We became a public company through a share exchange that was affected in October 2008. The first day of public trading of our stock was November 11, 2008. Since our fiscal year end was changed to June 30, public trading of our stock began in the second quarter of fiscal 2009. As of September 30, 2019,2022, there were approximately 1,1001,500 holders of record of our Common Stock. This does not reflect the number of persons or entities who hold stock in nominee or “street” name through various brokerage firms. The closing price of our common stock on October 4, 2019September 23, 2022 was 0.03.$0.04.

Dividend Policy

We have neither declared nor paid any dividends on our Common Stock in the preceding two fiscal years. We currently intend to retain future earnings, if any, to fund ongoing operations and finance the growth and development of our business and, therefore, do not anticipate declaring or paying cash dividends on our Common Stock for the foreseeable future. Any future decision to declare or pay dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deems relevant.

Securities Authorized for Issuance under Equity Compensation Plans

None.

Recent Sales of Equity Securities and Use of Proceeds

During the year ended June 30, 2019 the Company reissued 18,959,994 stock warrants at $.12. We did not sell anysold equity securities during the year ended June 30, 20182022 and 2021 as follows:

In July 2021, we issued 12,071,785 shares of common stock at a selling price of $0.065 per share and 12,071,785 of warrants, exercisable at $0.09 to various entities and individuals for net proceeds of $785,000. The shares were issued in transactions that were not registered underreliance on Section 4(2) of the Securities Act of 1933, as amended,amended. The shares were not offered via general solicitation to the public. No sales commissions or other than as previously disclosedremuneration was paid in our filingsconnection with this issuance. 

In June 2021, we issued 11,269,538 shares of common stock at a selling price of $0.065 per share and 11,269,538 of warrants, exercisable at $0.09 to various entities and individuals for net proceeds of $728,000. The shares were issued in reliance on Section 4(2) of the Securities and Exchange Commission.Act of 1933, as amended. The shares were not offered via general solicitation to the public. No sales commissions or other remuneration was paid in connection with this issuance.

Issuer Purchases of Equity Securities

None.

ITEM 6.   SELECTED FINANCIAL DATA

Not applicable for smaller reporting companies.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

We are a Nevada corporation originally incorporated under the name Bio Energy, Inc. On January 29, 2007, we incorporated a wholly owned subsidiary, Hydrodynamic Technology, Inc. as a California corporation.

We have developed, patented, and commercialized proprietary technology that can be used for processing of various industrial and consumer-oriented fluids. Our patentedNano Reactor®is the critical components ofthe CTi Nano Neutralization® System which has been shown to reduce operating costs and increase yields in processing oils and fats. CTi holds and applied for numerous patents covering technology and various processes in US and Internationally, covering vegetable and crude oil refining, processed and frac water treatment, algae oil extraction, and alcoholic beverage enhancement. During our Fiscal 2019,2022, we have developedcontinuously worked on developing additional technologies and products such as, LPN (lowrelated to low pressure nano reactor and system)(LPN™). LPN™ is designed to become a highly efficient mixer and homogenizer. We believe that LPN™ has a great commercial utilization opportunity by providing efficient and cost-effective solution in multiple fluid processing industries. LPN™ has a number of advantages over current mechanically operated mixers and homogenizers. Additionally,Industrial application of our miniature LPN has become an integral part of Barmuze®, consumer small home appliance device. In industrialtechnology in produced and frac water treatment system, LPN’sLPN™ along with our proprietary chemical formulations have depicted measurable and quantifiable advantages over industry standard processes and equipment. Additionally, our miniature low pressure nano reactor MLPN has become an integral part of Barmuze®, a small home appliance device for enhancing taste and extracting unwanted impurities typically present in alcoholic beverages.

During the year ended June 30, 2019,2022, we recorded revenue of $1,090,000 and loss from operations$1,665,000 and net loss of $724,000, respectively.$619,000, respectively.

Inflation and potential recession

We are, and our suppliers are experiencing significant broad-based inflation of manufacturing and distribution costs as well as transportation challenges, partially as a result of the pandemic. Although we do not believe that inflation has had a material effect on our business, financial condition or results of operations, it may in the future. We are monitoring cost structures and evaluating to what extent any such costs can be passed on to customers, taking into account the overall impact of increasing inflation and interest rate pressures on consumers. We expect input cost inflation to continue at least throughout 2022. If we are unable to successfully manage the effects of inflation, our business, operating results, cash flows and financial condition may be adversely affected. Additionally, there have been various economic indicators that the United States economy may be entering a recession in upcoming quarters. An economic recession could potentially impact the general business environment and the capital markets, which may have a material negative impact on our financial results.

Management’s Plan of Operation

We are continuously engaged in manufacturing of our Nano Reactor® andNano NeutralizationNeutralization® Systems which are designed to help refine vegetable oils such as soybean, canola and rapeseed. Additionally, we have developed LPN’sLPN™’s that provide commercial opportunity in industrial water treatment, andenhancement of alcoholic beverages, and MLPN being utilized in a consumer small home appliance. Our near-term goal is to develop strategic and marketing tools to accelerate sales cycles for our Nano Reactor® andNano Neutralization Systems, with an addition of LPN’s.

During the year ended June 30, 2019,2022, we incurred net loss of $723,000$619,000 and used cash in operationsoperating activities of $280,000. We also$484,000. As of June 30, 2022, we have a working capital deficiency of $894,000$30,000 and a stockholders’ deficitsurplus of $819,000 as of June 30, 2019. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.$1,110,000.

Management’s plan is to generate income from operations by licensing our technology globally through our licensees, Desmet Ballestra Group (Desmet), agreements with EnviroWaterTek and GEA Westfalia Group (GEA).Alchemy Beverages, Inc. In October 2018, we signed a three-year globalR and D, Marketing and Technology License Agreementwith Desmet for the sale and licensing of our reactors.Nano Reactor® and Nano Neutralization® Systems. This agreement is a continuation of the original agreement we signed with Desmet in May 2012. As part of the agreement, Desmet is also obligated to provide us with monthly advances of $50,000$40,000 to be applied against our share in gross profit from the sale of reactors. During the year ended June 30, 2019,2022, advances received from Desmet amounted to $550,000,$300,000 and together with previous period advances of which, $517,000 was$727,000, were recorded as revenues.revenues totaling $1,027,000. These funds service operational expenses on a monthly basis.

In January 2017, weOur agreement with Enviro WaterTek signed a three-year global R&D, Marketingin March of 2019, has generated sales of LPN™’s and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications. This agreement provides us with $25,000 monthly advances to be applied againstrecurring revenue stream in our sharefiscal 2022, resulting in gross profit from the saleaggregate revenue of reactors. This agreement may be terminated by either party on each anniversary date. During the year ended June 30, 2019, we received advances from GEA in the amount of $300,000 under this agreement. As of June 30, 2019, total advances received from GEA amounted to $727,000.$46,000

There was no revenue produced in relationship to our agreement with Alchemy Beverages, Inc.

In addition to these advances, we

We anticipate that we may need additional funding, and we may attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet our needs, or that we will be able to meet our future contractual obligations. Should management fail to obtain such financing, we may curtail its operations.

Critical Accounting Policies and Revenue Recognition

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those we consider most critical in preparing its consolidated financial statements. The following is a review of the accounting policies and estimates that include significant judgments made by management using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used instead.

Note 1 of the accompanying consolidated financial statements includes a summary of significant accounting policies, estimates, and methods used in the preparation of our financial statements. Accounting estimates are an integral part of the preparation of financial statements and are based on judgments by management using its knowledge and experience about the past and current events and assumptions regarding future events, all of which we consider to be reasonable. These judgments and estimates reflect the effects of matters that are inherently uncertain and that affect the carrying value of our assets and liabilities, the disclosure of contingent liabilities and reported amounts of expenses during the reporting period.

Revenue Recognition

Revenues from saleThe Company follows the guidance of reactors is recognized in accordance with ASC TopicAccounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“. ASC 606”). 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 the sale of our Nano ReactorsReactor® and LPN™ 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.

In addition, theThe Company also recognizes revenue from its share of gross profit as defined, to be earned from distributors. In accordance with ASC 606, the Company has determined that the gross profit to be earned from its distributor isdistributors, as defined, which we treat as variable consideration and evaluates the amount of the potential payments and the likelihood that the payments will be receivedrecognize using the most likely amount approach.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 Company considered these as variable revenue constraints, and as such, 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 probable that a significant future reversal of cumulative revenue reversal wouldunder 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.

Leases

The Company accounts for leases under guidance of Accounting Standards Codification (“ASC”) 842, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its office lease as a single lease component. Lease expense is recognized on a straight-line basis over the lease term.

Equity Method Investment

The Company accounts for investments in entities in which the Company has significant influence over the entity’s financial and operating policies, but does not control, using the equity method of accounting. The equity method investments are 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 equity method investment is allocated based on the Company’s economic interest. The Company assesses its investment in equity method investments for recoverability, and if it is determined that a loss in value of the investment is other than temporary, the Company writes down the investment to its fair value. The Company does not believe that the value of its equity method investment was impaired as of June 30, 2022.

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.

Recent Accounting Pronouncements

See Note 1 of the financial statements for discussion of recent accounting pronouncements.

Results of Operations

Below is summary comparing fiscal 20192022 and fiscal 2018.2021.

Revenue

During the year ended June 30, 20192022, revenue decreasedincreased by 16%$1,107,000 to $1,090,000$1,665,000 and it was derived primarily from the sales of our Nano Reactor® and CTi Nano Neutralization Systems to Desmet of $592,000 and share in gross profit of $1,027,000. In addition, the Company also recorded an aggregate revenue of $46,000 from the sale of LPN™ and water processing to Enviro Watertek, LLC.

During the year ended June 30, 2021, our revenue was $558,000 and it was derived from the sale of ourNano Reactor® and CTi Nano Neutralization Systems to Desmet Ballestraof $541,000, in theaddition, we recorded an aggregate revenue of $533,000 pursuant to seven purchase orders and corresponding share in gross profit in the aggregate of $517,000. In addition, the Company also recorded revenues of $40,000$17,000 from the sale of reactor systemLPN™ and water processing usage fee to a new customer, Enviro Watertek, LLC. During the year ended June 30, 2018, revenue of $1,303,000 was derived from the sale of ourCTi Nano Neutralization Systemsthrough Desmet Ballestra of $603,000 pursuant to eight purchase orders and corresponding share in gross profit of $700,000.

Operating Expenses

Operating expenses for fiscal 20192022 amounted to $1,744,000$1,923,000 versus $1,532,000$1,285,000 in fiscal 2018,2021, an increase of $212,000$638,000 or 14%50%. The increase in operating expenses was attributed to issuancean increase in advertising expenses of $95,000, an impairment charge of $178,000 on equipment, an increase in consulting fees of $99,000, an increase in legal fees of $54,000, non-cash stock warrantsbased compensation expense of $352,000, with major expense categories being salaries and payroll taxes of approximately $744,000, legal and professional fees of approximately $198,000, marketing services of $107,000. Research and development (R&D) expense was $17,000 and $21,000 for servicesthe fiscal years ended June 30, 2022 and 2021.

Operating expenses for fiscal 2021 amounted to $1,285,000 versus $1,487,000 in fiscal 20192020, a decrease of $195,000 or 14%. The decrease in operating expenses was attributed to lower legal fees, office and stock compensation expense compared to fiscal 2020, and amendment of certain stock warrants issued in prior period which resulted in stock compensation expense in the aggregate of $449,000. Otherperiod. Non-cash expense items such as amortization and depreciation expense of $26,000,$18,000, primarily amounted to a small proportion of operating expenses, with major expense categories being salaries and payroll taxes of approximately $699,000,$629,000, legal and professional fees of approximately $97,000, $167,000$126,000, for travel, insurance and marketing services combined.combined $156,000. Research and development (R&D) expense was $25,000 and$21,000 compared to $18,000 the same foras in the year ended June 30, 2019.2020.

Operating expenses for fiscal 2018 amounted to $1,532,000. Non-cash expense items such as amortization and depreciation expense of $50,000 among others, amounted to a small proportion of operating expenses, with major expense categories being salaries and payroll taxes of approximately $643,000, legal and professional fees of approximately $208,000, various insurance policies, travel and marketing services amounting to $185,000.

Net Loss

Gain on settlementOur reporting net loss in fiscal 2022 was $619,000 compared to $649,000 in fiscal 2021.

Liquidity and Capital Resources

Our cash balance at June 30, 2022 was $441,000, a decrease of accrued payroll$922,000 compared to $1,363,000 at June 30, 2021.

For the year ended June 30, 2022 cash used in operating activities was $484,000, cash used in investing activities was $1,223,000, and cash generated from financing activities was $785,000.

For the year ended June 30, 2021 cash provided by operating activities was $250,000, cash used in investing activities was $128,000, and cash provided by financing activities was $982,000.

Going concern

During the year ended June 30, 2018, accrued salary of $131,000 due to2022, we incurred a former director was settled for a payment of $30,000, resulting in a gain on settlement of $101,000. There was no such transaction during the year ended June 30, 2019.

Net Loss

Our reported Net Loss in fiscal 2019 was $723,000 compared to Net Loss in fiscal 2018 of $250,000.

Liquidity and Capital Resources

Our cash balance at June 30, 2019 decreased to $649,000 as compared to $945,000 at June 30, 2018. The decrease was the result of $280,000 in cash used in operating activities and $16,000 of cash used in investing activities. Net cash used in operations during the year ended June 30, 2019 was $280,000 compared with $396,000 of cash provided by operations during the same period of the prior year. Cash used in operations during the year ended June 30, 2019 was primarily to fund our net loss of $723,000, offset by an increase in stock-based compensation expense of $449,000 and depreciation of $41,000, and a net decrease to our working capital accounts of $47,000.

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern. During the year ended June 30, 2019, we recorded net loss of $723,000$619,000 and used cash in operationsoperating activities of $280,000. As of June 30, 2019, we had a working capital deficiency of $894,000, and stockholders’ deficit of $819,000. We have also been dependent on certain aspects of our funding from technology agreements with our distributors.$484,000. These factors, among others, raise substantial doubt about our 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 our June 30, 20192022 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable to continue as a going concern.

Management’s plan is to generate income from operations by continuing to license its technology globally. Currently,Additionally, we have a R&D, Marketinganticipate generating revenues from our agreements with EW and Technology License agreement with Desmet signed in October 2018, in which Desmet provides advances to the Company of $50,000 per month through October 2021 be applied to future gross profit revenues. In addition, we have a R&D, Marketing and Technology License agreement with GEA signed in January 2017, in which GEA provides advances to the Company of $25,000 per month through January 2020 to be applied to future sales. At June 30, 2018, advances from Desmet and GEA totaled $427,000. During the year ended June 30, 2019, the Company received advances of $850,000, of which $517,000 was recorded as revenues. As of June 30, 2019, advances from Desmet and GEA totaled $760,000.ABI.

We may also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing will be available in the future or obtained in sufficient amounts necessary to meet our needs, that we will be able to achieve profitable operations or that we will be able to meet our future contractual obligations. Should management fail to obtain such financing, we may curtail its operations.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 7A.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable for Smaller Reporting Companies.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Cavitation Technologies, Inc.

Los Angeles, CA

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Cavitation Technologies, Inc. and subsidiaries (the “Company”) as of June 30, 20192022 and 2018,2021, the related consolidated statements of operations, changes in stockholders’ deficit,equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 20192022 and 2018,2021, and the consolidated results of itstheir operations and itstheir cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, to the consolidated financial statements, the Company has sufferedincurred recurring operating losses and at June 30, 2019, has a working capital deficit.used cash in operations since inception. These conditionsmatters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the consolidated financial statements. TheThese consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.  The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinion on the critical audit matters or on the accounts or disclosures to which they relates.

Estimation of variable consideration

As described in Notes 1 and 2 to the consolidated financial statements, the Company receives a share of the gross profit earned by one of its distributors upon such distributors sale of products which include the Company's Nano Reactor® and CTi Nano Neutralization® System products. The Company's performance obligation related to the sale of its products is completed upon the shipment of the products to the distributor. Accordingly, at such time, the expected future share of gross profit to be earned from distributors is treated as variable consideration and recognized as revenue using the most likely amount method, subject to variable consideration constraints.

We identified management’s estimation and valuation of variable consideration as a critical audit matter because of the significant judgement by management in estimating the Company’s share of gross profit to be earned from distributors and the high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating the reasonableness of the significant assumptions used in developing the estimate.

Our primary audit procedures related to the estimation of variable consideration included the following, among others:

Accounting for Equity Method Investment

As described in Note 3 to the consolidated financial statements, in 2019, the Company and Delaware Water Company (Delaware) formed a limited liability company called Enviro WaterTek (“Enviro”) owned 50% by the Company and 50% by Delaware. In September 2021, the Company and Delaware entered into a separate agreement under Enviro for a specific project (referred to as “Ameredev”). Under the separate agreement, the Company contributed $1.2 million, and receives usage fees from Ameredev, as defined, with the balance of net income (loss) from Ameredev allocated 70% to Delaware and 30% to the Company. The Company accounts for its investment in Enviro Ameredev using the equity method of accounting based on its determination that it does not hold an absolute controlling financial interest but has the ability to exercise significant influence over the operating and financial policies of Enviro Ameredev.

We identified the accounting for the equity method investment as a critical audit matter because of the significance of the equity method investment to the Company’s financial statements, and the judgments made by management when assessing the results of the operations of the equity method investment. This required an increased extent of effort, and the high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating the reasonableness of managements assumptions used for recording the equity method investment.

Our primary audit procedures related to the accounting for equity method investment included the following, among others:

We have served as the Company’s auditor since 20132013.

572

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

See accompanying notes to the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

YEARS ENDED JUNE 30, 2022 AND 2021

See accompanying notes which are an integral part of theseto the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONSCASH FLOWS 

See accompanying notes which are an integral part of theseto the consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

YEARS ENDED JUNE 30, 2019 AND 2018

See accompanying notes, which are an integral part of these consolidated financial statements

CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes, which are an integral part of these consolidated financial statements

CAVITATION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 20192022 AND 20182021

Note 1 – Organization and Summary of Significant Accounting Policies

Cavitation Technologies, Inc. (referred to herein, unless otherwise indicated, as “the(“the Company,” “CTi,” “we,” “us,” and “our”) is a Nevada corporation originally incorporated in January 2007 under the name Bio Energy, Inc. CTiThe Company has developed, patented, and commercialized proprietary technology that may be used in liquid processing applications. CTi’s patentedour Nano Reactor® is the critical component of CTiNano Neutralization® System which has commercially been shown to reduce operating costs and increase yields in refining vegetable oils.

We have commercialized ourCTi Nano Neutralization® SystemLPN™ in the refining process of certain vegetable oils which has proven to reduce costs and increase yields for our customers. In addition,we have four US and one international patented systems, as well as twelve US approved patents for various processes, and have filed another seven US and international patents to employ our proprietary technology in applications including vegetable and oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.liquid processing applications.

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company ason a going concern. Duringconcern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in accompanying consolidated financial statements, during the year ended June 30, 2019,2022, the Company incurred a net loss of $723,000 had a working capital deficit$619,000 and used cash in operating activities of $894,000. The Company has also been dependent on certain aspects of its funding from technology and license agreements with its distributors, Desmet Ballestra (Desmet) and GEA Westfalia (GEA)$484,000. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements do not include any adjustments that may result from an inability of the Company to continue as a going concern.

Management’sAs of June 30, 2022, the Company has cash in the amount of $441,000. The Company’s ability to continue as a going concern is dependent upon its ability to continue to implement its business plan. Currently, management’s plan is to generate income from operationsincrease revenues by continuing to license its technology globally. Currently, we have a R&D Marketing and Technology License agreement with Desmet that was signed in October 2018, in which Desmet provides advances toWhile the Company believes in the viability of $50,000 through October 2021its strategy to increase revenues, there can be appliedno assurances to future gross profit revenues. In addition, we have a R&D, Marketing and Technology License Agreement with GEA signed in January 2017, in which, GEA provides advances to the Company of $25,000 per month through January 2020 to be applied to future sales. At June 30, 2018, advances from Desmet and GEA totaled $427,000. During the year ended June 30, 2019, the Company received advances of $850,000, of which, $517,000 was recorded as revenues. As of June 30, 2019, advances from Desmet and GEA totaled $760,000.that effect.

The Company may also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing will be available in the future 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.

Covid-19

During the year ended June 30, 2022, the COVID-19 pandemic did not have a material net impact on our operating results. The Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company’s business or results of operations, financial condition, or liquidity.

As of June 30, 2022, the Company has been following the recommendations of local health authorities to minimize exposure risk for its employees, including having employees work remotely and utilizing electronic submission of invoices and payments.

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.

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 include estimates for reserves for inventory obsolescence, valuation of our equity method investments, assumptions used in valuing our stock options, stock warrants and common stock issued for services and valuation allowance for our deferred tax asset, among other items. Actual results could differ from these estimates.

Revenue Recognition

Revenues from saleThe Company follows the guidance of reactors and the corresponding share in gross profit is recognized in accordance with ASC TopicFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers.Customers (“ASC 606”). 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.

In addition, the The Company also recognizes revenue from its share of gross profit as defined, to be earned from distributors. In accordance with ASC 606, the Company has determined that the gross profit to be earned from its distributordistributors, as adefined, which we treat as variable consideration that requires estimation in determining the transaction price, and as such all or a portion can be recognizedrecognize using the most likely amount approach.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 Company considered these as a variable revenue constraint that required consideration and as such, 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 probable that a significant future reversal of cumulative revenue reversal wouldunder 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.

Cash and Cash Equivalents

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.At June 30, 2022 and 2021, the Company had no cash equivalents.

The Company maintains its cash with one domestic financial institution. From time to time, cash balances 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, 2019,2022, and 2018,2021, Company had deposits in excess of federally insured limit 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.

Accounts Receivable

Accounts receivable are generally recorded at the invoiced amounts net of an allowance for expected losses. The Company evaluates the collectability of our trade accounts receivable based on a number of factors. In circumstances where it becomes aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount that management believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of past due trade accounts receivable outstanding. At June 30, 2022 and 2021, the Company had no reserve recorded for uncollectible accounts receivable.

Accounts receivable as of June 30, 2019 were $240,000 and were subsequently collected in full in July 2019. There was no account receivable outstanding as of June 30, 2018.

Inventory

Inventory is stated at the lower of cost or market.net realizable value. Cost is determined on a specific item basis. Inventory is composed of finished goods and represents costs incurred to manufacture the Company’sNano Reactor®systems. There was no recorded allowance for excess quantitiessystems and obsolescence as of June 30, 2019 and 2018.LPN™.

Property and Equipment

Property and equipment is presentedstated at cost less accumulated depreciation.cost. 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.

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, 2019 and 2018, the Company did not recognize any impairment for its property and equipment.

Equity Method Investment

The Company accounts for investments in entities in which the Company has significant influence over the entity’s financial and operating policies, but does not control, using the equity method of accounting. The equity method investments are 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 equity method investment is allocated based on the Company’s economic interest. Equity method investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If it is determined that a loss in value of the equity method investment is other than temporary, an impairment loss is measured based on the excess of the carrying amount of an investment over its estimated fair value. Impairment analyses are based on current plans, intended holding periods, and available information at the time the analysis is prepared. The Company does not believe that the value of its equity method investment was impaired as of June 30, 2022.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

Leases

The Company accounts for its leases in accordance with the guidance of FASB ASC 842, Leases. The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments (see Note 3).

Fair Value Measurement

FASB Accounting Standards Codification (“ASC”)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, 2019,2022, and 2018,2021, the carrying value of certain accounts such as accounts receivable, inventory, accounts payable, accrued expenses and accrued payroll approximates their fair value due to the short-term nature of such instruments.

Share-Based Compensation

The CompanyWe periodically issuesissue stock options, warrants and warrantscommon stock to employees and non-employees in non-capital raising transactions for services and capital raising transactions. We account for financing costs. The Company accountsshare-based payments under the guidance of FASB ASC 718, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options, based on estimated fair values. We estimate the fair value of stock option and warrant grants issued and vestingawards to employees basedand directors on the authoritative guidance provided by the Financial Accounting Standards Board whereasdate of grant using an option-pricing model, and the value of the portion of the award that is measuredultimately expected to vest is recognized as expense over the required service period in our Statements of Operations. We estimate the fair value of restricted stock awards to employees and directors using the market price of our common stock 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 compensationportion of the award that is based upon the measurement dateultimately expected to vest is recognized 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 amortizedexpense over the vestingrequired service 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-basedin our Statements of Operations. Recognition of compensation chargeexpense for non-employees is recorded in the same period ofand manner as if the measurement date.Company had paid cash for the services.

TheUnder ASC 718, the amount of cash or other assets transferred (or liabilities incurred) to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the Company’s common stock option and warrant grants is estimated usingequity instruments repurchased at the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected liferepurchase date. Any excess of the options and warrants, and future dividends. Compensation expense is recorded based uponrepurchase price over the fair value derived fromof the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affectinstruments repurchased shall be recognized as additional compensation expense recorded in future periods.cost.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

Advertising Costs

Advertising costs, including marketing expense, incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $16,000$106,000 and $23,000$12,000 for the years ended June 30, 20192022 and 20182021 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, 20192022 and 20182021 amounted to $25,000$17,000 and $25,000,$21,000, 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, 20192022 and 2018.2021.

Net Loss(Loss) Per Share

The Company’s computation of loss 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 arewere 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 loss per common share.