ||||||||||||||||||
| - Expired | (1,250,000 | ) | 0.03 | – | – | – | – | |||||||||||||||||
| Outstanding at March 31, 2022 vested and exercisable | 1,250,000 | $ | 0.03 | |||||||||||||||||||||
| Outstanding at September 30, 2022 vested and exercisable | 1,250,000 | $ | 0.03 | |||||||||||||||||||||
There was no intrinsic value of the outstanding options as of March 31,September 30, 2022 as the exercise price of these options were greater than the market price. The following table summarizes additional information concerning options outstanding and exercisable at March 31, 2021.September 30, 2022.
| Schedule of options outstanding and exercisable | ||||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise Price | Number of Shares | Weighted- Average Remaining Life (Years) | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Remaining Life (Years) | |||||||||||||||||
| $ | 0.03 | 1,250,000 | $ | 0.03 | 1,250,000 | |||||||||||||||||
| Schedule of options outstanding and exercisable | ||||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise Price | Number of Shares | Weighted- Average Remaining Life (Years) | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Remaining Life (Years) | |||||||||||||||||
| $ | 0.03 | 1,250,000 | $ | 0.03 | 1,250,000 | |||||||||||||||||
Stock Warrants
A summary of the Company's warrant activity and related information for the ninethree months ended on March 31,September 30, 2022 is as follows:
| Schedule of warrant activity | ||||||||||||||||||||||||
| Warrants | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (Years) | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (Years) | ||||||||||||||||||||
| Outstanding at June 30, 2021 | 98,966,049 | $ | 0.07 | |||||||||||||||||||||
| Outstanding at June 30, 2022 | 61,427,834 | $ | 0.09 | |||||||||||||||||||||
| Granted | 12,571,785 | 0.09 | 5.0 | – | – | – | ||||||||||||||||||
| Exercised | (50,110,000 | ) | 0.03 | – | – | – | ||||||||||||||||||
| Expired | 0 | – | – | – | ||||||||||||||||||||
| Outstanding at March 31, 2022 vested and exercisable | 61,427,834 | $ | 0.09 | |||||||||||||||||||||
| Outstanding at September 30, 2022 vested and exercisable | 61,427,834 | $ | 0.09 | |||||||||||||||||||||
During the period ended March 31, 2022, the Company granted a consultant warrants to purchaseThere was shares of common stock for services rendered. The warrants are exercisable at $0.09 per share, will expire in 5 years and fully vested upon grant. Total fair value of these warrants upon grant amounted to $computed using the Black Scholes Option pricing model and was recorded as stock compensation expense.
As of March 31, 2022, all outstanding warrants are fully vested. The intrinsic value of the outstanding warrants as of March 31,September 30, 2022 was $.as the exercise price of these warrants were greater than the market price. The following table summarizes additional information concerning warrants outstanding and exercisable at March 31, 2021.September 30, 2022.
| Schedule of warrants outstanding and exercisable | Schedule of warrants outstanding and exercisable | |||||||||||||||||||||||||||||||||||||
| Warrants Outstanding | Warrants Exercisable | Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||
| Exercise | Exercise | Number | Remaining | Exercise | Number | Exercise | Exercise | Number | Remaining | Exercise | Number | Exercise | ||||||||||||||||||||||||||
| Price | Price | of Shares | Life (Years) | Price | of Shares | Price | Price | of Shares | Life (Years) | Price | of Shares | Price | ||||||||||||||||||||||||||
| $ | 0.03 - 0.05 | 18,626,518 | $ | 0.03 – 0.05 | 19,626,518 | $ | 0.03 - 0.05 | 18,626,518 | $ | 0.03 – 0.05 | 19,626,518 | $ | 2.38 | |||||||||||||||||||||||||
| 0.09 | 23,841,323 | 0.09 | 23,841,323 | 0.09 | 23,841,323 | 0.09 | 23,841,323 | 3.76 | ||||||||||||||||||||||||||||||
| $ | 0.12 | 18,959,993 | $ | 0.12 | 18,959,993 | $ | 0.12 | 18,959,993 | $ | 0.12 | 18,959,993 | $ | 1.24 | |||||||||||||||||||||||||
| 61,427,834 | 61,427,834 | 61,427,834 | 61,427,834 | |||||||||||||||||||||||||||||||||||
Note 8 - Commitments and Contingencies
Royalty Agreements
On July 1, 2008, the Company entered into Patent Assignment Agreements with two parties, our President and Technology Development Supervisor, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and the Technology Development Supervisor have been assigned to the Subsidiary. In exchange, the Subsidiary agreed to pay a royalty of 5% of gross revenues to each of the President and Technology Development Supervisor for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from its subsidiary. The Company's President and Technology Development Supervisor both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through December 31, 2018.
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"“Inventor”) to receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of March 31,September 30, 2022 no patents have been granted in which this person is the legally named inventor.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. ("CTi"), a Nevada corporation, was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly technology-based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development firm that has developed, patented, and commercialized proprietary technology.
CTi has developed, patented, and commercialized proprietary technology that can be used for processing of industrial fluids. CTi's patented Nano Reactor® is the critical components of the CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano Reactor® systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
We are engaged in manufacturing our Nano-Reactors, which are designed to help refine vegetable oils, biodiesel transesterification and treatment of produced and frack water. Our near-term goal is to continue to sell our systems through our partners, Desmet Ballestra and EW.
During the past several years we have developed a number of new applications utilizing the core principal of our technology. Our low pressure non-reactors (LPN) can be utilized in multiple industries that process large volumes of fluids and we anticipate accelerated commercial sales in our fiscal 2020. Further, we have miniaturized our non-reactors to be utilized in various consumer oriented products, such as, processing and enhancing spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil.
We have agreements to license our technology globally through our strategic partners, Desmet Ballestra Group (Desmet) and Enviro Watertek, LLC (EW) and Alchemy Beverages, Inc (ABI). Desmet have been providing monthly advances of $50,000.$40,000 to be applied against future sales of reactors to Desmet. We may need additional funding, and may attempt to raise additional debt and/or equity financing to fund operations and additional working capital. However, there is no assurance that we will be successful in obtaining such financing or obtained sufficient amounts necessary to meet our business needs, or that we will be able to meet our future contractual obligations.
In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time.
Inflation
Global inflation also increased during 2021 and in 2022. The Russia and Ukraine conflict and other geopolitical conflicts, as well as related international response, have exacerbated inflationary pressures, including causing increases in the price for goods and services and global supply chain disruptions, which have resulted and may continue to result in shortages in food products, materials and services. Such shortages have resulted and may continue to result in inflationary cost increases for labor, fuel, food products, materials and services, and could continue to cause costs to increase as well as result in the scarcity of certain materials. We cannot predict any future trends in the rate of inflation or other negative economic factors or associated increases in our operating costs and how that may impact our business. To the extent we and our customers we service are unable to recover higher operating costs resulting from inflation or otherwise mitigate the impact of such costs on our and their business, our revenues and gross profit could decrease, and our financial condition and results of operations could be adversely affected.
Results of Operations
Results of Operations for the Three Months Ended March 31,September 30, 2022 Compared to the Three Months Ended March 31,September 30, 2021
The following is a comparison of our results of operations for the three months ended March 31,September 30, 2022 and 2021.
| For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||
| March 31, | September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |||||||||||||||||||||||||
| Revenue | $ | – | $ | 137,000 | $ | (137,000 | ) | (100)% | $ | 244,000 | $ | 551,000 | $ | (307,000 | ) | (56 | )% | |||||||||||||||
| Revenue from related party | 38,000 | 11,000 | 27,000 | 245% | 17,000 | – | 17,000 | (100 | )% | |||||||||||||||||||||||
| Total revenues | 261,000 | 551,000 | (209,000 | ) | (53 | )% | ||||||||||||||||||||||||||
| Cost of revenue | (16,000 | ) | (3,000 | ) | (13,000 | ) | 433% | (50,000 | ) | (23,000 | ) | (27,000 | ) | 117% | ||||||||||||||||||
| Gross profit | 22,000 | 145,000 | (123,000 | ) | (85)% | 211,000 | 528,000 | (317,000 | ) | (60 | )% | |||||||||||||||||||||
| General and administrative expenses | 270,000 | 285,000 | (15,000 | ) | (5)% | 265,000 | 306,000 | (41,000 | ) | (13 | )% | |||||||||||||||||||||
| Research and development expenses | 14,000 | – | 14,000 | 100% | ||||||||||||||||||||||||||||
| Total operating expenses | 284,000 | 285,000 | (1,000 | ) | (1)% | |||||||||||||||||||||||||||
| Loss from operations | (262,000 | ) | (140,000 | ) | (122,000 | ) | 87% | |||||||||||||||||||||||||
| Income from equity method investment | 37,000 | – | 37,000 | 100% | ||||||||||||||||||||||||||||
| Loss on settlement of liabilities | (371,000 | ) | – | (371,000 | ) | (100)% | ||||||||||||||||||||||||||
| Income (loss) from operations | (54,000 | ) | 222,000 | (276,000 | ) | (124 | )% | |||||||||||||||||||||||||
| Loss from equity method investment | (18,000 | ) | – | (18,000 | ) | (100 | )% | |||||||||||||||||||||||||
| Gain on forgiveness of note payable | – | 104,000 | (104,000 | ) | (100 | )% | ||||||||||||||||||||||||||
| Interest expense | (2,000 | ) | – | (2,000 | ) | (100)% | (1,000 | ) | 2,000 | 1,000 | (50 | )% | ||||||||||||||||||||
| Net loss | $ | (598,000 | ) | $ | (140,000 | ) | $ | (458,000 | ) | (527)% | ||||||||||||||||||||||
| Net income (loss) | $ | (73,000 | ) | $ | 324,000 | $ | (397,000 | ) | (123 | )% | ||||||||||||||||||||||
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. Additionally, the Company generates revenues from its equity method investment.
During the three months ended March 31,September 30, 2022 we recorded $38,000$262,000 in revenue compared to $148,000$551,000 for months ended March 31,September 30, 2021. Revenues decreased since the Company did not receive anyas many orders from Desmet, offset by sale of reactors to the equity method investment.
Cost of Revenue
During the three months ended March 31,September 30, 2022 and 2021, our cost of sales amounted to $16,000$50,000 and $3,000$23,000 respectively 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 March 31,September 30, 2022 amounted to $284,000$265,000 compared with $285,000$306,000 for the same period in 2021, a decrease of $1,000$41,000 or 1%13%. Decrease in general and administrative expense due to decrease in professional expenses.
Researchexpenses 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.payroll.
During the three months ended March 31,September 30, 2022 the Company recognized loss from equity method investment of $(18,000) compared to $102,000 for the three months ended September 30, 2021. The other income (expense) of $(336,000),for the three months ended September 30, 2021 was primarily made up of loss on settlement of liabilities of 371,000.
Results of Operations for the Nine Months Ended March 31, 2022 Compared to the Nine Months Ended March 31, 2021
The following is a comparison of our results of operations for the nine months ended March 31, 2022 and 2021.
| For the Nine Months Ended | ||||||||||||||||
| March 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Revenue | $ | 660,000 | $ | 626,000 | $ | 34,000 | 5% | |||||||||
| Revenue from related party | 42,000 | 11,000 | 31,000 | 282% | ||||||||||||
| Cost of revenue | (42,000 | ) | (15,000 | ) | (27,000 | ) | 180% | |||||||||
| Gross profit | 660,000 | 622,000 | 38,000 | 6% | ||||||||||||
| General and administrative expenses | 1,122,000 | 878,000 | 244,000 | 28% | ||||||||||||
| Research and development expenses | 16,000 | 11,000 | 5,000 | 45% | ||||||||||||
| Total operating expenses | 1,138,000 | 889,000 | 249,000 | 28% | ||||||||||||
| Loss from operations | (478,000 | ) | (267,000 | ) | (211,000 | ) | 79% | |||||||||
| Gain on forgiveness of PPP note payable | 104,000 | - | 104,000 | 100% | ||||||||||||
| Loss on settlement of liabilities | (371,000 | ) | - | (371,000 | ) | (100)% | ||||||||||
| Income from equity method investment | 37,000 | - | 37,000 | 100% | ||||||||||||
| Interest expense | (5,000 | ) | (3,000 | ) | (2,000 | ) | 67% | |||||||||
| Net loss | $ | (713,000 | ) | $ | (270,000 | ) | $ | (443,000 | ) | 164% | ||||||
Revenue
The Company generates revenues from the saleforgiveness of the Nano Reactor® to customers/distributor as well as share in gross profit from the salePPP note payable of such reactors by our distributors to their customers. Additionally, the Company generates revenues from its equity method investment.
During the nine months ended March 31, 2022 the Company recognized revenues of $702,000.
During the nine months ended March 31, 2021 we recorded $637,000 in revenue.
Cost of Revenue
During the nine months ended March 31, 2022 and 2021, our cost of sales amounted to $42,000, and $15,000 during the same period in prior year, which was the result of the revenue transactions described above.
104,000.
Operating Expenses
Operating expenses for the nine months ended March 31, 2022 amounted to $1,122,000 compared with $878,000 for the same period in 2021, an increase of $244,000 or 28%. The increase were due to increase in payroll expenses, increase in stock compensation expenses, offset by decrease in professional expenses.
Research and development (R&D) expenses remained relatively low as we continued to rely on Desmet 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.
Other Income
During the nine months ended March 31, 2022 the Company recognized other income (expense) of $(235,000), primarily made up of loss on settlement of liabilities of 371,000 offset by gain on forgiveness of PPP note payable of $104,000 and income from equity investment of $37,000.
Liquidity and Capital Resource
During the ninethree months ended March 31,September 30, 2022 the Company incurred a net loss of $713,000$73,000 and had a negativeused cash flow from operations of $146,000,$74,000 and had a working capital deficiency of $612,000 and a stockholders' deficit of $742,000.$85,000 as of September 30, 2022. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s June 30, 20212022 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern.
As of March 31,September 30, 2022 we had cash and cash equivalents on hand of $779,000$367,000 and are not generating sufficient revenues to fund operations. In addition, management believes we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partners, Desmet Ballestra Group (Desmet), Enviro Watertek (EW) and Alchemy Beverages, Inc. (ABI). Pursuant to our contract with Desmet, Desmet has been providing us monthly advances of $40,000 and our renewed contract is through October 1, 2024 to be applied against from future reactor sales.
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.
Cash Flow
Net cash used in operating activities during the ninethree months ended March 31,September 30, 2022 amounted to $146,000$74,000 compared to net cash used in operating activities of $50,000$16,000 for the same period in fiscal 2021.
Funding for the operating activities was provided primarily by sales of our systems to Desmet and advances received from distributor.Desmet.
Net cash used in investing activities during the three months ended September 30, 2022 and 2021 were $0 and $250,00 respectively. In 2021, the Company purchased $250,000 of equipment.
Net cash provided by financing activities during the three months ended September 30, 2022 and 2021 were $0 and $785,000, respectively. In 2021, the Company received proceeds from the sale of common stock with warrants.
Critical Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used for allowance for doubtful accounts, reserve for inventory obsolescence, valuation and impairment analysis for equity method investment, impairment analysis for property and equipment, accrual of potential liabilities, valuation allowance for deferred tax assets, and assumption in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606.
Revenue from the sale of the Company’s 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.
Revenue
| 18 |
The Company also recognized revenue from the Company’sits share of gross profit to be earned from distributors, as defined, which the Company treatswe treated as variable consideration isand recognized using the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most likely amount.
RevenueIn addition, the Company also recognizes revenues from usage fees isof certain reactors. Usage fees are recognized by the Company based on actual usage by the customer.
Recently Issued Accounting Standards
See Note 1 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable for smaller reporting companies.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with rule 13a-15(a), CTi management must maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934, or the Exchange Act, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Rule 13a-15(b) and (c), management must also evaluate the effectiveness of these disclosure control and procedures at the end of each fiscal year. As of March 31,September 30, 2022 the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that these disclosure controls and procedures were not effective as of March 31,September 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the third quarter of fiscal 2022 that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Mine Safety Disclosures
None
Item 5 - Other Information
None
Item 6 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
* In accordance with Regulation S-K 406 of the Securities Act of 1934, we undertake to provide to any person without charge, upon request, a copy of our "Code of Business Conduct and Ethics". A copy may be requested by sending an email to info@cavitationtechnologies.com.
| Incorporated by Reference | ||||||
| Exhibit | Filed | |||||
| Number | Exhibit Description | Herewith | Form | Pd. Ending | Exhibit | Filing Date |
| 3(i)(a) | Articles of Incorporation - original name of Bioenergy, Inc. | SB-2 | N/A | 3.1 | October 19, 2006 | |
| 3(i)(b) | Articles of Incorporation - Amended and Restated | 10-Q | December 31, 2008 | 3-1 | February 17, 2009 | |
| 3(i)(c) | Articles of Incorporation - Amended and Restated | 10-Q | June 30, 2009 | 3-1 | May 14, 2009 | |
| 3(i)(d) | Articles of Incorporation - Amended; increase in authorized shares | 8-K | N/A | N/A | October 29, 2009 | |
| 3(i)(e) | Articles of Incorporation - Certificate of Amendment; forward split | 10-Q | December 31, 2009 | 3-1 | November 16, 2009 | |
| 10.1 | Patent Assignment Agreement between the Company and Roman Gordon dated July 1, 2008. | 8-K | June 30, 2009 | 10.1 | May 18, 2010 | |
| 10.2 | Patent Assignment Agreement between the Company and Igor Gorodnitsky dated July 1, 2008. | 8-K | June 30, 2009 | 10.2 | May 18, 2010 | |
| 10.3 | Assignment of Patent Assignment Agreement between the Company and Roman Gordon | 8-K | June 30, 2009 | 10.3 | May 18, 2010 | |
| 10.4 | Assignment of Patent Assignment Agreement between the Company and Igor Gorodnitsky | 8-K | June 30, 2009 | 10.4 | May 18, 2010 | |
| 10.5 | Employment Agreement between the Company and Roman Gordon date March 17, 2008 | 10K/A | June 30, 2009 | 10.3 | October 20, 2011 | |
| 10.6 | Employment Agreement between the Company and Igor Gorodnitsky dated March 17, 2008 | 10K/A | June 30, 2009 | 10.4 | October 20, 2011 | |
| 10.7 | Employment and Confidentiality and Invention Assignment Agreement between the Company and Varvara Grichko dated April 30, 2008 | 10-Q | December 31, 2010 | 10.3 | February 11, 2011 | |
| 10.8 | Board of Director Agreement - James Fuller | 10-Q | December 31, 2011 | 10.12 | October 20, 2011 | |
| 10.9 | Technology and License Agreement with Desmet Ballestra dated 14 May 2012 | 10-K | June 30, 2012 | 10.1 | October 15, 2012 | |
| 10.10 | Short Term Loan Agreement - CEO | 10-K | June 30, 2012 | 10.11 | October 15, 2012 | |
| 10.11 | Loan Agreement - Desmet Ballestra - Oct. 26, 2010 | |||||
| 14.1 | Code of Business Conduct and Ethics* | 10-K | June 30, 2011 | 14.1 | September 28, 2011 | |
| 31.1 | Certificate of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | X | ||||
| 31.2 | Certificate of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | X | ||||
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | ||||
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | X | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | X | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). | X | ||||
| * | In accordance with Regulation S-K 406 of the Securities Act of 1934, we undertake to provide to any person without charge, upon request, a copy of our "Code of Business Conduct and Ethics". A copy may be requested by sending an email to info@cavitationtechnologies.com. | |||||
SIGNATURES
Pursuant to the requirements of the securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIGNATURE | TITLE | DATE | ||
| /s/ | President; Member of Board of Directors | |||
| (Principal Executive Officer) | ||||
| /s/ | Chief Financial Officer | |||
| (Principal Financial Officer) | ||||