UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2015
Commission file number 0-29901
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 No.) |
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(g) OF THE ACT:
|
Title of Each Class: |
Name of Each Exchange on Which Registered: | |
| Common Stock, $0.001 par value | Over the Counter (Bulletin Board) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ¨
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 ¨ | Smaller reporting company x | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES ¨ NO x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant by reference to the price at which the common equity was last sold, or of the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $10,452,277 as of December 31, 2014 based on the closing price of $0.07 per share and 149,318,244 non-affiliate shares outstanding.
The registrant had 193,997,802 shares of common stock outstanding on October 9, 2015.
DOCUMENTS INCORPORATED BY REFERENCE:
Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the Form 10-K/A to be filed within 120 days of June 30, 2015.
CAVITATION TECHNOLOGIES, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 2015
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and the exhibits attached hereto contain "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. We use words like "expects," "believes," "intends," "anticipates," "plans," "targets," "projects" or "estimates" in this annual report. When used, these words and other, similar words and phrases or statements that an event, action or result "will," "may," "could," or "should" result, occur, be taken or be achieved, identify "forward-looking" statements. Such forward-looking statements are subject to certain risks and uncertainties, both known and unknown, and assumptions.
Management has included projections and estimates in this annual report, which are based primarily on management's experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the Securities and Exchange Commission or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law. We qualify all the forward-looking statements contained in this annual report by the foregoing cautionary statements.
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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. The Company engineers and designs environmentally friendly Nano technology based systems that have potential applications in industrial liquid processing. CTi is a California-based development stage company that has designed, developed, and patented two proprietary Nano Reactors (Nano Reactor®). In addition, the company has filed a number of process patent applications incorporating these patented devices for processing fluids in vegetable oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
Our investment in research and development ("R&D") since inception on January 29, 2007 through June 30, 2015 is $5,651,679 in total and $22,310 and $40,820 for fiscal years 2015 and 2014, respectively. This investment has led to five device patents issued for the Company's Nano Reactor®. In addition, the Company has filed fluid process patents and has successfully commercialized CTi Nano Neutralization® in the refining process of certain vegetable oils which has proven to reduce costs and increase yields for our customers
Vegetable Oil Refining
The Company's first commercial application for its technology is CTi Nano Neutralization®. Our environmentally friendly process has proven to reduce refining costs, increase oil yield, and limit the amount of chemical additives used in chemical refining vegetables oils. This patented process (patent # 8,911,808) is designed to be incorporated into new and existing soybean, rapeseed, and canola oil chemical refineries. The global demand for vegetable oils has grown consistently at a rate of about 5.5% p.a. from 84.5 million metric tons in 1999 to 150.8 million metric tons in 2012.
The Company's first pilot test of our NANO Neutralization System was conducted in 2010 at Carolina Soya, a 200 metric ton/day crude soy oil refining plant in Estill, South Carolina. Our second system which became operational in fiscal 2011 is a 450 metric tons per day plant that has been in continuous operation for more than 3 years. Since then, the Company has successfully shipped over 20 systems both domestically and abroad.
Desmet Ballestra Agreement
On May 14, 2012 we signed a global R and D, Marketing and Technology License Agreement with Desmet Ballestra Group s.a. (Desmet), a Belgian company that is actively marketing the NANO Neutralization System, the key component of which is the Company's reactor to soybean and other vegetable oil refiners. The Agreement provides Desmet (licensee) a limited, exclusive license and right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devices on a global basis but is limited to oils and fats and oleo chemical applications. CTi (licensor) remains owner of the current patents and patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet agreed to provide, under certain conditions, limited monthly advance payments of $125,000 against future sales to CTi through May 2015. Desmet shall be entitled to immediately terminate the present agreement in case the claims of current US Patent Application Number 12/484,981 are not granted as such or are cancelled. In addition, Desmet may terminate the agreement on August 1 of any particular year if they have not installed at least 6 Nano Reactor® devices in the previous 12 month period. CTi may terminate the Agreement for material default. This Agreement terminated in May 2015.
Desmet, together with its affiliates, is a global engineering and equipment supply firm engaged in the development, design and supply of process equipment for oils and fats processing facilities including vegetable oil refining, biofuel, oleo chemical, seed crushing, surfactant and detergent markets. Desmet supplies these markets with competitive services based on the latest globally sourced technologies. Since its founding in 1946, Desmet has built a global network that includes 1,300 employees, 17 global and 8 representative offices, and more than 5,700 lines in a variety of applications. Desmet operates a separate division for each of the above markets and the Desmet Oils & Fats division has supplied small and large plants to approximately 1,700 oil millers in 150 countries, covering over 6,000 process sections. We have developed a relationship with the North American arm of Desmet which operates in each of these markets and provides the Company with other potential opportunities such as palm oil refining.
The Company and Desmet have worked together to determine the appropriate sales approach and installation process. The Company's Nano Neutralization is designed to be used as an add-on process to an existing neutralization system within soybean and other vegetable oil refineries. Desmet is now focused on marketing CTi's Nano Neutralization® to vegetable oil refiners to help them increase profits through cost savings and improved oil yields. Desmet purchases Nano Reactor Systems from the Company and installs them at the refinery as part of an integrated neutralization system. Based on successful commercial implementations, Desmet guarantees minimum economic benefits to a facility that installs CTi Nano Neutralization®. We are therefore substantially dependent on Desmet to identify prospects, complete sales contracts, install the system and manage relationships with end-users. CTi focuses on developing additional Nano Reactor® applications and managing the intellectual property issues associated with new developments.
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Desmet has relationships with major refiners globally A significant portion of global vegetable oil refineries include major refiners such as Archer Daniels Midland Company, Cargill, Inc. and Bunge Limited. Desmet has more than 40 sales representatives selling in North America, South America, Europe, and Asia.
The Agreement with Desmet expired in May 2015. The Company and Desmet are currently in negotiations for a new agreement, and we expect all terms to remain the same except that the monthly advances will be changed to $50,000.
Customers
We had an exclusive sales and marketing agreement with on our strategic partner, Desmet Ballestra, to market CTi Nano Neutralization® and other applications to the vegetable oil refining industry, The Agreement expired in May 2015 which we expect will be renewed. We continue to sell our Nano Reactors and technology to Desmet and they are responsible for installing and servicing the systems.
Sources and availability of raw materials and the names of principal suppliers
We have historically sourced reactor components from various domestic and international suppliers including Canyon Engineering, EA365 Management and Strategic IR with whom we have no long term contracts, agreements, or commitments. They provide parts as directed. We believe it would take approximately 60 days to find a new supplier, if necessary.
Competition
Our competitors who sell equipment and engineering services for the vegetable oil refining business are a myriad of companies both large and small that provide equipment and technology to oil refiners. These include known companies that have longer operating histories, more experience, and stronger financial capabilities. Competitors include Westfalia, Alfa Laval, and Crown Iron Works as well as many firms that provide advice and services to small and regional firms. In addition, Arisdyne Systems, a designer of cavitation devices, is marketing a system using similar technology. The vegetable oil refining business is a highly competitive commodity market where the low-cost producer has the advantage. We intend to compete by offering solutions that help our clients remain or become a low-cost producer. Because the industry in which we compete has limited new technology introduced in the last 50 years, we believe the CTi Nano Neutralization® provides a unique opportunity for refiners to increase margins. We differentiate ourselves by the designs, processes, and applications described in our issued and patent pending applications. We compete by offering solutions that we believe can reduce operating expenses and increase yield vis-à-vis current technology.
Patents
Our Cavitation Generator patent was issued during fiscal 2011. In addition, we have a patent for our Multi-State Cavitation Device that was issued August 22, 2011. In the fiscal 2014 the Company received approvals for another 3 patents. During current fiscal year 2015 the Company received approvals for 3 more patents.
We also have 16 US and 9 PCT/ international patent applications pending which apply to the design of the Company's reactor and the processes related thereto. The Company filed a number of process patent applications incorporating these patented devices for processing fluids in vegetable oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement. We received comments from the USPTO with regard to our Method for Cavitation-Assisted Refining, Degumming, and Dewaxing of Oil and Fat, and we responded. We also received a second round of comments and are responding to those as well. There is no assurance that our patents pending will be ultimately issued.
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The Company believes its technology can be applied to other liquid processing industries where there is a need to solve environmental problems, reduce operating costs, and/or improve quality and yield. The Company's issued and allowed patents and pending patents support potential applications of the Company's proprietary technology in markets which include, but are not limited to, vegetable oils refining, renewable fuel production, alcoholic beverage enhancement, water purification, and algae oil extraction. In addition, we believe our proprietary technology may also be applied to fuel mixing and crude oil refining. During fiscal 2011, we received the "CE Marking" certification which allows us to market our systems in the European Union. Our success will depend in part on our ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others both in the United States and other countries. There can be no assurances that patents issued to CTi will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to CTi. We plan to continue to invest in R&D and file for new and improved patents.
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two individuals, our President as well as our former CEO/ current CTO, where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CTO/former CEO were assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the CTO and President for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company's CTO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2015.
On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical Department ("Inventor") who shall 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. These agreements were subsequently assigned to Cavitation Technologies and Inventor waived her rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2015.
Governmental Approval and Regulations and Environmental Compliance
Due to the nature of our products, we have incurred no costs with respect to environmental compliance with federal, state, and local laws. To our knowledge, our products do not require governmental approval, and we do not foresee that governmental regulations will have a material impact on our business.
Employees
On June 30, 2015 we had four total and full-time employees and had engaged several consultants and independent contractors over the past year. Members of our staff and technical team are comprised of experienced professionals who are chemists, civil-, chemical-, and mechanical engineers with expertise in hydrodynamic cavitation, Nano technology, and water treatment. These individuals hold degrees in Civil, Chemical, and Mechanical Engineering.
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Not applicable for smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our corporate headquarters is located in Chatsworth, California. This approximate 5,000 square foot facility includes office space and an area to conduct research and development. We extended our lease agreement for office space until February 1, 2016. We do not anticipate any material difficulties with the renewal of our rental agreement when it expires or in securing replacement facilities on commercially reasonable terms.
The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of our business. As of June 30, 2015, the Company was a party to legal proceedings related to claims for payment that are currently accrued for in its financial statements. Except for income tax contingencies, the Company record 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. Material legal proceedings that are currently pending are as follows:
| a. | In August 2015, a former employee and former Director filed a claim of approximately $179,000 for unpaid wages, penalties and interest. The Company deemed that the claim of $179,000 is without merit. The Company believes that the total liability to the former employee is only up to $134,000 which was accrued in prior period as part of Accrued Payroll and payroll taxes due to officers in the accompanying Consolidated Balance Sheets for the years ended June 30, 2015 and 2014. The Company will appeal any unfavorable rulings and vigorously defend its case against the former employee. |
| b. | The Company has several patents issued by the US Patent Office with regards to the use and efficacy of its Nano Reactors. In August 2015, a competitor, Arisdyne System filed a complaint challenging the patentability of certain claims of the Company’s Patent No. 8,911,808 B2 or Patent 808. Patent 808 is currently being used in the reactors purchased by our distributor, Desmet. The Company intends to vigorously respond to the complaint in order to maintain the patented status of Patent 808. There is no monetary compensation being claimed by Arisdyne. |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our Common Stock is traded on the Over the Counter Bulletin Board under the symbol CVAT. The following table sets forth the high and low price per share based on the closing price of our Common Stock for the periods indicated.
| HIGH | LOW | |||||||||
| Fiscal 2014 | First Quarter | $ | 0.07 | 0.04 | ||||||
| Second Quarter | 0.14 | 0.04 | ||||||||
| Third Quarter | 0.11 | 0.08 | ||||||||
| Fourth Quarter | 0.10 | 0.07 | ||||||||
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| HIGH | LOW | |||||||||
| Fiscal 2015 | First Quarter | $ | 0.10 | 0.07 | ||||||
| Second Quarter | 0.08 | 0.06 | ||||||||
| Third Quarter | 0.07 | 0.06 | ||||||||
| Fourth Quarter | 0.06 | 0.04 | ||||||||
We became a public company through a share exchange that was effected in October 2008. The first day of public trading of our stock was November 11, 2008. Since our fiscal year end was changed to June 30, public trading of our stock began in the second quarter of fiscal 2009. As of October 9, 2015, there were approximately 1,100 holders of record of our Common Stock. This does not reflect the number of persons or entities who hold stock in nominee or "street" name through various brokerage firms.
Dividend Policy
We have neither declared nor paid any dividends on our Common Stock in the preceding two fiscal years. We currently intend to retain future earnings to fund ongoing operations and finance the growth and development of our business and, therefore, do not anticipate declaring or paying cash dividends on our Common Stock for the foreseeable future. Any future decision to declare or pay dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deems relevant. In addition, certain of our debt facilities contain restrictions on the declaration and payment of dividends.
Securities Authorized for Issuance under Equity Compensation Plans
None
Unregistered Sales of Equity Securities and Use of Proceeds
Since our previous disclosure in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed on May 15, 2015, the following is our unregistered security activity.
Issuance of Common Stock for Warrants
On June 30, 2015 we issued 800,828 shares of common stock to a consultant in exchange for the cancellation of 800,828 warrants granted to the same consultant in December 2012. The warrants had been previously issued in exchange for the same amount of shares surrendered which were issued for services to the same consultant. The Company recorded an expense for the net difference between the value of the common shares and the warrants of $442.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable for smaller reporting companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of should be read in conjunction with the Company's 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
Hydrodynamic Technology, Inc. was incorporated January 29, 2007 as a California corporation. It is a wholly owned subsidiary of Cavitation Technologies, Inc., a Nevada corporation 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, 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.
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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 five 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 and crude oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the year ended June 30, 2015, we recorded revenue of $489,255. Our loss from operations in 2015 is $1,378,926 including non-cash compensation expense of $309,455 to account for the fair value of shares of common stock issued for services and warrants that vested in 2015. Cumulative net cash used in operating activities of $100,691 was funded largely by advances received from a strategic partner in the amount of $1,375,000 and from financing activities which provided $375,498.
Management's Plan of Operation
We are engaged in merchandising our Neutralization System which is designed to help refine vegetable oils such as soybean, canola, and rapeseed. Our near term goal is to continue to merchandise our systems through our partner, Desmet Ballestra. Even though the Company's revenue decreased significantly in current fiscal year, we generated a smaller net loss of $1,378,926. We also have a working capital deficiency of $1,222,593 and a stockholders' deficit of $1,075,555. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.
Management's plan is to generate income from operations by licensing our technology globally through our strategic partner, the Desmet Ballestra Group. Desmet has provided us monthly advances of $125,000 against future sales. During the year ended June 30, 2015, advances received from Desmet amounted to $1,375,000. These funds service operational expenses on a monthly basis. Desmet shall be entitled to immediately terminate the present agreement in case the claims of current US Patent Application Number 12/484,981 are not granted as such or are cancelled. In addition, Desmet may terminate the agreement on August 1 of any particular year if they have not installed at least 6 Nano Reactor® devices in the previous 12 month period. The agreement with Desmet expired in May 2015. The Company and Desmet are currently in negotiations for a new agreement and we expect the terms will remain the same except that the monthly advances will be changed to $50,000. CTi may terminate the Agreement for material default.. 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 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. For a more detailed discussion of our plan, please review to Part I, Item 1, Business.
The accompanying consolidated financial statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern. As a result of the aforementioned factors, our independent auditors, in their report on our audited financial statements as of and for the year ended June 30, 2015, expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies and Revenue Recognition
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those CTi considers most critical in preparing its consolidated financial statements. The following is a review of the accounting policies and estimates that include significant judgments made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used instead.
Note 3 to our consolidated financial statements includes a summary of significant accounting policies, estimates, and methods used in the preparation of CTi's financial statements. Accounting estimates are an integral part of the preparation of financial statements and are based on judgments by management using its knowledge and experience about the past and current events and assumptions regarding future events, all of which we consider to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain and that affect the carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts of expenses during the reporting period.
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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 profit share from its distributor from the sale of the reactors. The profit share is non-refundable and is recorded upon shipment and acceptance of the reactors by the distributor.
Recoverability of Intangible and Long Lived Assets
Management believes that the accounting estimate related to the recoverability of its intangible and long-lived assets is a "critical accounting estimate" because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income and non-current assets.
Testing intangible and long-lived assets for impairment involves a high degree of judgment due to the assumptions that underlie the undiscounted cash flows analysis. In accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the net book value may not be recoverable. When such factors and circumstances exist, we compare 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. Management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of 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.
Determining the fair value of share-based awards at the measurement date requires judgment, including estimating the expected term that stock options and warrants will be outstanding prior to exercise, the associated volatility, and the expected dividends. CTi estimates the fair value of options granted using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period the options are expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of CTi's stock for a period approximating the expected life, and the risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues approximating the expected life. Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting. CTi believes that these assumptions are "critical accounting estimates" because significant changes in the assumptions used to develop the estimates could materially affect key financial measures including net income (loss).
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Results of Operations
Below is summary comparing fiscal 2015 and fiscal 2014.
| For the Years Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2015 | 2014 | $ Change | % Change | |||||||||||||
| Revenue | $ | 489,255 | $ | 1,855,707 | $ | (1,366,452 | ) | -73.6 | % | |||||||
| Cost of revenue | 73,253 | 120,170 | (46,917 | ) | -39.0 | % | ||||||||||
| Gross profit | 416,002 | 1,735,537 | (1,319,534 | ) | -76.0 | % | ||||||||||
| General and administrative expenses | 1,772,618 | 2,444,163 | (671,545 | ) | -27.5 | % | ||||||||||
| Research and development expenses | 22,310 | 40,820 | (18,511 | ) | -45.3 | % | ||||||||||
| Total operating expenses | 1,794,928 | 2,484,983 | (690,055 | ) | -27.8 | % | ||||||||||
| Loss from operations | (1,378,926 | ) | (749,446 | ) | (629,480 | ) | 84.0 | % | ||||||||
| Interest expense and other | - | (1,435,041 | ) | 1,435,041 | -100.0 | % | ||||||||||
| Net loss | $ | (1,378,926 | ) | $ | (2,184,487 | ) | 805,561 | -36.9 | % | |||||||
Revenue
During the year ended June 30, 2015, revenue of $489,255 was derived largely from the sale of three NANO Neutralization Systems. During fiscal 2014, revenue of $1,855,707 consisted primarily of sales of six of our systems.
Operating Expenses
Operating expenses for fiscal 2015 amounted to $1,794,928 versus $2,484,983for fiscal 2014, a decrease of $690,055 or 28%. The decrease was mostly attributable to a 27% reduction in G&A expenses, which in turn was mostly affected by a reduction in non-cash compensation for Officers and consultants. Non-cash expense items such as share based compensation of $64,080 and consulting expense of $245,375, together with patent amortization and depreciation expense of $154,554, among others, amounted to just over 25% of G&A expenses, with other major expense categories being salaries and payroll taxes of over $476,000, professional fees of almost $130,000, and travel, insurance and marketing services fees being some of the other major cash expense items. R&D expense decreased by $18,511 as we tended to rely more on our partner, Desmet Ballestra, for R&D.
Operating expenses for fiscal 2014 amounted to $2,484,983. Non-cash expense items such as share based compensation of $1,183,505 together with patent amortization and depreciation expense of $100,693 and accrued interest of $80,931, among others, amounted to over 50% of G&A expenses, with other major expense categories being salaries and payroll taxes of over $400,000, professional fees of almost $200,000, and travel, insurance and services fees being some of the other major cash expense items.
Interest Expense and Other
During the year ended June 30, 2014, interest expense amounted to $81,931 for notes payable outstanding in 2014. In addition, we also recorded loss on conversion of debt into common stock and warrants of $1,353,110. There was no similar transaction in 2015.
Liquidity and Capital Resources
For fiscal 2015, proceeds from sale of 5.2 million shares of common stock amounted to $375,498. These proceeds financed operating activities of $100,691 and investing activities resulting in purchase of equipment of $22,750. These activities resulted in net increase in cash of $252,057.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, we had a net loss of $1,378,926 for the year ended June 30, 2015, and had a stockholders' deficit of $1,075,555 at June 30, 2015. These factors raise substantial doubt about our ability to continue as a going concern.
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Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Sources and Uses of Cash
During fiscal 2015, net cash used in operating activities amounted to $100,691 - a decrease over fiscal 2014 of $132,600. During the year ended June 30, 2015 we received gross proceeds of $1,375,000 in advances against future sales from our partner, Desmet Ballestra. This cash was used largely to pay fixed operating costs, professional service providers such as auditors and accountants, acquire new inventory, pay management salaries and to pay travel and insurance expenses. The Agreement with Desmet expired in May 2015. The Company and Desmet are currently in negotiation to enter into a new agreement and we expect all terms will remain the same except that the monthly advances will be changed to $50,000. There can be no assurance that such a new agreement will be finalized. During fiscal 2014, net cash provided by operating activities amounted to $31,910. This cash was used largely to pay fixed operating costs, professional service providers such as auditors and accountants, interest expense on the outstanding loans and convertible debt, acquire new inventory and pay management salaries.
Net cash used in investing activities during fiscal 2015 amounted to $22,750 for property, plant, and equipment. Net cash used in investing activities during fiscal 2014 amounted to $68,878 including $43,254 for property, plant, and equipment and $25,624 related to capitalized patent costs.
For fiscal 2015 net cash provided by financing activities of $375,498 consisted of cash received as a result of the sale of our common stock. These proceeds financed the operating and investing activities and provided net cash increase for future operations. During fiscal 2014, net cash provided by financing activities of $1,021,500 consisted of cash received as a result of the sale of our common stock.
Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable for Smaller Reporting Companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| 9 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cavitation Technologies, Inc.
Los Angeles, CA
We have audited the accompanying consolidated balance sheets of Cavitation Technologies, Inc. (the "Company") as of June 30, 2015 and 2014 and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that we considered appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cavitation Technologies, Inc. as of June 30, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has experienced recurring net losses since inception and has a stockholders deficit as of June 30, 2015. Furthermore, the Company has been dependent on certain of its funding from a technology agreement which expired in May 2015. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 to the financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Weinberg & Company, P.A.
Weinberg & Company, P.A.
Los Angeles, California
October 13, 2015
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CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
| June 30, | June 30, | |||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,478,565 | $ | 1,226,508 | ||||
| Inventory, net | 135,599 | 116,644 | ||||||
| Total current assets | 1,614,164 | 1,343,152 | ||||||
| Property and equipment, net | 100,372 | 137,095 | ||||||
| Patents, net | 37,166 | 67,473 | ||||||
| Other assets | 9,500 | 9,500 | ||||||
| Total assets | $ | 1,761,202 | $ | 1,557,220 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 198,686 | $ | 173,110 | ||||
| Accrued payroll and payroll taxes due officers | 1,016,223 | 1,030,031 | ||||||
| Related party payable | 1,147 | 1,147 | ||||||
| Advances from distributor | 1,620,701 | 734,956 | ||||||
| Total current liabilities | 2,836,757 | 1,939,244 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' deficit: | ||||||||
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2015 and June 30, 2014, respectively. | - | - | ||||||
| Common stock, $0.001 par value, 1,000,000,000 shares authorized, 184,968,551 and 177,906,365 shares issued and outstanding as of June 30, 2015 and 2014, respectively | 184,968 | 177,906 | ||||||
| Additional paid-in capital | 21,259,285 | 20,580,952 | ||||||
| Common stock issuable, 9,029,251 shares | 812,633 | 812,633 | ||||||
| Accumulated deficit | (23,332,441 | ) | (21,953,515 | ) | ||||
| Total stockholders' deficit | (1,075,555 | ) | (382,024 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 1,761,202 | $ | 1,557,220 | ||||
See accompanying notes, which are an integral part of these consolidated financial statements
| 11 |
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended | ||||||||
| June 30, | ||||||||
| 2015 | 2014 | |||||||
| Revenue | $ | 489,255 | $ | 1,855,707 | ||||
| Cost of revenue | 73,253 | 120,170 | ||||||
| Gross profit | 416,002 | 1,735,537 | ||||||
| General and administrative expenses | 1,772,618 | 2,444,163 | ||||||
| Research and development expenses | 22,310 | 40,820 | ||||||
| Total operating expenses | 1,794,928 | 2,484,983 | ||||||
| Loss from operations | (1,378,926 | ) | (749,446 | ) | ||||
| Interest expense and other | - | (1,435,041 | ) | |||||
| Net Loss | $ | (1,378,926 | ) | $ | (2,184,487 | ) | ||
| Net loss per share, | ||||||||
| Basic and Diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted average shares outstanding, | ||||||||
| Basic and Diluted | 183,378,917 | 160,625,090 | ||||||
See accompanying notes, which are an integral part of these consolidated financial statements
| 12 |
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
| Preferred | Common Stock | Additional Paid- | Common Stock | Accumalated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | Issuable | Deficit | Total | |||||||||||||||||||||||||
| Balance at June 30, 2013 | - | $ | - | 158,439,702 | $ | 158,440 | $ | 17,484,058 | $ | - | $ | (19,769,028 | ) | $ | (2,126,530 | ) | ||||||||||||||||
| Common stock issued upon conversion of note payable | 3,333,333 | 3,333 | 96,667 | 100,000 | ||||||||||||||||||||||||||||
| Fair value of warrants granted to settle notes payable | 811,355 | 811,355 | ||||||||||||||||||||||||||||||
| Fair value of common stock to be issued due to settle notes payable | 812,633 | 812,633 | ||||||||||||||||||||||||||||||
| Fair value of shares of common stock issued for services | 1,000,000 | 1,000 | 89,000 | 90,000 | ||||||||||||||||||||||||||||
| Common stock issued for cash | 15,133,330 | 15,133 | 1,006,367 | 1,021,500 | ||||||||||||||||||||||||||||
| Fair value of vested options and warrants | 1,093,505 | 1,093,505 | ||||||||||||||||||||||||||||||
| Net Loss | (2,184,487 | ) | (2,184,487 | ) | ||||||||||||||||||||||||||||
| Balance at June 30, 2014 | - | - | 177,906,365 | 177,906 | 20,580,952 | 812,633 | (21,953,515 | ) | (382,024 | ) | ||||||||||||||||||||||
| Fair value of shares of common stock issued for services | 1,068,000 | 1,068 | 63,012 | 64,080 | ||||||||||||||||||||||||||||
| Common stock issued for cash | 5,193,328 | 5,193 | 370,305 | 375,498 | ||||||||||||||||||||||||||||
| Common stock issued for cancelled options | 800,858 | 801 | (359 | ) | 442 | |||||||||||||||||||||||||||
| Fair value of vested warrants | 245,375 | 245,375 | ||||||||||||||||||||||||||||||
| Net Loss | (1,378,926 | ) | (1,378,926 | ) | ||||||||||||||||||||||||||||
| Balance at June 30, 2015 | - | $ | - | 184,968,551 | $ | 184,968 | $ | 21,259,285 | $ | 812,633 | $ | (23,332,441 | ) | $ | (1,075,555 | ) | ||||||||||||||||
See accompanying notes, which are an integral part of these consolidated financial statements
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CAVITATION TECHNOLOGIES, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
| Years Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (1,378,926 | ) | $ | (2,184,487 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 89,780 | 100,693 | ||||||
| Amortization of convertible notes discount | - | 55,174 | ||||||
| Fair value of common stock issued for services | 64,080 | 90,000 | ||||||
| Fair value of vested options and warrants | 245,375 | 1,093,505 | ||||||
| Allowance for inventory obsolescence | 22,852 | 36,393 | ||||||
| Excess of fair value of common stock and warrants issued in exchange for face amount of demand notes | - | 1,353,110 | ||||||
| Fair value of common stock issued for cancelled options | 442 | - | ||||||
| Effect of changes in: | ||||||||
| Inventory | (41,807 | ) | (45,302 | ) | ||||
| Prepaid expenses and other current assets | - | 3,125 | ||||||
| Accounts payable and accrued expenses | 25,576 | (3,402 | ) | |||||
| Accrued payroll and payroll taxes | (13,808 | ) | 13,808 | |||||
| Advances from distributor | 1,375,000 | 1,375,000 | ||||||
| Reduction in advances due to revenues from distributor | (489,255 | ) | (1,855,707 | ) | ||||
| Net cash (used in) provided by operating activities | (100,691 | ) | 31,910 | |||||
| Investing activities: | ||||||||
| Purchase of property and equipment | (22,750 | ) | (43,254 | ) | ||||
| Payments for patents | - | (25,624 | ) | |||||
| Net cash used in investing activities | (22,750 | ) | (68,878 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from sale of common stock | 375,498 | 1,021,500 | ||||||
| Net cash provided by financing activities | 375,498 | 1,021,500 | ||||||
| Net increase in cash | 252,057 | 984,532 | ||||||
| Cash, beginning of period | 1,226,508 | 241,976 | ||||||
| Cash, end of period | $ | 1,478,565 | $ | 1,226,508 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | - | $ | 5,000 | ||||
| Cash paid for income taxes | $ | - | $ | - | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Conversion of convertible notes payable and accrued interest to common stock | $ | - | $ | 270,878 | ||||
| Common stock issued upon conversion of notes payable | $ | - | $ | 100,000 | ||||
See accompanying notes, which are an integral part of these consolidated financial statements
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CAVITATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2015 AND 2014
Note 1 - Organization
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 five patented systems and has filed 25 national and international patents to employ its proprietary technology in applications including vegetable and oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
Note 2 - Basis of Presentation and Going Concern
Going Concern
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. The Company has incurred recurring net losses and working capital deficiency. During the year ended June 30, 2015, the Company incurred a net loss of $1,378,926 and utilized $100,691 of cash in operations. As of June 30, 2015, the Company had a working capital deficiency of $1,222,593 and a stockholders' deficit of $1,075,555. The Company has also been dependent on certain of its funding from a technology agreement, which as described below, ended in May 2015. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern. Management's plan is to generate income from operations by continuing to license its technology globally through our strategic partner with the Desmet Ballestra Group (Desmet). Pursuant to a R&D, Marketing and Technology License agreement, Desmet has provided us monthly advances of $125,000 which started in May 2012 and ended in May 2015. These advances will be applied against future sales to Desmet. During the years ended June 30, 2015 and 2014, advances received from Desmet amounted to $1,375,000. The agreement ended in May 2015 and the Company is currently in negotiations with Desmet for a new agreement and we expect all terms will remain the same except that the monthly advances will be changed to $50,000. However, there is no assurance that such new agreement will be finalized.
We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. During the year ended June 30, 2015, the Company raised $375,498 through the issuance of 5,193,328 shares of our common stock for cash. There is no assurance that such financing will be available in the future or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.
Note 3 - 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. Intercompany 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.
In addition to defining fair value, the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
| 15 |
Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 - inputs are based upon significant observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
As of June 30, 2015, the carrying value of certain accounts such as inventory, accounts payable, accrued expenses and accrued payroll approximates their fair value due to the short-term nature of such instruments.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in reserves for inventory obsolescence, valuing our stock options, stock warrants and common stock issued for services, 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 profit share from its distributor from the sale of the reactors. The profit share is non-refundable and is recorded upon shipment and acceptance of the reactors by the distributor.
Cash
The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.
The Company maintains its cash with one domestic financial institution. From time to time, cash balance in this domestic bank may exceed federally insured limits provided by the Federal Deposit Insurance Corporation ("FDIC") of up to $250,000. As of June 30, 2015 and 2014, before adjustments for outstanding checks and deposits in transit, the Company had approximately $1,489,000 and $1,226,000, respectively, on deposit with one bank. The Company believes that no significant concentration of credit risk exists with respect to this cash balances because of its assessment of the creditworthiness and financial viability of this financial institution.
Inventory
Inventory, net of an allowance for excess quantities and obsolescence, is stated at the lower of cost or market. Cost is determined on a specific item basis. Inventory is composed of finished goods and represents costs incurred to manufacture our Nano Reactor® systems.
Property and Equipment
Property and equipment is presented at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are removed from the Company's accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations.
| 16 |
Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives.
| Leasehold improvements | Shorter of life of asset or lease | |
| Furniture | 5-7 Years | |
| Office equipment | 5Years | |
| Lab equipment | 4 Years | |
| Skid systems (demo units) | 4 Years |
Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended June 30, 2015 and 2014, the Company did not recognize any impairment for its property and equipment.
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 2013, 2012 and 2011. As of June 30, 2015, we have a total of 25 patents pending. The patents have duration of twenty years from filing date. We amortize our patents over a four year period which we believe is a reasonable estimate based upon our estimate of time until the next generation of reactors is developed or until other forms of competition appear.
During the year ended June 30, 2014, the Company recognized patent amortization expense of $28,466. As of June 30, 2014, total capitalized patent costs amounted to $157,012 and accumulated amortization of $84,238.
During the year ended June 30, 2015, the Company recognized patent amortization expense of $30,307. As of June 30, 2015, total capitalized patent costs amounted to $157,012 and accumulated amortization of $119,846. At June 30, 2015, future estimated patent amortization costs are:
| Year Ended | ||||
| June 30, | Amount | |||
| 2016 | 20,690 | |||
| 2017 | 13,501 | |||
| 2018 | 2,975 | |||
| Total | $ | 37,166 | ||
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 the Company annual impairment tests, management believes there is no impairment of its intangibles and long-lived assets as of June 30, 2015 and 2014. 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.
| 17 |
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 option and warrant grants 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.
Advertising costs
Advertising costs (including marketing expense) incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $23,285 and $7,871 for the years ended June 30, 2015 and 2014 respectively and was reported as part of General and administrative expenses in the accompanying Consolidated Statements of Operations.
Research and Development Costs
Research and development expenses relate primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the years ended June 30, 2015 and 2014 amounted to $22,310 and $40,820, respectively.
Warranty Policy
The Company provides a limited warranty with every set of reactors sold, typically 2 to 5 years. The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at June 30, 2015 and 2014.
| 18 |
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed similar to basic net income (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive securities had been issued. At June 30, 2015 potentially dilutive securities include options to acquire 12,810,957 shares of common stock and warrants to acquire 68,259,843 shares of common stock.
Net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Basic and diluted net loss per common share is the same for all periods presented with a net loss because warrants and stock options outstanding are anti-dilutive.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing 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 interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation – Stock Compensation (Topic 718). The pronouncement was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of ASU 2014-12 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the Company’s financial statements and disclosures.
In July 2015, the FASB issued Accounting Standards Update 2015-11, Simplifying the Measurement of Inventory, which requires that inventory within the scope of ASU 2015-11 be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (LIFO) and the retail inventory method are not impacted by the new guidance. ASU 2015-11 applies to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for public business entities in fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2015-11 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
Dependence on Desmet Ballestra
Our revenue is almost entirely dependent on Desmet Ballestra who is our exclusive distribution agent with regard to the CTi Nano Neutralization® System for edible oils. During the year ended June 30, 2015 and 2014, 100% of our revenue was derived from sales to Desmet (see Note 4). All sales to Desmet were located outside of the United States.
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Note 4 - Agreement with Desmet Ballestra
On May 14, 2012 we signed a global R and D, Marketing and Technology License Agreement with the n.v. Desmet Ballestra Group s.a. (Desmet), a Belgian company that is actively marketing the NANO Neutralization System, the key component of which is the Company's reactor to soybean and other vegetable oil refiners. The Agreement provides Desmet (licensee) a limited, exclusive license and right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devices on a global basis but is limited to oils and fats and oleo chemical applications. CTi (licensor) remains owner of the current patents and patent applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet agreed to provide, under certain conditions, limited monthly advance payments of $125,000 against future sales to CTi through May 15, 2015. Desmet shall be entitled to immediately terminate the present agreement in case the claims of current US Patent Application Number 12/484,981 are not granted as such or are cancelled. In addition, Desmet may terminate the agreement on August 1 of any particular year if they have not installed at least 6 Nano Reactor® devices in the previous 12 month period. CTi may terminate the Agreement for material default. Desmet, together with its affiliates, is a global engineering and equipment supply firm engaged in the development, design and supply of process equipment for oils and fats processing facilities including vegetable oil refining, biofuel, oleo chemical, seed crushing, surfactant and detergent markets. Desmet supplies these markets with competitive services based on the latest globally sourced technologies.
The Company and Desmet have worked together to determine the appropriate sales approach and installation process. The Company's Nano Neutralization is designed to be used as an add-on process to an existing neutralization system within soybean and other vegetable oil refineries. Desmet purchases Nano Reactor Systems from the Company and installs them at the refinery as part of an integrated neutralization system. We are therefore substantially dependent on Desmet to identify prospects, complete sales contracts, install the system and manage relationships with end-users.
The agreement with Desmet expired in May 2015. The Company is currently in negotiations with Desmet for a new agreement and we expect all terms will remain the same except that the monthly advances will be changed to $50,000. However there is no assurance that such agreement will be finalized.
During the years ended June 30, 2015 and 2014, we recorded revenues from Desmet amounting to $489,255 and $1,855,707. In addition, we received advances of $1,375,000 in each of the fiscal years 2015 and 2014 respectively. As of June 30, 2015 and 2014, Desmet has advanced to us an excess of funds of $1,620,701 and $734,956 which will be recognized as revenue as sales orders are shipped.
Note 5 - Property and Equipment
Property and equipment consisted of the following as of June 30, 2015 and June 30, 2014:
| June 30, | June 30, | |||||||
| 2015 | 2014 | |||||||
| Leasehold improvement | $ | 2,475 | $ | 2,475 | ||||
| Furniture | 26,837 | 26,837 | ||||||
| Office equipment | 1,499 | 1,499 | ||||||
| Equipment | 68,380 | 68,380 | ||||||
| Systems | 291,090 | 268,340 | ||||||
| 390,281 | 367,531 | |||||||
| Less: accumulated depreciation and amortization | (289,909 | ) | (230,436 | ) | ||||
| Property & Equipment, net | $ | 100,372 | $ | 137,095 | ||||
Depreciation expense for the years ended June 30, 2015 and 2014 amounted to $59,473 and $72,227, respectively and was reported as part of General and administrative expenses in the accompanying Consolidated Statements of Operations.
Note 6 - Accrued Payroll and Payroll Taxes to Officers and former officers
As of June 30, 2015 and 2014, the Company had accrued unpaid salaries to officers and former officers amounting to $1,016,223 and $1,030,331, respectively.
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Note 7 - Related Party Short-Term Loan and Payables
As of June 30, 2012, we had received $185,000 from West Point Partners, LLC, whose managing partner is the Company's Principal Accounting Officer. These funds were due on demand, and accrued an annual interest rate of 12%.
On April 1, 2014, we granted an aggregate of 7,610,000 shares of common stock with a fair value of $684,900 along with 7,610,000 warrants with a fair value of $683,983 to settle this demand note with a face value of $185,000 and accrued interest of $43,300. As a result of this settlement, the Company recognized a loss of $1,140,583 which was accounted for as part of Interest expense and other in the accompanying Consolidated Statement of Operations for the year ended June 30, 2014 in order to account for the excess of the fair value of the equity instruments issued at the date of settlement. The 7,610,000 shares of common stock were subsequently issued on September 25, 2015.
Note 8 - Short-Term Loans
As of June 30, 2012, we had received $34,521 from a third party, Strategic IR. These funds were due on demand and pay an annual interest rate of 12%.
On April 1, 2014, we granted an aggregate of 1,419,251 shares of common stock to Strategic IR with a fair value of $127,733 along with 1,419,251 warrants with a fair value of $127,432 to settle this demand note with a face value of $34,521 and accrued interest of $8,057. As a result of this settlement, the Company recognized a loss of $212,587 which was accounted for as part of Interest expense and other in the accompanying Consolidated Statement of Operations for the year ended June 30, 2014 in order to account for the excess of the fair value of the equity instruments issued at the date of settlement. The 1,419,251 shares of common stock were issued on September 25, 2015.
Note 9 - Convertible Note
On December 17, 2012, we issued a convertible promissory note payable to a private party, in the amount of $100,000 with an interest rate of 12% per annum and due May 31, 2014. The note was unsecured, convertible into shares of our common stock at a conversion price of $0.03 per share. In connection with the note offering, we also issued fully vested warrants to purchase 3,333,333 shares of common stock with a fair value of $90,106. The warrants are exercisable at $0.07/share and will expire in 3 years. The fair value of the warrants was recorded as a note discount and was amortized to interest expense over the term of the note.
On December 2, 2013 the entire Note was converted into 3,333,333 shares of the Company's common stock and the unamortized balance of the note discount of $55,174 was expensed as part of Interest expense and other in the accompanying Consolidated Statement of Operations for the year ended June 30, 2014.
Note 10 - Stockholders' Deficit
Common Stock
Year ended June 30, 2015
In October 2014, we issued 1,068,000 shares of common stock valued at $64,080 as payment to a service provider. These shares were valued at fair value at the date of issuance.
In July 2014 we issued 5,193,328 shares of common stock to various entities and individuals in exchange for cash proceeds of $375,498, net of commissions of $14,359. In addition, the Company also granted these entities and individuals five year, fully vested warrants to purchase 5,193,328 shares of common stock at $0.12 per share. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public. The Company issued rule 144 shares in connection with these issuances.
In June 2015, we issued an aggregate of 800,858 shares of common stock to a consultant in exchange for the cancellation of 800,858 fully vested stock options that were granted in December 2012. As a result, the Company recognized compensation cost of $442 to account for the incremental difference in fair value of the 800,858 shares of common stock and the fair value of the cancelled 800,858 stock options.
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Year ended June 30, 2014
On December 2, 2013, we issued 3,333,333 shares of common stock to convert $100,000 of outstanding principal under the convertible promissory notes (see Note 9).
In April 2014, we issued 1,000,000 shares of common stock valued at $90,000 as payment to a service provider. These shares were valued at fair value at the date of issuance.
On June 30, 2014 we issued 15,133,330 shares of common stock to various entities and individuals in exchange for net cash proceeds of $1,021,500. In addition, the Company also granted these entities and individuals five year, fully vested warrants to purchase 15,133,330 shares of common stock at $0.12 per share. The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The shares were not offered via general solicitation to the public. The Company issued rule 144 shares in connection with these issuances.
Preferred Stock
On March 17, 2009, the Company filed Amended and Restated Articles of Incorporation and created two new series of preferred stock, the first of which is designated Series A Preferred Stock and the second of which is designated as Series B Preferred Stock. The total number of shares of Common Stock which this corporation shall have authority to issue is 1,000,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors. Each share of Common Stock and Preferred Stock has a par value of $0.001. As of June 30, 2015 and 2014, there are no shares of Series A or Series B Preferred Stock issued and outstanding.
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 from June 30, 2015 and 2014 is as follows:
| Weighted- | ||||||||||||
| Average | ||||||||||||
| Weighted- | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Exercise | Life | |||||||||||
| Options | Price | (Years) | ||||||||||
| Outstanding June 30, 2013 | 13,611,815 | 0.10 | 8.17 | |||||||||
| - Granted | - | - | - | |||||||||
| - Forfeited | - | - | - | |||||||||
| - Exercised | - | - | - | |||||||||
| - Expired | - | - | - | |||||||||
| Outstanding June 30, 2014 | 13,611,815 | 0.10 | 6.37 | |||||||||
| - Granted | - | - | - | |||||||||
| - Forfeited/Replaced | (800,858 | ) | - | - | ||||||||
| - Exercised | - | - | - | |||||||||
| - Expired | - | - | - | |||||||||
| Outstanding at June 30, 2015 | 12,810,957 | 0.10 | 5.35 | |||||||||
| Exercisable at June 30, 2015 | 12,810,957 | 0.10 | 5.35 | |||||||||
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In June 2015, the Company cancelled fully vested stock options to purchase 800,858 shares of common stock that were granted to a consultant in prior periods. In exchange for the cancellation, we granted the consultant 800,858 shares of common stock.
The intrinsic value of the outstanding options was $330,000 and $590,043 as of June 30, 2015 and 2014, respectively. The following table summarizes additional information concerning options outstanding and exercisable at June 30, 2015.
| Options Outstanding | Options Exercisable | ||||||||||||||||||||
| Weighted | Weighted | Weighted | |||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Number | Remaining | ||||||||||||||||
| Price | of Shares | Life (Years) | Price | of Shares | Life (Years) | ||||||||||||||||
| $ | 0.03 | 11,000,000 | 5.96 | $ | 0.03 | 11,000,000 | $ | 5.96 | |||||||||||||
| $ | 0.33 | 637,297 | 1.31 | $ | 0.33 | 637,297 | $ | 1.31 | |||||||||||||
| $ | 0.67 | 1,173,660 | 1.68 | $ | 0.67 | 1,173,660 | $ | 1.68 | |||||||||||||
| 12,810,957 | 12,810,957 | ||||||||||||||||||||
Warrants
A summary of the Company's warrant activity and related information from as of June 30, 2015 and 2014 is as follows.
| Weighted- | ||||||||||||
| Average | ||||||||||||
| Weighted- | Remaining | |||||||||||
| Average | Contractual | |||||||||||
| Exercise | Life | |||||||||||
| Warrants | Price | (Years) | ||||||||||
| Outstanding at June 30, 2013 | 18,433,867 | 0.09 | 6.74 | |||||||||
| Granted | 47,362,581 | 0.07 | 7.40 | |||||||||
| Exercised | - | - | - | |||||||||
| Expired | 2,729,934 | 0.50 | - | |||||||||
| Outstanding at June 30, 2014 | 63,066,514 | 0.06 | 6.91 | |||||||||
| Granted | 5,193,329 | 0.12 | 5.00 | |||||||||
| Exercised | - | |||||||||||
| Expired | - | |||||||||||
| Outstanding at June 30, 2015 | 68,259,843 | 0.07 | 5.77 | |||||||||
| Exercisable at June 30, 2015 | 68,259,843 | 0.07 | 5.77 | |||||||||
2015
In July of 2014, the Company issued warrants to purchase 5,193,329 shares of common stock to the purchasers of our common stock offering. The warrants are exercisable at $0.12 per share, vesting immediately and expiring in 5 years from the grant date.
During the year ended June 30, 2015, the Company recognized compensation expense of $245,375 to account for the fair value of vested warrants granted to a consultant and a member of our Board of Directors.
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2014
In October 2013, the Company granted employees warrants to purchase 9,100,000 shares of common stock at $0.04 per share, vesting immediately and expiring in 5 and 10 years from the grant date. The fair value of the warrants amounted to $363,882 using the Black-Scholes Merton valuation model.
In October 2013, the Company granted consultants warrants to purchase 13,100,000 shares of common stock at prices ranging from $0.04 up to $0.045 per share, vesting over a period of one year and expiring in 5 and 10 years from the grant date. The fair value of the warrants that vested during the current fiscal year amounted to $726,299 using the Black-Scholes Merton valuation model.
In April 2014, the Company granted a total of 9,029,251 warrants to demand note holders pursuant to settlement agreements (see Note 7 and 8).
In April 2014, the Company granted a new Board member warrants to purchase 1,000,000 shares of common stock at $0.08 per share which vest over a period of one year and expiring in 5 years from the grant date. The fair value of the warrants at the grant date amounted to $79,764 using the Black-Scholes Merton valuation model. During the year ended June 30, 2014, we recognized a total of $3,324 based upon the vesting of the warrants.
In June of 2014, the Company issued warrants to purchase 15,133,330 shares of common stock to the purchasers of our common stock offering. The warrants are exercisable at $0.12 per share, vesting immediately and expiring in 5 years from the grant date.
The intrinsic value of the outstanding warrants was $651,999 and $1,551,329 as of June 30, 2015 and 2014, respectively. The following table summarizes additional information concerning warrants outstanding and exercisable at June 30, 2015.
| Warrants Outstanding | Warrants Exercisable | ||||||||||||||||||||
| Weighted | Weighted | Weighted | |||||||||||||||||||
| Average | Average | Average | |||||||||||||||||||
| Exercise | Number | Remaining | Exercise | Number | Exercise | ||||||||||||||||
| Price | of Shares | Life (Years) | Price | of Shares | Price | ||||||||||||||||
| $ | 0.04 - 0.07 | 47,933,184 | 6.75 | $ | 0.05 | 44,641,518 | $ | 0.05 | |||||||||||||
| $ | 0.12 | 20,326,659 | 4.25 | $ | 0.12 | 20,326,659 | $ | 0.12 | |||||||||||||
| 68,259,843 | 68,259,843 | ||||||||||||||||||||
The table below represents the assumptions used in valuing the stock options and warrants granted in fiscal 2015 and 2014:
| Year Ended June 30, | ||||||||
| 2015 | 2014 | |||||||
| Expected life in years | 3 - 10 | 3 - 10 | ||||||
| Stock price volatility | 183% - 191% | 185% - 232% | ||||||
| Risk free interest rate | 2.75% - 3.21% | 1.44% - 3.50% | ||||||
| Expected dividends | None | None | ||||||
| Forfeiture rate | 0% | 0% | ||||||
The assumptions used in the Black Scholes models referred to above are based upon the following data: (1) the contractual life of the underlying non-employee options is the expected life. The expected life of the employee option is estimated by considering the contractual term of the option, the vesting period of the option, the employees' expected exercise behavior and the post-vesting employee turnover rate. (2) The expected stock price volatility was based upon the Company's historical stock price over the expected term of the option. (3) The risk free interest rate is based on published U.S. Treasury Department interest rates for the expected terms of the underlying options. (4) The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future. (5) The expected forfeiture rate is based on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.
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Note 11 - Income Taxes
Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to income before income tax expense as a result of the NOL carry forward. Therefore, the company's effective tax rate is 0.0%. The Company files income tax returns in the United States ("Federal") and California ("State") jurisdictions. The Company is subject to Federal and State income tax examinations by tax authorities for all years since its inception.
At June 30, 2015, the Company had Federal and State net operating loss 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 IRS limitations, including change in ownership.
The Company periodically evaluates the likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the deferred tax assets by a valuation allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. The Company considers many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available to us for tax reporting purposes, and other relevant factors.
At June 30, 2015, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, the Company determined that it was more likely than not that its deferred tax assets would not be realized. Accordingly, the Company has recorded a valuation allowance for 100% of its cumulative deferred tax assets.
As a result of the implementation of certain provisions of ASC 740-10, the Company performed an analysis of its previous tax filings and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of June 30, 2015.
Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its consolidated statements of operations. There is no interest or penalties accrued as of June 30, 2015.
The following summarizes the open tax years for each major jurisdiction:
| Jurisdiction | Open Tax Years | |
| Federal | 2010 - 2014 | |
| California | 2009 - 2014 |
The Company's net operating loss carry forwards are subject to IRS examination until they are utilized and such tax years are closed.
Note 12 - Commitments and Contingencies
Lease Agreement
The Company leases approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave in Chatsworth, California under a lease agreement which extends through February 1, 2016. Monthly payments are approximately $4,511 beginning May 2012. The Company has a security deposit of $9,500 associated with this lease. Future minimum lease payments under our non-cancelable operating lease through February 2016 is $31,577.
Total rent expense was $61,236 and $54,130 for the years ended June 30, 2015 and 2014 and was reported as part of General and administrative expenses in the accompanying Consolidated Statements of Operations,
Royalty Agreements
On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with two parties, our President as well as our former Chief Executive Officer (CEO) and current Chief Technology Officer (CTO), where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and former CEO/current CTO have been assigned to the Company. In exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the CTO and President and former CEO for licensing of the technology and leasing of the related equipment embodying the technology. These agreements were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company's CTO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2015.
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On April 30, 2008 (as amended November 22, 2010), our wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical Department (the "Inventor") who shall 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 June 30, 2015, no patents have been granted in which this person is the legally named inventor.
Litigation
The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of our business. As of June 30, 2015, the Company was a party to legal proceedings related to claims for payment that are currently accrued for in its financial statements. Except for income tax contingencies, the Company record 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. Material legal proceedings that are currently pending are as follows:
| a. | In August 2015, a former employee and former Director filed a claim of approximately $179,000 for unpaid wages, penalties and interest. The Company deemed that the claim of $179,000 is without merit. The Company believes that the total liability to the former employee is only up to $134,000 which was accrued in prior period as part of Accrued Payroll and payroll taxes due to officers in the accompanying Consolidated Balance Sheets for the years ended June 30, 2015 and 2014. The Company will appeal any unfavorable rulings and vigorously defend its case against the former employee. |
| b. | The Company has several patents issued by the US Patent Office with regards to the use and efficacy of its Nano Reactors. In August 2015, a competitor, Arisdyne System filed a complaint challenging the patentability of the Company’s Patent No. 8,911,808 B2 or Patent 808. Patent 808 is currently being used in the reactors purchased by our distributor, Desmet. The Company intends to vigorously respond to the complaint in order to maintain the patented status of Patent 808. There is no monetary compensation being claimed by Arisdyne. |
Note 13 - Subsequent Events
In September of 2015 we issued a total of 9,029,251 shares of common stock to a related party and a former note holder that were reflected as common stock issuable at June 30, 2015 (see Note 7 and 8).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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 June 30, 2015, 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 June 30, 2015.
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Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed under the supervision of our principal executive and principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, (as defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the year ended June 30, 2015. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are ineffective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Company's CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
We are in the continuous process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort is needed to fully remedy these deficiencies. Management has engaged a Certified Public Accountant as a consultant to assist with the financial reporting process in an effort to mitigate some of the identified weaknesses. The Company intends on hiring the necessary staff to address the weaknesses once additional capital is obtained which will allow full operations to commence. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We have taken numerous steps to address the underlying causes of the internal control deficiencies, primarily through the development and implementation of policies, improved processes and documented procedures, the retention of third-party experts and contractors, and the hiring of additional accounting personnel with technical accounting and inventory accounting experience.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2015 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Attestation
Pursuant to Item 308(b) of Regulation S-K, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Wall Street Reform Act), this report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. The Wall Street Reform Act permanently exempts small public companies from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls.
None.
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ITEM 10. Directors, Executive Officers and Corporate Governance.
Certain of the information required by this item will be contained in the Form 10-K/A to be filed within 120 days of June 30, 2015. Such information is incorporated into this item by reference.
ITEM 11. Executive Compensation.
Certain of the information required by this item will be contained in the Form 10-K/A to be filed within 120 days of June 30, 2015. Such information is incorporated into this item by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters.
Certain of the information required by this item will be contained in the Form 10-K/A to be filed within 120 days of June 30, 2015. Such information is incorporated into this item by reference.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence.
Certain of the information required by this item will be contained in the Form 10-K/A to be filed within 120 days of June 30, 2015. Such information is incorporated into this item by reference.
ITEM 14. Principal Accountant Fees and Services.
Certain of the information required by this item will be contained in the Form 10-K/A to be filed within 120 days of June 30, 2015. Such information is incorporated into this item by reference.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this annual report on Form 10-K:
1. Financial Statements
The financial statements are filed as part of this report under Item 8 "Financial Statements and Supplementary Data".
2. Financial Statement Schedules
All other schedules are omitted because they are not applicable or the required information is presented in the financial statements and notes thereto.
3. Exhibits
The exhibits required by Item 601 of Regulation S-K are included in Item 15(b) below.
(b) - Exhibits.
| Incorporated by Reference | ||||||||||
| Exhibit | Filed | |||||||||
| Number | Exhibit Description | Herewith | Form | Period Ended | 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 | 10Q | September 30, 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 Agreement with R.L. Hartshorn dated Sept. 22, 2009 | 10-Q | December 31, 2011 | 10.70 | February 10, 2012 | |||||
| 10.8 | 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 | |||||
| 10.9 | Board of Director Agreement - James Fuller | 10-Q | December 31, 2011 | 10.12 | October 20, 2011 | |||||
| 10.10 | Technology and License Agreement with Desmet Ballestra dated 14 May 2012 | 10-K | June 30, 2012 | 10.10 | October 12, 2012 | |||||
| 10.11 | Short Term Loan Agreement - CEO | 10-K | June 30, 2012 | 10.11 | October 12, 2012 | |||||
| 10.13 | Convertible Note Payable - Prolific Group LLC - $25,000 | 10-Q | December 31, 2011 | 10.40 | February 10, 2012 | |||||
| 10.14 | Convertible Note Payable - Tripod Group LLC - $30,000 | 10-Q | December 31, 2011 | 10.41 | February 10, 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. | ||||||||||
| 99.1 | Loan Agreement - Desmet Ballestra - Oct. 26, 2010 | 10-Q | September 30, 2010 | 99.1 | November 12, 2010 | |||||
| 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.LAB | 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. | |||||||||
(c) - Financial Statement Schedules
See Item (a) 2 above.
| 29 |
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED
| SIGNATURE | TITLE | DATE | ||
| /s/ Igor Gorodnitsky | President; Member of Board of Directors | October 13, 2015 | ||
| Igor Gorodnitsky | (Principal Executive Officer) | |||
| /s/ N. Voloshin | Chief Financial Officer | October 13, 2015 | ||
| N. Voloshin | (Principal Financial Officer) | |||
| /s/ James Fuller | Audit Committee Chairman, Independent Financial Expert | October 13, 2015 | ||
| James Fuller |
| 30 |