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.

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 $50,000. Our license agreement with Desmet has ended on October 1. 2021, however, we are finalizing a new three years license agreement and should announce it shortly. Additionally, we are working with ABI on expansion of our alcoholic beverages license agreement with a new strategic partner and anticipate to announce in November-December 2021. 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 2020 the World 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.











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Results of Operations

Results of Operations for the Three Months Ended September 30, 2021 and 2020





                                For the Three Months Ended
                                      September 30,
                                 2021                2020            $ Change         % Change

Revenue                     $      551,000       $     418,000     $    133,000               32%
Cost of revenue                    (23,000 )           (11,000 )         12,000              109%
Gross profit                       528,000             407,000          121,000               30%

General and
administrative expenses            306,000             310,000           (4,000 )             (1% )
Research and development
expenses                                 -               6,000           (6,000 )           (100% )
Total operating expenses           306,000             316,000          (10,000 )              3%
Other income, net                  102,000                   -          102,000              100%
Net income                  $      324,000       $      91,000     $    233,000              256%




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.

During the three months ended September 30, 2021, the Company recognized revenues of $551,000 from sale of reactors and the corresponding share in gross profit pursuant to two purchase orders received from Desmet.

During the three months ended September 30, 2020, the Company recognized revenues of $418,000 from sale of reactors and the corresponding share in gross profit pursuant to two purchase orders received from Desmet.





Cost of Revenue

During the three months ended September 30, 2021, our cost of sales amounted to $23,000, and to $11,000 during 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 September 30, 2021 amounted to $306,000 compared with $316,000 for the same period in 2020, a decrease of $10,000, or 3%. The slight decrease in operating expenses was primarily due to reduction in cost associated with R&D expenses.

Liquidity and Capital Resources

During the three months ended September 30, 2021, the Company used cash in operations of $16,000 and has not been generating sufficient revenues to fund its operations. 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, 2021 financial statements, has expressed substantial doubt about the Company's ability to continue as a going concern.











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As of September 30, 2021, we had cash and cash equivalents on hand of $1,882,000. 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 partner Desmet Ballestra Group (Desmet), and existing agreements with Alchemy Beverages, Inc. (ABI) and Enviro Watertek (EW).

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.

In March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially leading to an economic downturn. 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.





Cash Flow

Net cash used in operating activities during the three months ended September 30, 2021 amounted to $16,000 compared to net cash used in operating activities of $122,000 during the three months ended September 30, 2020.

Net cash used in investing activities during the three months ended September 30, 2021 amounted to $250,000 as a result of a deposit made for a purchase of an equipment compared to $75,000 for the period ended September 30,2020.

Net cash provided in financing activities during the three months ended September 30, 2021 amounted to $785,000 as a result of the sale of our common stock, compared to $150,000 as a result of a note payable obtained from the Small Business Association under its Economic Injury Disaster Loan (EIDL) assistance program.





Critical Accounting Policies



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 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.











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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 the end 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.

Recently Issued Accounting Standards

See Note 1 of the accompanying Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards.

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