The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements. Overview of our Business
Cavitation Technologies, Inc.("CTi"), a Nevadacorporation, was originally incorporated under the name Bio Energy, Inc.We design and engineer environmentally friendly technology-based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development that has developed, patented, and commercialized proprietary technology. CTi has developed, patented, and commercialized proprietary technology that can be used for processing of industrial fluids. CTi's patented Nano Reactor® is the critical components of the CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano Reactor® systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement. We are engaged in manufacturing our Nano-Reactors, which are designed to help refine vegetable oils, biodiesel transesterification and treatment of produced and frack water. Our near-term goal is to continue to sell our systems through our partner Desmet Ballestra, EW and ABI. During the past several years we have developed a number of new applications utilizing the core principal of our technology. Our low-pressure non-reactors (LPN)can be utilized in multiple industries that process large volumes of fluids, such as produced and frack water treatment and anticipate accelerated commercial sales in our fiscal 2022. Further, we have miniaturized our non-reactors to be utilized in various consumer-oriented products, such as, processing and enhancing spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil. We had an agreement to license our technology globally through our strategic partner, Desmet Ballestra Group(Desmet) and existing agreements with Enviro Watertek, LLC(EW) and Alchemy Beverages, Inc(ABI). Desmet have been providing monthly advances of $40,000in accordance with a license agreement with Desmet which has been renewed on October 1, 2021. Additionally, we are working with ABI on expansion of our alcoholic beverages license agreement with a new strategic partner and anticipate to announce a new agreement in our March 2022. We may need additional funding, and may attempt to raise additional debt and/or equity financing to fund operations and additional working capital. However, there is no assurance that we will be successful in obtaining such financing or obtained sufficient amounts necessary to meet our business needs, or that we will be able to meet our future contractual obligations. In March 2020the World Health Organizationdeclared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time.
Results of operations for the three months ended
Here is a comparison of our operating results for the three months ended
For the Three Months Ended December 31, 2021 2020 $ Change % Change Revenue
$ 113,000 $ 72,000 $ 41,00057% Cost of revenue 3,000 2,000 (1,000) 50% Gross profit 110,000 70,000 40,000 57%
General and administrative expenses 546,000 283,000 263,000 93% Research and development expenses 2,000 5,000 (3,000 ) (60% ) Total operating expenses 548,000 288,000
260,000 90% Interest expense (1,000 ) 3,000 2,000 (67%) Net loss
$ (439,000 ) $ (221,000 ) $ (218,000)99% 18 Revenue
The Company generates revenue from the sale of the Nano Reactor® to customers/distributors as well as a share of the gross profit from the sale of these reactors by our distributors to their customers.
During the three months ended
December 31, 2021, we recorded $109,000in revenue from sale of reactors to our distributor Desmet pursuant to three purchase orders and usage fees of $4,000from our investment in Ameredev, for a total of $113,000. During the three months ended December 31, 2020, we recorded $36,000in revenue from sale of reactors to our distributor Desmet pursuant to four purchase orders and corresponding share in gross profit of 36,000 for a total of $72,000. Cost of Revenue
During the three months ended
December 31, 2021, our cost of sales amounted to $3,000and to $2,000during the same period in prior year, which was the result of the revenue transactions described above. Operating Expenses
Operating expenses for the three months ended
Research and development (R&D) costs remain minimal and we intend to continue R&D as our cash position improves.
Interest Expense During the three months ended
December 31, 2021and 2020, the Company recognized interest expense of $1,000and $3,000, respectively, pursuant to the terms of our outstanding notes payable.
Results of operations for the six months ended
Here is a comparison of our operating results for the six months ended
For the Six Months Ended December 31, 2021 2020 $ Change % Change Revenue
$ 664,000 $ 489,000 $ 175,00036% Cost of revenue 26,000 12,000 14,000 117% Gross profit 638,000 477,000 161,000 34%
General and administrative expenses 852,000 593,000 259,000 44% Research and development expenses 2,000 11,000 (9,000 ) (82 )% Total operating expenses 854,000 604,000 250,000 41% Gain on forgiveness of note payable 104,000 -
104,000 100% Interest Expense (3,000 ) 3,000 - - Net loss
$ (115,000 ) $ (130,000 ) $ 15,000(12% ) 19 Revenue
The Company generates revenues from the sale of the Nano Reactor® to customers/distributors as well as a share of profits from water treatment.
During the six months ended
December 31, 2021, we recorded $592,000in revenue from sale of reactors to our distributor Desmet pursuant to five purchase orders and revenue from share in gross profit of $68,000and usage fees of $4,000from our investment in Ameredev, for a total of $664,000. During the six months ended December 31, 2020, the Company recognized revenues of $277,000from sale of reactors pursuant to three purchase orders and $212,000from share in gross profit to Desmet for a total revenue of $489,000. Cost of Revenue
In the six months ended
Operating expenses for the six months ended
Research and development (R&D) costs have remained minimal and we intend to continue R&D as our cash position permits.
Other income (expense)
Other income increased following the cancellation of the Société de
Liquidity and capital resources
During the six months ended
December 31, 2021the Company incurred a net loss of $115,000and a working capital deficit of $755,000. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company's independent registered public accounting firm, in its report on the Company's June 30, 2021financial statements, has expressed substantial doubt about the Company's ability to continue as a going concern. As of December 31, 2021, we had cash and cash equivalents on hand of $1,100,000and are not generating sufficient revenues to fund operations. In addition, management believes we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partners, Desmet Ballestra Group(Desmet), Enviro Watertek (EW) and Alchemy Beverages, Inc.(ABI). Desmet has been providing us monthly advances of $40,000and our renewed contract is through October 1, 2024to be applied against from future reactor sales. We may also attempt to raise additional debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations. 20 Cash Flow
Net cash generated by operating activities during the six months ended
Net cash used in investing activities during the six months ended
December 31, 2021amounted to $1,179,000,000as a result of an investment in a joint venture compared to $125,000for the same period ended in fiscal 2020. Net cash provided in financing activities during the six months ended December 31, 2021, amounted to $785,000as a result of the sale of our common stock, compared to $150,000as a result of a note payable obtained from the Small Business Associationunder its Economic Injury Disaster Loan (EIDL) assistance program.
Significant accounting policies Use of estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
U.Srequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used for allowance for doubtful accounts, reserve for inventory obsolescence, impairment analysis for property and equipment, accrual of potential liabilities, valuation allowance for deferred tax assets, and assumption in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates. Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients. Revenue from sale of our Nano Reactors is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these contracts and we have no continuing obligation to the customer. The Company also recognizes revenue from its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most likely amount. However, given the lack of control over the sale to theend customer and the lack of history of prior sales, the amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined is not refundable and it is probable that a significant revenue reversal of cumulative product revenue under the contract will not occur. In addition, the Company also recognizes revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
Investment in an unconsolidated joint venture
The Company accounts for its investment in an unconsolidated joint venture under the equity method of accounting as we exercise significant influence over, but do not control, the joint venture. The investment in the unconsolidated joint venture is initially recorded at cost, and subsequently increased for capital contributions and allocations of net income, and decreased for capital distributions and allocations of net loss. Equity in net income (loss) from the unconsolidated joint venture is allocated based on our economic interest. We assess our investment in unconsolidated joint venture for recoverability, and if it is determined that a loss in value of the investment is other than temporary, we write down the investment to its fair value. We do not believe that the value of our equity investment was impaired as of
December 31, 2021.
Recently issued accounting standards
See Note 1 to the condensed consolidated financial statements for a discussion of recently issued accounting standards.
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