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 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) and Enviro Watertek, LLC (EW) and
Alchemy Beverages, Inc (ABI). Desmet have been providing monthly advances of
$40,000 to be applied against future sales of reactors to Desmet. 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.



Inflation



Global inflation also increased during 2021 and in 2022. The Russia and Ukraine
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.







  16






Results of Operations

Results of Operations for the Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

The following is a comparison of our results of operations for the three months ended September 30, 2022 and 2021.





                                         For the Three Months Ended
                                               September 30,
                                           2022               2021          $ Change       % Change

Revenue                               $      244,000       $   551,000     $ (307,000 )           (56 )%
Revenue from related party                    17,000                 -         17,000            (100 )%
Total revenues                               261,000           551,000       (209,000 )           (53 )%
Cost of revenue                              (50,000 )         (23,000 )      (27,000 )          117%
Gross profit                                 211,000           528,000       (317,000 )           (60 )%


General and administrative expenses          265,000           306,000        (41,000 )           (13 )%
Income (loss) from operations                (54,000 )         222,000       (276,000 )          (124 )%
Loss from equity method investment           (18,000 )               -        (18,000 )          (100 )%
Gain on forgiveness of note payable                -           104,000     

 (104,000 )          (100 )%
Interest expense                              (1,000 )           2,000          1,000             (50 )%
Net income (loss)                     $      (73,000 )     $   324,000     $ (397,000 )          (123 )%




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 three months ended September 30, 2022 we recorded $262,000 in revenue
compared to $551,000 for months ended September 30, 2021. Revenues decreased
since the Company did not receive as many orders from Desmet, offset by sale of
reactors to the equity method investment.



Cost of Revenue



During the three months ended September 30, 2022 and 2021, our cost of sales
amounted to $50,000 and $23,000 respectively 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, 2022 amounted to
$265,000 compared with $306,000 for the same period in 2021, a decrease of
$41,000 or 13%. Decrease in general and administrative expense due to decrease
in professional expenses and payroll.



During the three months ended September 30, 2022 the Company recognized loss
from equity method investment of $(18,000) compared to $102,000 for the three
months ended September 30, 2021. The other income for the three months ended
September 30, 2021 was primarily made up of forgiveness of the PPP note payable
of 104,000.





  17

Liquidity and Capital Resource


During the three months ended September 30, 2022 the Company incurred a net loss
of $73,000 and used cash from operations of $74,000 and had a working capital
deficit of $85,000 as of September 30, 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's June 30, 2022 financial statements, has expressed
substantial doubt about the Company's ability to continue as a going concern.



As of September 30, 2022 we had cash and cash equivalents on hand of $367,000
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 through October 1, 2024 to be applied against from
future reactor sales.



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 three months ended September
30, 2022 amounted to $74,000 compared to net cash used in operating activities
of $16,000 for the same period in fiscal 2021.

Funding for the operating activities was provided primarily by sales of our systems to and advances received from Desmet.

Net cash used in investing activities during the three months ended September 30, 2022 and 2021 were $0 and $250,00 respectively. In 2021, the Company purchased $250,000 of equipment.

Net cash provided by financing activities during the three months ended September 30, 2022 and 2021 were $0 and $785,000, respectively. In 2021, the Company received proceeds from the sale of common stock with warrants.





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, valuation and impairment analysis for equity
method investment, 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.





  18






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.

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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