CAVITATION TECHNOLOGIES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with our
financial statements and the related notes. This discussion contains
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as its plans, objectives, expectations and intentions.
Its actual results and the timing of certain events could differ materially from
those anticipated in these forward-looking statements.
Overview of our Business
Cavitation Technologies, Inc. ("CTi"), a Nevada corporation, was originally
incorporated under the name Bio Energy, Inc. We design and engineer
environmentally friendly technology based systems that are designed to serve
large, growing, global markets such as vegetable oil refining, renewable fuels,
water treatment, algae oil extraction, biodiesel production, water-oil emulsions
and crude oil yield enhancement. Our systems are designed to process industrial
liquids at a lower cost and higher yield than conventional technology. We are a
process and product development firm that has developed, patented, and
commercialized proprietary technology.
CTi has developed, patented, and commercialized proprietary technology that can
be used for processing of industrial fluids. CTi's patented Nano Reactor® is the
critical components of the CTi Nano Neutralization® System which is commercially
proven to reduce operating costs and increase yields in processing oils and
fats. CTi has two issued patents relating to our Nano Reactor® systems and has
filed several national and international patents to employ its proprietary
technology in applications including, vegetable oil refining, biodiesel
production, waste water treatment, algae oil extraction, and alcoholic beverage
enhancement.
During the nine months ended March 31, 2016, we recorded revenue of $725,666, net loss of $282,673 and used cash in operations of $686,557.
Management's Plan
We are engaged in merchandising our Neutralization System, which is designed to
help refine vegetable oils such as soybean, canola, sunflower and rapeseed. Our
near term goal is to continue to merchandise our systems through our partner,
Desmet Ballestra. During the nine months ended March 31, 2016, we recorded
revenues of $725,666 and incurred a net loss of $282,673. As of March 31, 2016,
we had a working capital deficiency of $1,520,958 and a stockholders' deficit of
$1,358,228. The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern.
As of March 31, 2016, we had cash and cash equivalents on hand of $730,443 and
are not generating sufficient funds to cover operations. In addition to the
funds on hand, Management believes we will require additional funds to continue
to operate our business. Management's plan is to generate income from operations
by continuing to license our technology globally through our strategic partner,
the Desmet Ballestra Group (Desmet). Desmet has agreed to provide us monthly
advances of $50,000 to be applied against future sales pursuant to a January of
2016 agreement. This new agreement replaces the agreement dated on May 12, 2012
that ended on May 12, 2015. During the nine months ended March 31, 2016, the
Company received $300,000 advances from Desmet.
In addition to these advances, we anticipate that we will need additional
funding, and we will attempt to raise additional debt and/or equity financing to
fund operations and to provide additional working capital. However, there is no
assurance that such agreement with Desmet will be successful and such financing
will be consummated or obtained in sufficient amounts necessary to meet our
needs, or that we will be able to meet our future contractual obligations.
Should management fail to obtain such financing, we may curtail operations. The
accompanying condensed consolidated financial statements do not include
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from our inability to continue as a going concern. As a result of the
aforementioned factors, our independent auditors, in their report on our audited
financial statements for the fiscal year ended June 30, 2015, expressed
substantial doubt about our ability to continue as a going concern.
14
Critical Accounting Policies
CTi's critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended June 30, 2015, and did not change for the nine months ended March 31, 2016.
Recent Accounting Pronouncements
Recent Accounting Pronouncements applicable to the Company are discussed in Note 2 to the Notes to the Financial Statements included elsewhere in this Form 10-Q.
Results of Operations
Results of Operations for the Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
The following is a comparison of our results of operations for the three months ended March 31, 2016 and 2015.
For the Quarter Ended
March 31,
2016 2015 $ Change % Change
Revenue $ 85,000 $ 333,662 $ (248,662 ) -74.5 %
Cost of revenue 19,446 52,038 (32,592 ) -62.6 %
Gross profit 65,554 281,624 (216,070 ) -76.7 %
General and administrative expenses 280,946 331,850 (50,904 ) -15.3 %
Research and development expenses 4,502 2,742 1,760 64.2 %
Total operating expenses 285,448 334,592 (49,144 ) -14.7 %
Loss from operations (219,894 ) (52,968 ) (166,926 ) 315.1 %
Interest expense and other - (2 ) 2 -100.0 %
Net loss $ (219,894 ) $ (52,970 ) $ (166,924 ) 315.1 %
Revenue
We recorded $85,000 in revenue in the third quarter of fiscal 2016, as opposed
to $333,662 in the same period of fiscal 2015, representing a decrease of 75%.
The decrease in revenue was attributed to a new agreement with distributor
signed in January of 2016 according to which the licensing portion of revenues
is unknown upon shipment as it was before and is recognized by the Company upon
final acceptance by the end user. In fiscal 2016, we shipped reactors to Desmet
customers in Japan, Canada and India. During the three months ended March 31,
2016, our cost of revenue amounted to $19,446, which was the result of the
revenue transactions described above, a reduction of 37% as compared to the cost
of revenue of $52,038 for the three months ended March 31, 2015.
Operating Expenses
General and administrative expenses for the three months ended March 31, 2016
amounted to $280,946 compared with $331,850 for the same period in fiscal 2015,
a decrease of $50,904, or 15%. In both periods, the major expense component was
salaried compensation. Another major expense item in the third quarter of fiscal
2015 was non-salaried compensation to consultants of $41,000, with such
compensation expense in third quarter of fiscal 2016 only amounting to $9,100.
In the third quarter of fiscal 2016, total salaried compensation amounted to
$103,053 or 37% of total operating expenses compared with $112,287 or 34% of
operating expenses in the third quarter of fiscal 2015.
During the third quarter of 2016, the other major components of general and
administrative expenses were professional service fees related to auditors,
accounting, and legal services which amounted to $33,019 or 11.5% of total
operating expenses, and various insurance premiums totaling $18,964. The same
expenses in the third quarter of fiscal 2015 amounted to $35,862 or 11% of total
operating expenses, and $24,058 respectively.
15
Research and development (R&D) expenses remained relatively low as we continued
to rely on Desmet Ballestra for support in R&D. It is our intention to pursue
R&D as our cash position permits.
Results of Operations for the Nine Months Ended March 31, 2016 Compared to the Nine Months Ended March 31, 2015
The following is a comparison of our results of operations for the nine months ended March 31, 2016 and 2015.
For the Nine Months Ended
March 31,
2016 2015 $ Change % Change
Revenue $ 725,666 $ 333,662 $ 392,004 117.5 %
Cost of revenue 85,737 52,038 33,699 64.8 %
Gross profit 639,929 281,624 358,305 127.2 %
General and administrative expenses 903,272 1,336,924 (433,652 ) -32.4 % Research and development expenses
19,330 16,746 2,584 15.4 %
Total operating expenses 922,602 1,353,670 (431,068 ) -31.8 %
Loss from operations (282,673 ) (1,072,046 ) 789,373 -73.6 %
Interest expense and other - (1,447 ) 1,447 -100.0 %
Net loss $ (282,673 ) $ (1,073,493 ) $ 790,820 -73.7 %
Revenue
We recorded $725,666 in revenue in the nine months ended March 31, 2016 which
consisted primarily of NANO Neutralization System reactor sold to Desmet
customers in United States, Canada, India and Japan. During the nine months
ended March 31, 2015, we recorded revenue of $333,662 which consisted primarily
of NANO Neutralization System reactor sold to Desmet customer in Mexico. The
increase in revenue amounted to $392,004 or 117.5%.
Cost of Revenue
During the nine months ended March 31, 2016, our cost of revenue increased by
$33,699 or 65% to $85,737, which was the result of the revenue transactions
described above. In the 3rd quarter of fiscal 2015 cost of revenue amounted
to
$52,038.
Operating Expenses
Operating expenses for the nine months ended March 31, 2016 amounted to $922,602
compared with $1,353,670 for the same period in 2015, a decrease of $431,068, or
32%. The decrease was attributable largely to a $433,652 decrease in General and
administrative expenses (G&A) (attributable mostly to costs of $272,598 relating
to the vesting of options and warrants issued for services recorded in the first
and second quarters of fiscal 2015 and some other non-cash charges).
The primary expenditures during the 3 quarters of fiscal 2016 were approximately
$115,587 for professional service fees such as auditors, attorneys, and SEC
related services, $36,501 in service and consulting fees, $72,842 in marketing
and travel expenses, $67,760 in insurance expenses and $334,653 in salaries and
salary related expenses. The primary expenditures during the first 3 quarters of
fiscal 2015 were $103,876 for professional service fees such as auditors,
attorneys, and SEC related services, $117,595 in consulting and service fees
excluding items relating to vested options and warrants, $74,374 in insurance
expenses, $346,847 in salaries and salary related expenses and $235,003 relating
to the vesting of options and warrants issued for services.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. During the nine months ended
March 31, 2016, we incurred a net loss of $282,673 and used cash in operations
of $686,557. As of March 31, 2016, we had a working capital deficiency of
$1,520,958 and a stockholders' deficit of $1,358,228. Furthermore, we have been
dependent on most of our funding from a technology agreement with a distributor.
These factors, among others, raise substantial doubt about our ability to
continue as a going concern. Our independent auditors, in their report on our
audited financial statements for the fiscal year ended June 30, 2015 expressed
substantial doubt about our ability to continue as a going concern. The
accompanying condensed consolidated financial statements do not include
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from an inability of us to continue as a going concern.
16
Management's plan is to generate income from operations by licensing our
technology globally through our strategic partner, Desmet Ballestra Group
(Desmet). Desmet had provided us monthly advances of $125,000 against future
sales through May of 2015. The agreement with Desmet expired in May 2015. We
have recently signed a new agreement with Desmet with the same terms as the
prior agreement except that the monthly advances will be changed to $50,000. We
will need additional funding, and we will attempt to raise additional debt
and/or equity financing to fund operations and to provide additional working
capital. However, there is no assurance that such financing will be consummated
or obtained in sufficient amounts necessary to meet the Company's needs, or that
the Company will be able to meet its future contractual obligations. Should
management fail to obtain such financing, the Company may curtail its
operations.
At March 31, 2016, we had cash on hand in the amount of $730,443 and is not
generating sufficient funds to cover operations. In addition to the funds on
hand, we will require additional funds to continue to operate our business. This
includes expenses we will incur in connection with costs to manufacture and ship
our products; costs to design and implement an effective system of internal
controls and disclosure controls and procedures; costs of maintaining our status
as a public company by filing periodic reports with the SEC and costs required
to protect our intellectual property. In addition, we have contractual
commitments for salaries to our executive officers. In light of our financial
commitments over the next several months and its liquidity constraints, we have
implemented cost reduction measures in all areas of operations. We intend to
review these measures on an ongoing basis and make additional decisions as
may
be required.
Cash Flow
Net cash used by operating activities during the nine months ended March 31,
2015 amounted to $71,901, compared to net cash used of $686,557 for the same
period in fiscal 2016. Funding for the operating activities was provided by
$300,000 in advances from our distributor in the first nine months of fiscal
2016 and from cash reserves. For the first nine months of fiscal 2016, we paid
approximately $335,000 in employees' compensation, approximately $229,000 in
fixed operating costs, $116,000 in professional services fees and $68,000 in
various insurance premiums. For the first three quarters of fiscal 2015, we paid
$346,847 in employees' compensation, $103,876 for professional service fees such
as auditors, attorneys, and SEC related services, $117,595 in consulting and
service fees, $74,374 in insurance expenses and about $430,000 in various
operating costs and other obligations.
For the period ended March 31, 2016, cash used in investing activities amounted to $61,565 due to purchase of property and equipment. There were no such activities in the fiscal 2015.
For the period ended March 31, 2015, financing activities provided a net cash of
$375,498 via common stock issuance. There were no such activities in the fiscal
2016.
Off-Balance Sheet Arrangements
During the nine months ended March 31, 2016, we did not have, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
Contractual Obligations
There have been no material changes to our contractual obligations during the
period covered by this report from those disclosed in our Annual Report on Form
10-K for the year ended June 30, 2015.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer
