CAVITATION TECHNOLOGIES, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

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 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 $40,000 in accordance with a license agreement with Desmet which has
been renewed on October 1, 2021. Additionally, we are working with ABI on
expansion of our alcoholic beverages license agreement with a new strategic
partner and anticipate to announce a new agreement in our March 2022. 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.


Operating results

Results of operations for the three months ended December 31, 2021compared to the three months ended December 31, 2020

Here is a comparison of our operating results for the three months ended December 31, 2021and 2020.


                                         For the Three Months Ended
                                                December 31,
                                          2021                2020          $ Change         % Change

Revenue                               $     113,000        $    72,000     $    41,000              57%
Cost of revenue                               3,000              2,000         (1,000)              50%
Gross profit                                110,000             70,000          40,000              57%
General and administrative expenses         546,000            283,000         263,000              93%
Research and development expenses             2,000              5,000          (3,000 )           (60% )
Total operating expenses                    548,000            288,000     
   260,000              90%
Interest expense                             (1,000 )            3,000           2,000            (67%)
Net loss                              $    (439,000 )      $  (221,000 )   $ (218,000)              99%








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Revenue


The Company generates revenue from the sale of the Nano Reactor® to customers/distributors as well as a share of the gross profit from the sale of these reactors by our distributors to their customers.



During the three months ended December 31, 2021, we recorded $109,000 in revenue
from sale of reactors to our distributor Desmet pursuant to three purchase
orders and usage fees of $4,000 from our investment in Ameredev, for a total of
$113,000.



During the three months ended December 31, 2020, we recorded $36,000 in revenue
from sale of reactors to our distributor Desmet pursuant to four purchase orders
and corresponding share in gross profit of 36,000 for a total of $72,000.



Cost of Revenue


During the three months ended December 31, 2021, our cost of sales amounted to
$3,000 and to $2,000 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 December 31, 2021 amounted to
$546,000 compared to $288,000 for the same period in 2020, an increase of
$206,000 or 72%. The increase is mainly explained by the stock compensation expense of
$119,000 and costs related to our expansion into produced water treatment.

Research and development (R&D) costs remain minimal and we intend to continue R&D as our cash position improves.


Interest Expense



During the three months ended December 31, 2021 and 2020, the Company recognized
interest expense of $1,000 and $3,000, respectively, pursuant to the terms of
our outstanding notes payable.



Results of operations for the six months ended December 31, 2021 Compared to the half-year ended December 31, 2020

Here is a comparison of our operating results for the six months ended December 31, 2021 and 2020.


                                         For the Six Months Ended
                                               December 31,
                                          2021              2020          $ Change         % Change

Revenue                               $     664,000      $   489,000     $   175,000              36%
Cost of revenue                              26,000           12,000          14,000             117%
Gross profit                                638,000          477,000         161,000              34%
General and administrative expenses         852,000          593,000         259,000              44%
Research and development expenses             2,000           11,000          (9,000 )            (82 )%
Total operating expenses                    854,000          604,000         250,000              41%
Gain on forgiveness of note payable         104,000                -       
 104,000             100%
Interest Expense                             (3,000  )         3,000               -                -
Net loss                              $    (115,000 )    $  (130,000 )   $    15,000             (12% )






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Revenue


The Company generates revenues from the sale of the Nano Reactor® to customers/distributors as well as a share of profits from water treatment.



During the six months ended December 31, 2021, we recorded $592,000 in revenue
from sale of reactors to our distributor Desmet pursuant to five purchase orders
and revenue from share in gross profit of $68,000 and usage fees of $4,000 from
our investment in Ameredev, for a total of $664,000.



During the six months ended December 31, 2020, the Company recognized revenues
of $277,000 from sale of reactors pursuant to three purchase orders and $212,000
from share in gross profit to Desmet for a total revenue of $489,000.



Cost of Revenue


In the six months ended December 31, 2021our cost of sales was
$26,000 and to $12,000 in the same period of the prior year, resulting from the revenue transactions described above.


Operating Expenses


Operating expenses for the six months ended December 31, 2021 amounted to
$852,000 compared to $593,000 for the same period in 2020, an increase of
$259,000 or 44%. The increase is mainly explained by the stock compensation expense of
$119,000 and costs related to our expansion into produced water treatment.

Research and development (R&D) costs have remained minimal and we intend to continue R&D as our cash position permits.


Other income (expense)


Other income increased following the cancellation of the Société de $104,000. There was no similar transaction during the previous period.

Liquidity and capital resources



During the six months ended December 31, 2021 the Company incurred a net loss of
$115,000 and a working capital deficit of $755,000. 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, 2021 financial statements, has expressed
substantial doubt about the Company's ability to continue as a going concern.



As of December 31, 2021, we had cash and cash equivalents on hand of $1,100,000
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). Desmet has been providing us monthly advances of $40,000 and our renewed
contract is 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.





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Cash Flow


Net cash generated by operating activities during the six months ended
December 31, 2021amounted to $131,000 compared to the net cash generated by operating activities of $108,000 for the same period of fiscal year 2020.

Net cash used in investing activities during the six months ended December 31,
2021 amounted to $1,179,000,000 as a result of an investment in a joint venture
compared to $125,000 for the same period ended in fiscal 2020.



Net cash provided in financing activities during the six months ended December
31, 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.


Significant 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.



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 theend
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.


Investment in an unconsolidated joint venture

The Company accounts for its investment in an unconsolidated joint venture under
the equity method of accounting as we exercise significant influence over, but
do not control, the joint venture. The investment in the unconsolidated joint
venture is initially recorded at cost, and subsequently increased for capital
contributions and allocations of net income, and decreased for capital
distributions and allocations of net loss. Equity in net income (loss) from the
unconsolidated joint venture is allocated based on our economic interest. We
assess our investment in unconsolidated joint venture for recoverability, and if
it is determined that a loss in value of the investment is other than temporary,
we write down the investment to its fair value. We do not believe that the value
of our equity investment was impaired as of December 31, 2021.



Recently issued accounting standards

See Note 1 to the condensed consolidated financial statements for a discussion of recently issued accounting standards.

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