| Organization and Summary of Significant Accounting Policies | Note 1
- Organization and Summary of Significant Accounting Policies 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® Nano Neutralization® System Basis of Presentation The accompanying
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP")
as promulgated in the United States of America ("U.S.") and with instructions to Form 10-Q pursuant to the rules and
regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X
under the Exchange Act. Accordingly, these condensed consolidated financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered
necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended September
30, 2018 are not indicative of the results that may be expected for the fiscal year ending June 30, 2019. You should read these
unaudited condensed consolidated financial statements in conjunction with the audited financial statements and the notes thereto
included in the Company's annual report on Form 10-K for the year ended June 30, 2018 filed on October 15, 2018. The condensed
consolidated balance sheet as of June 30, 2018 has been derived from the audited financial statements included in the Form 10-K
for that year. Going Concern The accompanying
condensed 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. During the three months ended September
30, 2018, the Company incurred a net loss of $256,000 and used cash in operations of $284,000, and at September 30, 2018, had
a working capital deficiency of $891,000 and a stockholders' deficit of $801,000. 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, 2018 financial statements, has expressed substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include adjustments that may result from an inability of the
Company to continue as a going concern. As of September
30, 2018, we had cash and cash equivalents on hand of $661,000 and are not generating sufficient revenues to fund operations.
In addition to the funds on hand, 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), GEA Westfalia, AG (GEA), and recent agreements with Alchemy Beverages, Inc.(ABI). Desmet has provided
us monthly advances of $50,000 through August 2018 that was applied against gross profit share from reactor sales pursuant to
a January 2016 agreement. Our agreement with Desmet expired on October 1, 2018, however, Desmet and CTi are actively pursuing
to finalize a new three year term. We believe that a new license agreement with Desmet should be finalized during fiscal 2019.
GEA has agreed to provide us monthly advances of $25,000 less applicable taxes through January 2020, to be applied against gross
profit share from future sales pursuant to January 2017 agreement. In June 2018, we entered into two licensing agreements with
ABI and anticipate to start receiving certain royalties payments and revenue stream from ABI in fiscal 2019. 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. Principles of Consolidation The condensed
consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic
Technology, Inc. Inter-company 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. The three
levels of the fair value hierarchy are as follows:
· Level
1 - Valuations based on unadjusted quoted prices in active markets for identical assets
or liabilities that the entity has the ability to access.
· Level
2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices
in markets that are not active, or other inputs that are observable or can be corroborated
by observable data for substantially the full term of the assets or liabilities.
· Level
3 - Valuations based on inputs that are unobservable, supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. On September
30, 2018 and June 30, 2018, the fair values of cash and cash equivalents, accounts receivable, inventory and accounts payable
and accrued expenses approximate their carrying values due to their short-term nature. 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 reserve for inventory obsolescence, impairment analysis for fixed assets, accrual of potential liabilities,
deferred tax assets and valuing our stock options, warrants, and common stock issued for services, among other items. Actual results
could differ from these estimates. Revenue Recognition Revenues
from sale of reactors and the corresponding share in gross profit is recognized in accordance with ASC 606, Revenue from Contracts
with Customers and all the related amendments (“new revenue standard”) to all contracts. Sales revenue from the 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. Accordingly, the Company estimates and
recognizes the corresponding gross profit at the time of shipment of the Nano reactor hardware, subject to variable consideration
constraints, in accordance to ASC 606. Specifically,
the Company has determined that the gross profit to be earned from its distributor as a variable consideration that requires estimation
in determining the transaction price, and as such all or a portion can be recognized using the most likely amount approach (subject
to the variable consideration constraint). 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 the end customer and the lack of history of prior
sales, the Company considered these as a variable revenue constraint that required consideration and as such, the amount of revenue
recognized is being limited to the actual amount of cash received under the contract which the Company has determined as not refundable
and has concluded that future revenue reversal of such amount is not probable. 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 options and warrants grant 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. Earnings(
Loss) Per Share The Company’s
computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s
net income (loss) available to common stockholders by the weighted average number of common shares during the period. Shares of
restricted stock subject to vesting are included in basic weighted average common shares outstanding from the time they vest.
Diluted EPS 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 net income (loss) of the Company. In computing diluted EPS, 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 and there were no instruments
that would result in issuance of additional shares during the period. As of September
30, 2018, the Company had 11,000,000 stock options and 75,926,510 stock warrants outstanding to purchase shares of common stock
that were not included in the diluted net loss per common share because their effect would be anti-dilutive. Recent
Accounting Pronouncements In February
2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases Targeted Improvements In January
2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10) - Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities. 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. |
