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

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended December 31, 2016

 

Commission File Number: 000-53239

 

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)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    x          NO    ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

YES    x          NO    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    ¨

Accelerated filer    ¨

Non-accelerated filer    ¨ (Do not check if a smaller reporting company)

Smaller reporting company    x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES    ¨          NO    x

 

As of February 17, 2017, the issuer had 193,997,906 shares of common stock outstanding.

 

 

TABLE OF CONTENTS

 

PART I.	FINANCIAL INFORMATION		Page
Item 1.	Condensed Consolidated Financial Statements  (unaudited)		3
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statement of Stockholders' Deficit		5
	Condensed Consolidated Statements of Cash Flows		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18
Item 4.	Controls and Procedures		18
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3.	Defaults Upon Senior Securities		19
Item 4.	(Removed and Reserved)		19
Item 5.	Other Information		19
Item 6.	Exhibits		20
Signatures			21
Certifications

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - Condensed Consolidated Financial Statements

 

CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

  

		December 31,				June 30,
		2016				2016
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	399,430			$	657,396
Inventory			162,129				153,811
Total current assets			561,559				811,207
Property and equipment, net			107,839				122,641
Patents, net			9,620				16,336
Other assets			9,500				9,500
Total assets		$	688,518			$	959,684
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses		$	158,468			$	171,029
Accrued payroll and payroll taxes due to officers			994,033				994,033
Related party payable			1,147				1,147
Advances from distributor, net			688,123				436,250
Total current liabilities			1,841,771				1,602,459
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2016 and June 30, 2016, respectively			-				-
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 193,997,906 shares issued and outstanding as of December 31, 2016 and June 30, 2016, respectively			193,998				193,998
Additional paid-in capital			22,062,888				22,062,888
Accumulated deficit			(23,410,139	)			(22,899,661	)
Total stockholders' deficit			(1,153,253	)			(642,775	)
Total liabilities and stockholders' deficit		$	688,518			$	959,684

 

 

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

 

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

 

		For the Three Months Ended								For the Six Months Ended
		December 31,								December 31,
		2016				2015				2016				2015
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Revenue		$	35,000			$	144,388			$	120,000			$	640,667
Cost of revenue			7,912				21,781				15,824				66,290
Gross profit			27,088				122,607				104,176				574,377
General and administrative expenses			287,493				333,674				606,974				622,327
Research and development expenses			1,351				2,321				7,680				14,829
Total operating expenses			288,844				335,995				614,654				637,156
Net Loss		$	(261,756	)		$	(213,388	)		$	(510,478	)		$	(62,779	)
Net Loss per share,
Basic and Diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Weighted average shares outstanding,
Basic and Diluted			193,997,906				193,997,906				193,997,906				193,997,906

 

 

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

 

CAVITATION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited)

 

		Series A Preferred								Common Stock								Additional Paid-				Accumulated
		Shares				Amount				Shares				Amount				in Capital				Deficit				Total
Balance at June 30, 2016			-			$	-				193,997,906			$	193,998			$	22,062,888				(22,899,661	)			(642,775	)
Net Loss																							(510,478	)			(510,478	)
Balance at December 31, 2016			-			$	-				193,997,906			$	193,998			$	22,062,888			$	(23,410,139	)		$	(1,153,253	)

 

 

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

 

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

 

		Six Months Ended December 31,
		2016				2015
		(unaudited)				(unaudited)
Operating activities:
Net loss		$	(510,478	)		$	(62,779	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			21,518				30,992
Effect of changes in:
Inventory			(8,318	)			(20,386	)
Accounts payable and accrued expenses			(12,561	)			76,095
Advances from distributor			371,873				-
Reduction in distributor advances from recognition of revenues			(120,000	)			(640,667	)
Net cash used in operating activities			(257,966	)			(616,745	)
Investing activities:
Purchase of property and equipment			-				(61,565	)
Net cash used in investing activities			-				(61,565	)
Net decrease in cash			(257,966	)			(678,310	)
Cash, beginning of period			657,396				1,478,565
Cash, end of period		$	399,430			$	800,255
Supplemental disclosures of cash flow information:
Cash paid for interest		$	-			$	-
Cash paid for income taxes		$	1,600			$	1,600

 

 

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

 

CAVITATION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six months ended December 31, 2016 and 2015

 

Note 1 - Organization and Basis of Presentation

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") as promulgated in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the six months ended December 31, 2016 are not indicative of the results that may be expected for the fiscal year ending June 30, 2017. 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, 2016 filed on October 13, 2016. The condensed consolidated balance sheet as of June 30, 2016 has been derived from the audited financial statements included in the Form 10-K for that year.

 

Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as "the Company," "CTi," "we," "us," and "our") is a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented, and commercialized proprietary technology that may be used in liquid processing applications. CTi's patented Nano Reactor® is the critical component of CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in refining vegetable oils. CTi has two patented systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, wastewater treatment, biodiesel, algae oil extraction, and alcoholic beverage enhancement.

 

Going Concern

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  During the six months ended December 31, 2016, the Company incurred a net loss of $510,478 and utilized $257,966 in operations. As of December 31, 2016, the Company had a working capital deficiency of $1,280,212 and a stockholders' deficit of $1,153,253.   These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. In addition, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2016 expressed substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.

 

Management's plan is to generate income from operations by continuing to market our technology and products globally through our strategic partner, the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly advances of $50,000 to be applied against future revenues pursuant to a January 2016 agreement. This new agreement replaces the agreement dated on May 12, 2012 that ended on May 12, 2015. During the six months ended December 31, 2016, the Company received advances from Desmet totaling $200,000.

 

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

 

Note 2 - Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Inter-company transactions and balances have been eliminated in consolidation.

 

 

Fair Value Measurement

 

FASB Accounting Standards Codification ("ASC") 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

 

The following table presents information about the Company's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of December 31, 2016 and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:

 

·

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

·

Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

·

Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

At December 31, 2016 and June 30, 2016, the fair values of cash and cash equivalents, inventory and accounts payable and accrued expenses approximate their carrying values due to their short-term nature.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.

 

Revenue Recognition

 

Revenue from the sale of our Nano Reactor® Systems is recognized when persuasive evidence of an agreement exists; shipment has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured.

 

The Company is also entitled to certain non-refundable profit share from our distributor from the sale of the reactors. Pursuant to the May 2012 agreement with our distributor, the profit share was fixed and determinable at the time of shipment, and as such, recorded upon shipment and acceptance of the reactors by the distributor. Pursuant to the January 2016 agreement with our distributor, the profit share is not fixed at the time of delivery, and as such, revenue will be recognized when the profit shares is fixed and determinable, which will generally be upon delivery of the NANO Neutralization System by the distributor to its customer.

 

Patents

 

Capitalized patent costs represent legal fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill. The Company has five patents issued in fiscal 2014, 2012 and 2011. During fiscal years 2015 and 2016, we also received approvals in the US for another 5 patents for various processes and 1 for another device/apparatus. We also received 1 patent approval for its device in Singapore. As of December 31, 2016, the Company has a total of 15 patents pending. The patents have duration of twenty years from filing date. The Company amortizes its patents over a four-year period which we believe is a reasonable estimate based upon its estimate of time until the next generation of reactors is developed or until other forms of competition appear.

 

During the six months ended December 31, 2016 and 2015, we recorded amortization expense of $6,716 and $11,344, respectively relating to our capitalized patent costs.

 

As of December 31, 2016 and June 30, 2016 the Company had remaining unamortized patent costs of $9,620 and $16,336 respectively.

 

 

Impairment of Intangible and Long-Lived Assets

 

In accordance with ASC 350-30 (General Intangibles Other than Goodwill), the Company evaluates amortizable intangibles and long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Based on our impairment tests, management believes there is no impairment of its intangibles and long-lived assets as of December 31, 2016 and June 30, 2016. There can be no assurance, however, that market conditions will not change or demand for the Company's products under development will continue. Either of these could result in future impairment of intangibles and long-lived assets.

 

Share-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company's common stock options and warrants grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

 

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.

 

Warranty Policy

 

The Company provides a limited warranty with every set of reactors sold, typically two years. The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at December 31, 2016.

 

 

Dependence on Desmet Ballestra

 

Our revenue is almost entirely dependent on Desmet Ballestra who is our exclusive distribution agent with regard to the CTi Nano Neutralization® System for edible oils. During fiscal 2016, our revenue was derived from Desmet sales efforts (see Note 3).

 

Basic Loss Per Share

 

The Company computes the loss per common share using ASC 260, Earnings per Share.  The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period.  The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.

 

As of December 31, 2016, the Company had 11,685,852 stock options and 64,326,509 stock warrants outstanding to purchase shares of common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

In March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.

 

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

 

Business and Credit Concentrations

 

The Company’s cash balances in a financial institution at times may exceed federally insured limits. As of December 31, 2016, and June 30, 2016, before adjustments for outstanding checks and deposits in transit, the Company had approximately $399,000 and $657,000, respectively, deposited in one financial institution. The deposits are federally insured up to $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of this financial institution.

 

All recorded revenues during the six months ended December 31, 2016 of $120,000 were attributable to one customer (see Note 3).

 

 

Note 3 - Agreement with Desmet Ballestra

 

On January 22, 2016, the Company signed a three-year agreement with Desmet effective August 1, 2015 for the sale and marketing of the Company’s Nano reactor system. As part of the agreement, Desmet will provide, under certain conditions, limited monthly advance payments of $50,000 against future sales to CTi. The agreement may be terminated by Desmet every August 1 should Desmet and its affiliates fail to convert a minimum of six Nano Reactors System to sold status during the period of June 1 to May 31. The agreement may also be terminated in case the Company loses ownership of patents and patent applications being used in the NANO Neutralization System.

 

Pursuant to the 2016 Agreement, the Company recognizes revenue from sale of reactors upon shipment and acceptance by Desmet, as the Company has no further obligations to Desmet other than the reactor’s two-year standard warranty. In addition, Desmet now pays for such reactors on credit terms and the amount of the sale is recorded as a receivable upon acceptance by Desmet. The Company also continues to receive a share in gross margin or profit from the sale of Desmet’s integrated neutralization system to its customer of which the reactors are an integral component, however, such amount is now subject to adjustment based on certain factors including costs over run. The Company deemed that such amount is not yet fixed and determinable upon shipment of the reactors. As a result, the corresponding revenue is now being recognized upon installation and acceptance of the integrated neutralization system by Desmet’s customer.

 

As of June 30, 2016, total outstanding advances from Desmet amounted to $500,000. In addition, the Company also recorded accounts receivable from Desmet of $63,750 from the sale of reactors. For financial reporting purposes, the Company deducted this amount from the advance payments received which resulted in a net balance of $436,250.

 

During the six months ended December 31, 2016, the Company recognized revenue of $120,000 related to the shipment and acceptance of reactors to Desmet. In addition, the Company also received advances payments amounting to $200,000 and collection of accounts receivable of $171,873.

 

As of December 31, 2016, total outstanding advances from Desmet amounted to $700,000. In addition, the Company also recorded accounts receivable from Desmet of $11,877 from the sale of reactors. For financial reporting purposes, the Company deducted this amount from the advance payments received which resulted in a net balance of $688,123.

 

The Company expects to recognize approximately $317,000 from its share in gross margin in future periods upon delivery and acceptance of the NANO Neutralization System by Desmet to its customer.

 

Note 4 - Property and Equipment

 

Property and equipment consisted of the following as of December 31, 2016 and June 30, 2016:

 

		December 31,				June 30,
		2016				2016
Leasehold  improvement		$	2,475			$	2,475
Furniture			26,837				26,837
Office equipment			1,499				1,499
Equipment			68,380				68,380
Systems			352,655				352,655
			451,846				451,846
Less: accumulated depreciation and amortization			(344,007	)			(329,205	)
Property & Equipment, net		$	107,839			$	122,641

 

Depreciation expense for the six months ended December 31, 2016 and 2015 amounted to $14,802 and $19,648, respectively.

 

 

Note 5 - Accrued Payroll and Payroll Taxes

 

As of December 31, 2016 and June 30, 2016, the Company had accrued salaries to current and former officers of the Company amounting to $916,864. In addition, the Company also accrued the estimated payroll taxes due to this unpaid payroll of $77,169. The accrued payroll is unsecured and is due upon demand.

 

Note 6 - Stockholders' Deficit

 

Stock Options

 

A summary of the stock option activity for the six months ended December 31, 2016 is as follows:

 

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual
						Exercise				Life
		Options				Price				(Years)
Outstanding June 30, 2016			12,595,992			$	0.10				4.96
- Granted			-
- Forfeited			-				-				-
- Exercised			-				-				-
- Expired			(910,140	)			-				-
Outstanding December 31, 2016			11,685,852			$	0.07				4.77
Exercisable and vested at December 31, 2016			11,685,852			$	0.07				4.77

 

The intrinsic value of the outstanding options was $94,600 as of December 31, 2016. The following table summarizes additional information concerning options outstanding and exercisable at December 31, 2016.

  

					Options Outstanding
									Weighted				Weighted
									Average				Average
	Exercise				Number				Remaining				Exercise
	Price				of Shares				Life (Years)				Price
$	0.03				11,000,000				5.46				0.03
$	0.33				174,022				1.60				0.33
	0.67				511,830				1.50				0.67
					11,685,852

 

As of December 31, 2016, all stock options were vested and exercisable.

 

 

Warrants

 

A summary of the Company's warrant activity for the six months ended on December 31, 2016 is as follows.

 

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual
						Exercise				Life
		Warrants				Price				(Years)
Outstanding at June 30, 2016			64,326,510			$	0.07				5.09
Granted			-			$	-				-
Exercised			-			$	-
Expired			-			$	-
Outstanding at December 31, 2016			64,326,510			$	0.07				4.58
Vested and exercisable at December 31, 2016			64,326,510			$	0.07				4.58

 

As of December 31, 2016, all warrants granted were vested and exercisable. The intrinsic value of the outstanding warrants was $0 as of December 31, 2016. The following table summarizes additional information concerning warrants outstanding and exercisable at December 31, 2016.

 

				Warrants Outstanding
								Weighted				Weighted
								Average				Average
Exercise				Number				Remaining				Exercise
Price				of Shares				Life (Years)				Price
$	0.04 - 0.07				43,999,851				5.44			$	0.05
$	0.12				20,326,659				2.75			$	0.12
					64,326,510

 

Note 7 - Commitments and Contingencies

 

Royalty Agreements

 

On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two parties, our President and Technology Development Supervisor, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and the Technology Development Supervisor have been assigned to the Subsidiary.  In exchange, the Subsidiary agreed to pay a royalty of 5% of gross revenues to each of the President and Technology Development Supervisor for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assumed by Cavitation Technologies on May 13, 2010 from its subsidiary. The Company's President and 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, 2016.

 

On April 30, 2008 and as amended on November 22, 2010, our wholly owned subsidiary entered into an employment agreement with our former Director of Chemical and Analytical Department (the "Inventor") to receive an amount equal to 5% of actual gross royalties received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent year. As of December 31, 2016, no patents have been granted in which this person is the legally named inventor.

 

 

Litigation

 

The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.

 

In August 2014, a former employee and former Director filed an administrative Complaint for approximately $179,000 in unpaid wages, plus penalties and interest, with the California Labor Commissioner’s Office (CLCO).  In January 2016, the CLCO ruled in favor of the Company and dismissed the case. As a result of this ruling, the Company’s obligation to the former employee and former Director only amounted to approximately $134,000 which was already accrued in prior periods and included as part of Accrued Payroll and payroll taxes due to officers in the accompanying balance sheet.

 

In February 2016, the former employee and former Director appealed this ruling to the Los Angeles County Superior Court.  In addition to defending itself, the Company also has filed a cross-complaint against the former employee and former Director for breach of contract and breach of fiduciary duty as a Director.  Trial is scheduled to begin sometime in 2017. Based upon available information at this very early stage of litigation, Management believes the likelihood of material loss resulting from this lawsuit to be remote.

 

Note 8 - Income Taxes

 

As of December 31, 2016, the Company had Federal and State net operating loss (NOL) carry forwards available to offset future taxable income of approximately $8.4 million and $8.3 million, respectively. These carry forwards will begin to expire in the years ending June 30, 2027 and June 30, 2017, respectively, subject to statutory limitations, including change in ownership.

 

Authoritative guidance issued by the ASC Topic 740 – Income Taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Due to the restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carry forwards, the utilization of the Company’s NOL is limited to $1.8 million per year as a result of recent cumulative changes in stock ownership. NOL’s of $8.4 million, which were incurred subsequent to the latest change in control, are not subject to the $1.8 million per year limitation. As a result of the limitations related to Internal Revenue Code Section 382 and the Company’s lack of history of profitable operations, the Company recorded a 100% valuation allowance against its net deferred tax assets as of December 31, 2016 and June 30, 2016. 

 

In assessing the realize-ability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company has existing limitations on its available federal NOL due to its previous changes in ownership under Internal Revenue Service Section 382 guidelines. These restrictions limit the amount of NOL the Company can utilize over the next several years.

 

Note 9 - Subsequent Events

 

The Company granted employees and a consultant warrants to purchase a total of 9.8 million shares of the Company’s common stock.  The warrants vest in five years, exercisable at $0.03 per share and will expire in 10 years.  The Company estimated the fair value of the warrants to be $387,000 and will be expensed based upon its vesting.  The average assumptions the Company used as inputs to the Black-Scholes pricing model included stock price of $0.04 per share, dividend yield of zero, a risk-free interest rate of 2.31%, expected term of 8.75 years and an expected volatility of 162%.  In addition, the Company also granted a member of the Board of Directors 200,000 shares of common stock with a fair value of $8,000 for services. 

 

 

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.

 

Overview of our Business

 

Cavitation Technologies, Inc. ("CTi"), a Nevada corporation, was originally incorporated under the name Bio Energy, Inc. We design and engineer environmentally friendly technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement.  Our systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development firm that has developed, patented, and commercialized proprietary technology.

 

CTi has developed, patented, and commercialized proprietary technology that can be used for processing of industrial fluids. CTi's patented Nano Reactor® is the critical components of the CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano Reactor® systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.

 

During the six months ended December 31, 2016, we recorded revenue of $120,000, net loss of $510,478 and used cash in operations of $257,966.

 

Management's Plan

 

We are engaged in merchandising our Neutralization System, which is designed to help refine vegetable oils such as soybean, canola, sunflower and grapeseed.  Our near term goal is to continue to merchandise our systems through our partner, Desmet Ballestra. During the six months ended December 31, 2016, we recorded revenues of $120,000 and incurred a net loss of $510,478.  As of December 31, 2016, the Company had a working capital deficiency of $1,280,212 and a stockholders' deficit of $1,153,253. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern.

 

As of December 31, 2016, we had cash and cash equivalents on hand of $399,430 and are not generating sufficient funds to cover operations. In addition to the funds on hand, Management believes we will require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to market our technology and products globally through our strategic partner, Desmet. Desmet has agreed to provide us monthly advances of $50,000 to be applied against future sales pursuant to a January 2016 agreement. During the six months ended December 31, 2016, the Company received $200,000 advances from Desmet.

 

In addition to these advances, we anticipate that we will need additional funding, and we will attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such agreement with Desmet will be successful and such financing will be consummated or obtained in sufficient amounts necessary to meet our needs, or that we will be able to meet our future contractual obligations. Should management fail to obtain such financing, we may curtail operations. The accompanying condensed consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. As a result of the aforementioned factors, our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2016, expressed substantial doubt about our ability to continue as a going concern.

 

Critical Accounting Policies

 

CTi's critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended June 30, 2016, and did not change for the six months ended December 31, 2016.

 

 

Results of Operations

 

Results of Operations for the Three Months Ended December 31, 2016 Compared to the Three Months Ended December 31, 2015

 

The following is a comparison of our results of operations for the three months ended December 31, 2016 and 2015.

 

		For the Quarter Ended
		December 31,
		2016				2015				$ Change				% Change
Revenue		$	35,000			$	144,388			$	(109,388	)			0.0	%
Cost of revenue			7,912				21,781				(13,869	)			0.0	%
Gross profit			27,088				122,607				(95,519	)			0.0	%
General and administrative expenses			287,493				333,674				(46,181	)			-13.8	%
Research and development expenses			1,351				2,321				(970	)			-41.8	%
Total operating expenses			288,844				335,995				(47,151	)			-14.0	%
Net Loss		$	(261,756	)		$	(213,388	)			(48,368	)			22.7	%

 

Revenue

 

We recorded $35,000 in revenue in the second quarter of fiscal 2017, as opposed to $144,388 in the same period of fiscal 2016. In fiscal 2017, we shipped reactors to one Desmet customer in the US. In fiscal 2016, we shipped reactors to two Desmet customers in Japan and India.

 

During the three months ended December 31, 2016, our cost of sales amounted to $7,912, as opposed to $21,781 in the three months ended December 31, 2015, which was the result of the revenue transactions described above.

 

Operating Expenses

 

General and administrative expenses for the three months ended December 31, 2016 amounted to $287,493 compared with $333,674 for the same period in fiscal 2016, a decrease of $46,181, or 14%. In both periods, the major expense component was employees’ compensation. In the second quarter of fiscal 2016, total compensation amounted to $131,423 or 39% of total costs compared with $121,618 or 42% of total costs in the second quarter of fiscal 2017.

 

During the second quarter of 2017, the other major components of general and administrative expenses were professional service fees related to accounting, and legal services which amounted to $40,475 or 14% of total operating expenses, travel expenses of $11,344 and various insurance premiums totaling $30,555. The same professional service expenses in the second quarter of fiscal 2016 amounted to $35,249 or 10.5% of total operating expenses, travel expenses of $9,904 and various insurance premiums totaling $24,526.

 

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

 

 

Results of Operations for the Six Months Ended December 31, 2016 Compared to the Six Months Ended December 31, 2015

 

The following is a comparison of our results of operations for the six months ended December 31, 2016 and 2015.

 

		For the Six Months Ended
		December 31,
		2016				2015				$ Change				% Change
Revenue		$	120,000			$	640,667			$	(520,667	)			0.0	%
Cost of revenue			15,824				66,290				(50,466	)			0.0	%
Gross profit			104,176				574,377				(470,201	)			0.0	%
General and administrative expenses			606,974				622,327				(15,355	)			-2.5	%
Research and development expenses			7,680				14,829				(7,149	)			-48.2	%
Total operating expenses			614,654				637,156				(22,503	)			-3.5	%
Net Loss		$	(510,478	)		$	(62,779	)			(447,699	)			713.1	%

 

Revenue

 

We recorded revenue of $120,000 in the six months ended December 31, 2016 for the reactors shipped to Desmet customers in the US. During the six months ended December 31, 2015, we recorded revenue of $640,667 which consisted primarily of NANO Neutralization System reactor sold to Desmet customers in United States, India and Japan. Included in the 2016 revenues are share in gross profit/margin of approximately $353,000 from the sale of reactors to Desmet. There were no similar revenues recorded in 2017.

 

Cost of Revenue

 

During the six months ended December 31, 2016, our cost of sales amounted to $15,824, and during the six months ended December 31, 2015, our cost of sales amounted to $66,290, both of which were the result of the revenue transactions described above.

 

Operating Expenses

 

Operating expenses for the six months ended December 31, 2016 amounted to $606,974 compared with $622,327 for the same period in 2015, a decrease of $15,355, or 2.5%.

 

The primary expenditures during the first half of fiscal 2017 were approximately $98,567 for professional service fees such as accounting, legal and SEC related services, $14,508 in service and consulting fees, $19,019 in marketing and travel expenses, $55,321 in insurance expenses and $259,307 in salaries and salary related expenses. The primary expenditures during the first half of fiscal 2016 were approximately $82,568 for professional service fees such as accounting legal and SEC related services, $26,502 in service and consulting fees, $40,452 in marketing and travel expenses, $48,796 in insurance expenses and $292,168 in salaries and salary related expenses.

 

Liquidity and Capital Resources

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern.  During the six months ended December 31, 2016, we incurred a net loss of $510,478. As of December 31, 2016, we had a working capital deficiency of $1,280,212 and a stockholders' deficit of $1,153,253. Furthermore, we have been dependent on most of its funding from a technology agreement with a distributor. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our independent auditors, in their report on our audited financial statements for the fiscal year ended June 30, 2016 expressed substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of us to continue as a going concern.

 

 

Management's plan is to generate income from operations by marketing our technology and products globally through our strategic partner, the Desmet Ballestra Group (Desmet). In January 2016, we signed a marketing and research and development agreement with Desmet which include among others, a monthly advance of $50,000 that will be applied to future sales. We will need additional funding, and we will attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

  

At December 31, 2016, we had cash on hand in the amount of $399,430. In addition to the funds on hand, we will require additional funds to continue to operate our business. This includes expenses we will incur in connection with costs to manufacture and ship our products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual commitments for salaries to our executive officers. In light of our financial commitments over the next several months and its liquidity constraints, we have implemented cost reduction measures in all areas of operations. We intend to review these measures on an ongoing basis and make additional decisions as may be required.

 

Cash Flow

 

Net cash used in operating activities during the six months ended December 31, 2016 amounted to $257,966, compared to net cash used of $616,745 for the same period in fiscal 2016. Funding for the operating activities was provided by $200,000 in advances from our distributor and proceeds from sale of reactors and collection of accounts receivable totaling $171,873 in the first six months of fiscal 2017. For the first half of fiscal 2017, we paid $259,307 in employees' compensation, $143,596 in professional services fees, $55,321 in various insurance premiums, and $150,365 in fixed operating costs and other obligations. For the first six months of fiscal 2016, we paid approximately $292,000 in compensation, approximately $268,000 in fixed operating costs, $68,576 in professional services fees and $48,796 in various insurance premiums.

 

Net cash used in investing activities during the six months ended December 31, 2015 amounted to $61,565 for the acquisition of machineries. There were no such activities in the fiscal 2017.

 

There were no financing activities in neither the fiscal 2016 nor the fiscal 2015.

 

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 December 31, 2016, 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 December 31, 2016.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in internal control over financial reporting during the second quarter of fiscal 2017 that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1 –

Legal Proceedings

 

We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

Item 2 –

Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3 –

Defaults Upon Senior Securities

 

None

 

Item 4 –

Mine Safety Disclosures

 

None

 

Item 5 –

Other Information

 

None

 

 

Item 6 –

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

Incorporated by Reference

Exhibit

Filed

Number

Exhibit Description

Herewith

Form

Pd. Ending

Exhibit

Filing Date

3(i)(a)

Articles of Incorporation - original name of Bioenergy, Inc.

SB-2

N/A

3.1

October 19, 2006

3(i)(b)

Articles of Incorporation - Amended and Restated

10-Q

December 31, 2008

3-1

February 17, 2009

3(i)(c)

Articles of Incorporation - Amended and Restated

10-Q

June 30, 2009

3-1

May 14, 2009

3(i)(d)

Articles of Incorporation - Amended; increase in authorized shares

8-K

N/A

N/A

October 29, 2009

3(i)(e)

Articles of Incorporation - Certificate of Amendment; forward split

10-Q

December 31, 2009

3-1

November 16, 2009

10.1

Patent Assignment Agreement between the Company and Roman Gordon dated July 1, 2008.

8-K

June 30, 2009

10.1

May 18, 2010

10.2

Patent Assignment Agreement between the Company and Igor Gorodnitsky dated July 1, 2008.

8-K

June 30, 2009

10.2

May 18, 2010

10.3

Assignment of Patent Assignment Agreement between the Company and Roman Gordon

8-K

June 30, 2009

10.3

May 18, 2010

10.4

Assignment of Patent Assignment Agreement between the Company and Igor Gorodnitsky

8-K

June 30, 2009

10.4

May 18, 2010

10.5

Employment Agreement between the Company and Roman Gordon date March 17, 2008

10K/A

June 30, 2009

10.3

October 20, 2011

10.6

Employment Agreement between the Company and Igor Gorodnitsky dated March 17, 2008

10K/A

June 30, 2009

10.4

October 20, 2011

10.7

Employment and Confidentiality and Invention Assignment Agreement between the Company and Varvara Grichko dated April 30, 2008

10-Q

December 31, 2010

10.3

February 11, 2011

10.8

Board of Director Agreement - James Fuller

10-Q

December 31, 2011

10.12

October 20, 2011

10.9

Technology and License Agreement with Desmet Ballestra dated 14 May 2012

10-K

June 30, 2012

10.1

October 15, 2012

10.10

Short Term Loan Agreement - CEO

10-K

June 30, 2012

10.11

October 15, 2012

10.11

Loan Agreement - Desmet Ballestra - Oct. 26, 2010

10-K

June 30, 2012

10.11

October 15, 2012

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

X

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted

X

pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

X

101.SCH

XBRL Taxonomy Extension Schema

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase

X

101.LA

XBRL Taxonomy Extension Label Linkbase

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

X

*

In accordance with Regulation S-K 406 of the Securities Act of 1934, we undertake to provide to any person

without charge, upon request, a copy of our "Code of Business Conduct and Ethics". A copy may be requested

by sending an email to info@cavitationtechnologies.com.

 

 

SIGNATURES

 

Pursuant to the requirements of the securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SIGNATURE		TITLE		DATE
/s/ Igor Gorodnitsky		President; Member of Board of Directors		February 17, 2017
Igor Gorodnitsky		(Principal Executive Officer)
/s/ N. Voloshin		Chief Financial Officer		February 17, 2017
N. Voloshin		(Principal Financial Officer)
/s/ Jim Fuller		Audit Committee Chairman, Independent Financial Expert		February 17, 2017
Jim Fuller