| 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: 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,
2017, 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 and realization of our deferred tax asset, among other items. Actual results could differ from these estimates. Revenue Recognition Revenue from
the sale of the Company’s Nano Reactor® Systems The Company is
also entitled to a profit share from its distributor from the sale of the reactors to their customers. Pursuant to the May 2012
agreement with our distributor, the profit share was fixed and determinable at the time of shipment, and as such, recorded upon
shipment and acceptance of the reactors by the distributor. Pursuant to the January 2016 agreement with the Company’s distributor,
the profit share is not fixed at the time of delivery, and as such, revenue is recognized when the profit share is fixed and determinable,
which will generally be upon delivery and installation of the NANO Neutralization System 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, 2017 and 2016,
before adjustments for outstanding checks and deposits in transit, the Company had approximately $549,000 and $657,000, 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 the Company’s Nano Reactor®
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. 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 5 Years
Lab equipment 4 Years
Skid systems 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, 2017 and 2016,
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 During the year
ended June 30, 2017, the Company recognized patent amortization expense of $13,432. As of June 30, 2017, total capitalized patent
costs amounted to $129,363 and accumulated amortization of $126,459 or a net balance of $2,904. During the year
ended June 30, 2016, the Company recognized patent amortization expense of $20,830. As of June 30, 2016, total capitalized patent
costs amounted to $129,363 and accumulated amortization of $113,027 or a net balance of $16,336. At June 30, 2017,
future estimated patent amortization costs are as follows:
Year Ended
June 30, Amount
2018 2,904
Total $ 2,904 Impairment
of Intangible and Long-Lived Assets In accordance
with ASC 350-30, General Intangibles Other than Goodwill 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 options and warrants,
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 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 $30,996 and $45,241 for the years ended June 30, 2017 and 2016 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,
2017 and 2016 amounted to $27,105 and $29,371, 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, 2017 and 2016. Net Income (loss) Per Share The Company’s
computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income
available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income
per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared
in the income of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later.
In computing diluted income per share, the treasury stock method assumes that outstanding options and warrants are exercised and
the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a
dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds
the exercise price of the options and warrants. Potential common shares that have an anti-dilutive effect (i.e., those that increase
income per share or decrease loss per share) are excluded from the calculation of diluted EPS. The following
table sets forth the computation of basic and diluted income per common share.
June 30,
2017 2016
Net income (loss) $ (1,066,945 ) $ 432,780
Weighted average common shares – basic 195,053,401 193,997,906
Dilutive effect of outstanding stock options - 354,839
Weighted average shares – diluted 195,053,401 194,352,745
Net income (loss) per common share:
Basic and Diluted $ (0.00 ) $ 0.00 There were no
adjustments to net income (loss) required for purposes of computing diluted earnings per share. At June 30, 2017 and 2016, the
Company excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock,
from its calculation of its diluted earnings per share, as their effect would have been antidilutive.
June 30, 2017 June 30, 2016
Options 11,685,852 12,241,153
Warrants 75,926,510 64,326,510 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 In February 2016,
the FASB issued Accounting Standards Update No. 2016-02, Leases In July 2017,
the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity
(Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features;
(Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception ("ASU 2017-11"). ASU 2017-11 allows
companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is
considered indexed to the entity's own stock. As a result, financial instruments (or embedded conversion features) with down round
features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down
round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial
instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available
to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing
down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized
to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach.
The adoption of ASU 2017-11 is not expected to have any impact on the Company's financial statement presentation or 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 The Company’s
revenue is entirely dependent on Desmet Ballestra who is its exclusive distribution agent with regard to the CTi Nano Neutralization®
System |
