CAVITATION TECHNOLOGIES, INC. 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"), aNevada corporation, was originally incorporated under the nameBio Energy, Inc. We design and engineer environmentally friendly technology-based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, water treatment, algae oil extraction, biodiesel production, water-oil emulsions and crude oil yield enhancement. Our systems are designed to process industrial liquids at a lower cost and higher yield than conventional technology. We are a process and product development firm that has developed, patented, and commercialized proprietary technology. CTi has developed, patented, and commercialized proprietary technology that can be used for processing of industrial fluids. CTi's patented Nano Reactor® is the critical components of the CTi Nano Neutralization® System which is commercially proven to reduce operating costs and increase yields in processing oils and fats. CTi has two issued patents relating to our Nano Reactor® systems and has filed several national and international patents to employ its proprietary technology in applications including, vegetable oil refining, biodiesel production, waste water treatment, algae oil extraction, and alcoholic beverage enhancement. We are engaged in manufacturing our Nano-Reactors, which are designed to help refine vegetable oils, biodiesel transesterification and treatment of produced and frack water. Our near-term goal is to continue to sell our systems through our partners,Desmet Ballestra and EW. During the past several years we have developed a number of new applications utilizing the core principal of our technology. Our low pressure non-reactors (LPN) can be utilized in multiple industries that process large volumes of fluids and we anticipate accelerated commercial sales in our fiscal 2020. Further, we have miniaturized our non-reactors to be utilized in various consumer oriented products, such as, processing and enhancing spirits and wines, drinking water with infusion of vitamins, minerals and cannabidiol (CBD) oil. We have agreements to license our technology globally through our strategic partners,Desmet Ballestra Group (Desmet) andEnviro Watertek, LLC (EW) andAlchemy Beverages, Inc (ABI). Desmet have been providing monthly advances of$50,000 . 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. InMarch 2020 theWorld Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and its effects on our business or results of operations at this time. 17 Inflation Global inflation also increased during 2021 and in 2022. TheRussia andUkraine conflict and other geopolitical conflicts, as well as related international response, have exacerbated inflationary pressures, including causing increases in the price for goods and services and global supply chain disruptions, which have resulted and may continue to result in shortages in food products, materials and services. Such shortages have resulted and may continue to result in inflationary cost increases for labor, fuel, food products, materials and services, and could continue to cause costs to increase as well as result in the scarcity of certain materials. We cannot predict any future trends in the rate of inflation or other negative economic factors or associated increases in our operating costs and how that may impact our business. To the extent we and our customers we service are unable to recover higher operating costs resulting from inflation or otherwise mitigate the impact of such costs on our and their business, our revenues and gross profit could decrease, and our financial condition and results of operations could be adversely affected. Results of Operations
Results of Operations for the Three Months Ended
The following is a comparison of our results of operations for the three months
ended
For the Three Months Ended
December 31,
2022 2021 $ Change % Change
Revenue $ 58,000 $ 109,000 $ (51,000 ) (47)%
Revenue from related party - 4,000 (4,000 ) (100)%
Cost of revenue (13,000 ) (3,000 ) (10,000 ) 333 %
Gross profit 45,000 110,000 (65,000 ) (59)%
General and administrative expenses 332,000 546,000 (214,000 ) (39)% Research and development expenses - 2,000
(2,000 ) (100)% Total operating expenses 332,000 548,000 (216,000 ) (39)% Loss from operations (287,000 ) (438,000 ) 151,000 (34)%
Income from equity method investment (11,000 ) -
(11,000 ) - % Interest expense (1,000 ) (1,000 ) - - % Net loss$ (299,000 ) $ (439,000 ) $ 140,000 (32)% Revenue
The Company generates revenues from the sale of the Nano Reactor® to customers/distributor. Additionally, the Company generates revenues from its equity method investment, specifically fees from usage of reactors or usage fees.
During the three months endedDecember 31, 2022 we recorded$58,000 in revenue compared to$113,000 for months endedDecember 31, 2021 . Revenues decreased since the Company received only one purchase order from Desmet during the current period compared to three purchase orders in prior period. In addition, the Company also recognized usage fees of$4,000 during the prior period while none during the current period. 18 Cost of Revenue
During the three months ended
Operating Expenses
Operating expenses for the three months ended
Research and development (R&D) expenses for the three months endedDecember 31, 2022 and 2021 were$0 and$2,000 , respectively. R&D expenses remained relatively low as we continued to rely on Desmet for support in R&D and development of new applications for our technology. It is our intention to pursue R&D as our cash position permits. Other income (expense) Other income (expense) for the three months endedDecember 31, 2022 and 2021, amounted to$(1,000) of interest expense for both periods presented. For the three months endedDecember 31, 2022 and 2021, the Company recognized a loss of$11,000 and$0 , respectively, to account for its 30% share in the net loss from the equity method investment.
Results of Operations for the Six Months Ended
The following is a comparison of our results of operations for the six months
ended
For the Six Months Ended
December 31,
2022 2021 $ Change % Change
Revenue $ 303,000 $ 660,000 $ (357,000 ) (54)%
Revenue from related party 17,000 4,000 13,000 325%
Cost of revenue (62,000 ) (26,000 ) (36,000 ) 138%
Gross profit 258,000 638,000 (380,000 ) (60)%
General and administrative expenses 598,000 852,000 (254,000 ) (30)% Research and development expenses
- 2,000 (2,000 ) (100)%
Total operating expenses 598,000 854,000 (256,000 ) (30)%
Loss from operations (340,000 ) (216,000 ) (124,000 ) 57%Income from equity method investment (29,000 ) - (29,000 ) 100% Gain on forgiveness of note payable - 104,000
(104,000 ) (100)% Interest expense (3,000 ) (3,000 ) - -% Net loss$ (372,000 ) $ (115,000 ) $ (257,000 ) 223% 19 Revenue
The Company generates revenues from the sale of the Nano Reactor® to customers/distributor as well as share in gross profit from the sale of such reactors by our distributors to their customers. Additionally, the Company generates revenues from its equity method investment.
During the six months endedDecember 31, 2022 we recorded$303,000 in revenue compared to$660,000 for months endedDecember 31, 2021 . Revenues decreased since the Company received four purchase orders from Desmet in during the current period compared five purchase order in the prior period. In addition, the Company also recognized usage fees of$4,000 during the prior period compared to$17,000 during the current period. Cost of Revenue
During the six months ended
Operating Expenses
Operating expenses for the three months ended
Research and development (R&D) expenses for the six months endedDecember 31, 2022 and 2021 were$0 and$2,000 , respectively. R&D expenses remained relatively low as we continued to rely on Desmet and for support in R&D and development of new applications for our technology. It is our intention to pursue R&D as our cash position permits. Other income (expense)
Other income (expense) for the six months endedDecember 31, 2022 and 2021, amounted to$(32,000) and$101,000 , respectively. The decrease in other income (expense) of$(132,000) was the result of a$29,000 loss from an equity method investment in 2022, offset by a gain on forgiveness of PPP note payable of$104,000 in 2021.
Liquidity and Capital Resource
During the six months endedDecember 31, 2022 the Company incurred a net loss of$372,000 and used cash from operations of$98,000 and had a working capital deficit of$373,000 as ofDecember 31, 2022 . These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company's independent registered public accounting firm, in its report on the Company'sJune 30, 2022 financial statements, has expressed substantial doubt about the Company's ability to continue as a going concern. As ofDecember 31, 2022 we had cash and cash equivalents on hand of$343,000 and are not generating sufficient revenues to fund operations. In addition, management believes we may require additional funds to continue to operate our business. Management's plan is to generate income from operations by continuing to license our technology globally through our strategic partners,Desmet Ballestra Group (Desmet),Enviro Watertek (EW) and Alchemy Beverages, Inc. (ABI). Pursuant to our contract with Desmet, Desmet has been providing us monthly advances of$40,000 throughOctober 1, 2024 to be applied against from future reactor sales. 20 We may also attempt to raise additional debt and/or equity financing to fund operations and provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company's needs, that the Company will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations. Cash Flow
Net cash used in operating activities during the six months endedDecember 31, 2022 amounted to$98,000 compared to net cash provided by operating activities of$131,000 for the same period in fiscal 2021. Funding for the operating activities was provided primarily by sales of our systems to Desmet, advances from distributor and cash reserve. Net cash used in investing activities during the six months endedDecember 31, 2022 and 2021 were$0 and$1,179,000 respectively. In 2021, the Company had a capital contribution from an investment in an unconsolidated joint venture.
Net cash provided by financing activities during the six months ended
Critical Accounting Policies Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in theU.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. Significant estimates are used for allowance for doubtful accounts, reserve for inventory obsolescence, impairment analysis for property and equipment, accrual of potential liabilities, valuation allowance for deferred tax assets, and assumption in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates. Revenue Recognition
The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606.
Revenue from the sale of the Company's Nano Reactors is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these contracts and we have no continuing obligation to the customer. The Company also recognized revenue from its share of gross profit to be earned from distributors, as defined, which we treated as variable consideration and recognized using the most likely amount method.
In addition, the Company also recognizes revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.
21
Recently Issued Accounting Standards
See Note 1 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards.
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