UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
 
FORM 10-Q
 
(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

þ(Mark One)
Quarterly Report pursuant to Sectionþ
QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20082009
OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to
Commission File Number: 0-29901
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
 
¨Nevada20-4907818
(State or Other Jurisdiction of
Incorporation or Organization)
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934(I.R.S. Employer
Identification No.)
 
For the transition periodto10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of Principal Executive Offices)
 
Commission File Number 0-29901(818) 718-0905
(Registrant’s telephone number, including area code)
 
CAVITATION TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Nevada
Title of Each Class:
20-4907818
Name of Each Exchange on Which Registered:
(State or other jurisdiction of
incorporation or organization)
None
(IRS Employer Identification No.)
Over the Counter (Bulletin Board)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.001 par value
 
10019 Canoga AveIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o      No x

Chatsworth, California 91311Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
(Address of principal executive offices)

818-718-0905
(Issuer’s telephone number,
including area code)
(Former name, former address and former fiscal year, if changed since last report)
CheckIndicate by check mark whether the issuerregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days    YES  days.  Yes þ     No     NO  o¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.101 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o    Accelerated Filer o   Non-Accelerated Filer o     Smaller Reporting Company  x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    YES ¨Act).
 NO Yes þo     No x

On November 13, 2008,State the aggregate market value of the voting and non -voting common equity held by non-affiliates of the registrant by reference to the price at which the common equity was last sold, or of the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completely second fiscal quarter: $33,204,808 as of December 31, 2008 based on the closing price of $1.17 per share and 28,380,178 shares outstanding.  

The registrant had outstanding 28,030,17828,380,178 shares of Common Stock, which is the registrant’s only classpar value $0.001 per share, outstanding at December 31, 2008 and 111,315,348 shares of common equity.stock outstanding on November 15, 2009 after accounting for our 3 for 1 forward stock split which occurred October 12, 2009.  .

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.DOCUMENTS INCORPORATED BY REFERENCE:
None.

Large accelerated filer  o
Accelerated filer  o
Non accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  x
Transitional Small Business Disclosure Format (Check one):    Yes ¨    No þ

CAVITATION TECHNOLOGIES, INC.
 
Form 10-Q
For the Quarter Ended September 30, 2008
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
Balance Sheets as of September 30, 2008 (Unaudited) and June 30, 2008
4
Statements of Operations (Unaudited) for the quarter ended September 30, 2008 and 2007
5
Statements of Cash Flows (Unaudited) for the quarter ended September 30, 2008 and 2007
6
Notes to Financial Statements (Unaudited)
7
Item 2.
Management’s Discussion and Analysis or Plan of Operations
14
Item 3
Quantitative and Qualitative Disclosures About Market Risk
17
Item 4
Controls and Procedures
17
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
18
Item 2.
Unregistered Sales of Equity Securities and use of Proceeds
18
Item 3.
Defaults Upon Senior Securities
18
Item 4.
Submission of Matters to a Vote of Security Holders
18
Item 5.
Other Information
18
Item 6.
Exhibits and Reports
18
Signatures

2

Note Regarding Forward Looking Statements
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain statements relating to future results of Cavitation Technologies, Inc. (including certain projections and business trends) that are “forward-looking“forward-looking statements”. Our actual results may differ  materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to, without limitation, statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects”“expects” or “does“does not expect”, “is“is expected”, “anticipates”“anticipates” or “does“does not anticipate”, “plans”“plans”, “estimates”“estimates” or “intends”“intends”, or stating that certain actions, events or results “may”“may”, “could”“could”, “would”“would”, “might”“might” or “will”“will” be taken, occur or be achieved) are not statements of historical fact and may be “forward-looking“forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Company to be materially different from any future results or achievements of the Company expressed or implied by such forward-looking statements. Such factors include, among others, those set forth herein and those detailed from time to time in our other Securities and Exchange Commission (“(“SEC”) filings including those contained in our most recent Form 8-K. Specifically, this Form 10-Q should be read in conjunction with our recently filed Form 8-K, which provided Form 10 type disclosures are required under item 5.06 of Form 8-K.filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. There can be no assurance thatWe qualify all the Company will be able to raise sufficient capital to continue as a going concern.forward-looking statements contained in this quarterly report by the foregoing cautionary statements.

3

PART I – FINANCIALINFORMATION
 
ItemITEM 1.  Financial Statements.

CAVITATION TECHNOLOGIES, INC.

(a Development Stage Company)
Consolidated Balance Sheets

 (Unaudited)    
 
 September 30,
 
 June 30,
  September 30,  June 30, 
 
 2008
 
 2008
  2009  2009 
 
 (unaudited)
          
ASSETS
ASSETS
       
             
Current assets:             
Cash and cash equivalents $84,919 $310,929  $7,029  $5,038 
Prepaid expenses and other current assets  5,718  1,445   1,875   2,341 
Total current assets  90,637  312,374   8,904   7,379 
               
Property and equipment, net  24,175  25,306   80,234   62,753 
Other assets  9,500  9,500   9,500   9,500 
Total assets $124,312 $347,180  $98,638  $79,632 
              
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES AND STOCKHOLDERS' DEFICIT
        
               
Current liabilities:               
Accounts payable and accrued expenses $119,205 $56,706  $473,060  $382,615 
Deferred revenue  33,480   26,000 
Convertible notes payable, net of discounts  -   200,000 
Common stock subscription deposit  289,684   - 
Line of credit  636,917  627,856   -   636,917 
Loan payable  627,876   - 
Total current liabilities  756,122  684,562   1,424,100   1,245,532 
        
               
Commitments and contingencies               
               
Stockholders' deficit:               
Preferred stock, $0.001 par value, 10,000,000 million shares authorized, 1,000,000 shares issued and outstanding as of September 30, 2008 and June 30, 2008  1,000  1,000 
Common stock, $0.001 par value, 50,000,000 shares authorized, 26,065,000 issued and outstanding as of September 30, 2008 and June 30, 2008  26,065  26,065 
Preferred stock ,$0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding as of September 30, 2009 and June 30, 2009  111   111 
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 108,044,979 shares and 88,984,593 shares issued and outstanding as of September 30, 2009 and June 30, 2009, respectively  36,014   29,661 
Additional paid-in capital  2,559,244  2,365,214   7,207,432   4,148,926 
Deficit accumulated during the development stage  (3,218,119) (2,729,661)  (8,569,019)  (5,344,598)
Total stockholders' deficit  (631,810) (337,382)  (1,325,462)  (1,165,900)
Total liabilities and stockholders' deficit $124,312 $347,180  $98,638  $79,632 
See accompanying notes, which are an integral part of these financial statements

4

CAVITATION TECHNOLOGIES, INC.

(a Development Stage Company)
Statement
Consolidated Statements of Operations (Unaudited)

      
January 29, 2007,
 
      
Inception,
        January 29, 2007, 
 
Three Months Ended
 
Through
  Three Months Ended  Three Months Ended  
Inception,
Through
 
 
September 30,
 
September 30,
  September 30,  September 30,  September 30, 
 
2008
 
 2007
 
2008
  2009  2008  2009 
                 
General and administrative expenses $348,946 $21,388 $841,287  $3,077,874  $348,946  $5,664,617 
Research and development expenses  129,875  5,617  2,264,689   62,965   129,875   2,501,463 
Total operating expenses  478,821  27,005  3,105,976   3,140,839   478,821   8,166,080 
Loss from operations  (478,821) (27,005) (3,105,976)  (3,140,839)  (478,821)  (8,166,080)
Interest expense  (9,637) (14,946) (64,264)  (83,582)  (9,637)  (236,114)
Loss before income taxes  (488,458) (41,951) (3,170,240)  (3,224,421)  (488,458)  (8,402,194)
Income tax expense  -  -  -   -   -   - 
Net loss $(488,458)$(41,951)$(3,170,240) $(3,224,421) $(488,458) $(8,402,194)
                      
Net loss available to common shareholders per share:          
Net loss available to common stockholders per share:            
Basic and Diluted $(0.02)$(0.00)    $(0.03) $(0.01)    
                      
Weighted average shares outstanding:                      
Basic and Diluted  26,065,000  21,000,000      103,111,510   56,720,883     
See accompanying notes, which are an integral part of these financial statements

5

CAVITATION  TECHNOLOGIES, INC.

(a Development Stage Company)
Statements of Cash FlowsChanges In Stockholders' Deficit (Unaudited)

        
January 29, 2007,
 
        
Inception,
 
  
 Three Months Ended
 
Through
 
  
 September 30,
 
September 30,
 
  
 2008
 
 2007
 
2008
 
          
Operating activities:         
Net loss $(488,458)$(41,951)$(3,170,240)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization  1,131  786  6,537 
Common stock issued for services  -  -  1,844,390 
Stock option compensation  194,030  -  194,030 
Effect of changes in:          
Prepaid expenses and other current assets  (4,273) -  (5,718)
Deposits  -  -  (9,500)
Accounts payable and accrued expenses  62,499  2,306  119,215 
Net cash used in operating activities  (235,071) (38,859) (1,021,286)
           
Investing activities:          
Purchase of property and equipment  -  (5,146) (30,712)
Net cash used in investing activities  -  (5,146) (30,712)
           
Financing activities:          
Proceeds from line of credit borrowings  9,061  44,700  636,917 
Proceeds from sales of preferred stock  -  -  500,000 
Net cash provided by financing activities  9,061  44,700  1,136,917 
Net increase (decrease) in cash  (226,010) 695  84,919 
Cash, beginning of period  310,929  -  - 
Cash, end of period $84,919 $695 $84,919 
           
Supplemental disclosures of cash flow information:
          
Cash paid for interest $9,637 $11,226 $64,264 
Cash paid for income taxes $- $- $1,850 
Supplemental disclosure of non-cash investing and financing activities:
          
Dividend issued to preferred shareholders $- $- $47,879 

  Preferred Stock  Common Stock  
Additional
Paid-In
  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                      
Issuance of common stock for services on January 29, 2007, inception -  $ -   42,993,630  $14,331  $6,669  $-  $21,000 
Net loss                            (533,185)  (533,185)
                           
Balance at December 31, 2007  -  $-   42,993,630  $14,331  $6,669  $(533,185) $(512,185)
                             
Common stock sold for cash          2,047,314   682   499,318       500,000 
Common stock issued as payment for services          10,369,650   3,457   1,819,943       1,823,400 
Amortization of discount on convertible preferred stock                  47,879   (47,879)  - 
Net loss                                (2,148,597)  (2,148,597)
                             
Balance at June 30, 2008  -  $-   55,410,594  $18,470  $2,373,809  $(2,729,661) $(337,382)
                             
Preferred stock sold in connection with reverse merger for cash          2,149,560   717   124,283       125,000 
Preferred stock sold for cash  111,111   111           99,889       100,000 
Preferred stock - Beneficial Conversion Feature                  11,111   (11,111)  - 
Bio shares outstanding before reverse merger          27,840,534   9,280   (9,280)      - 
Common stock issued as payment for services          1,983,909   661   639,012       639,673 
Common stock sold for cash          1,599,996   533   299,467       300,000 
Warrants issued in connection with issuance of convertible debt                  49,245       49,245 
Amortization of discount on conversion of preferred stock                  107,835   (107,835)  - 
Warrants issued as payment for services                  146,043   -   146,043 
Stock option compensation                  307,512       307,512 
Net loss                                (2,495,991)  (2,495,991)
                             
Balance at June 30, 2009  111,111  $111   88,984,593  $29,661  $4,148,926  $(5,344,598) $(1,165,900)
                             
Common stock issued as payment for services          17,938,011   5,979   2,799,303       2,805,282 
Common stock issued for debt and accrued interest conversion          1,122,375   374   190,429       190,803 
Conversion feature on notes payable                  63,601       63,601 
Warrants issued as payment for services                  5,173       5,173 
Net loss                                (3,224,421)  (3,224,421)
                             
Balance at September 30, 2009  111,111  $111   108,044,979  $36,014  $7,207,432  $(8,569,019) $(1,325,462)
See accompanying notes, which are an integral part of these financial statements

6
CAVITATION TECHNOLOGIESY, INC.
(a Development Stage Company)
Statements of Cash Flows (Unaudited)
        January 29, 2007, 
        Inception, 
  Three Months Ended  Three Months Ended  
Through
September 30,
 
  September 2009  September 2008  2009 
          
Operating activities:         
Net loss $(3,224,421) $(488,458) $(8,402,194)
Adjustments to reconcile net loss to net cash            
used in operating activities:            
Depreciation and amortization  3,539   1,131   16,157 
Warrants issued in connection with convertible notes payable  -   -   49,245 
Common stock issued for services  2,805,282   -   5,289,699 
Stock option compensation  -   194,030   307,512 
Warrants issued for services  5,173   -   151,216 
Amortization of loan discount  63,601   -   63,601 
Effect of changes in:            
Prepaid expenses and other current assets  466   (4,273)  (1,876)
Deposits  -   -   (9,500)
Accounts payable and accrued expenses  101,248   62,499   483,521 
Deferred revenue  7,480   -   33,480 
Net cash used in operating activities  (237,632)  (235,071)  (2,019,139)
             
Investing activities:            
Purchase of Property and Equipment  (21,020)  -   (96,392)
Net investing activities  (21,020)  -   (96,392)
             
Financing activities:            
Proceeds from line of credit borrowings  -   9,061   636,917 
Payments on line of credit  (9,041)      (9,041)
Proceeds from sales of preferred stock  -   -   725,000 
Payments on convertible notes payable  (20,000)  -   (55,000)
Proceeds from convertible notes payable  -   -   235,000 
Proceeds from sale of common stock/subscription  289,684   -   589,684 
           - 
Net cash provided by financing activities  260,643   9,061   2,122,560 
             
Net increase (decrease) in cash  1,991   (226,010)  7,029 
Cash, beginning of period  5,038   310,929     
Cash, end of period $7,029  $84,919  $7,029 
             
Supplemental disclosures of cash flow information:            
Cash paid for interest $20,201  $9,637  $123,488 
Cash paid for income taxes  -   -   3,469 
             
Supplemental disclosure of non-cash investing and financing activities:             
Warrants issued in connection with preferred stock  $ -  $-  $155,714 
Beneficial conversion feature of preferred stock $-  $-  $11,111 
Conversion of preferred to common stock in reverse merger $-  $-  $625,000 
Proceeds from sales of preferred stock used to purchase shares of Bio  $ -  $-  $400,000 
Conversion of notes payable in to common stock  $ 190,803  $-  $190,803 
See accompanying notes, which are an integral part of these financial statements

CAVITATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBERSeptember 30, 20082009
 
1. Organization and BusinessNote 1 - Nature of Operations

Hydrodynamic Technology, Inc. dba Cavitation Technologies, Inc (“Hydro”, or the “Company”) was incorporated on January 29, 2007, in California. The Company has one officedesigns and engineers environmentally friendly NANO technology based systems that use our patents pending, multi-stage, continuous flow-through, hydrodynamic cavitation reactors that have commercial application in Chatsworth, California.industries such as vegetable oil refining, renewable fuels, water recycling and desalination, alcoholic beverage enhancement, and crude oil yield enhancement.

The Company is a development stage enterprise and is primarily engaged in the development of a bio-diesel fuel production system (Bioforce 9000 and the Reactor Skid). The initial result of the Company’s research and development will be the generation of products for our target market of United States and international bio-diesel producers. The Company’sOur success will depend in part on itsour ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others both in the United States and other countries. We have seven patent applications pending in the US and have applied for three international patents.  We intend to apply for new patents on a regular basis. Our patents pending apply to potential commercial applications in markets such as vegetable oil refining, renewable fuels production, waste water treatment, water–oil emulsions, crude oil yield enhancement, and alcoholic beverage enhancement. There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company.

2. Basis of Presentation

On October 24, 2008,We are a public company with stock traded on the Company effected a transactionOver the Counter Bulletin Board with Bio Energy, Inc., a non-operating shell company (“Bio”) (the “Transaction”)ticker symbol CVAT. Our stock is also traded on the Berlin Stock Exchange with symbol WTC-BER. Our only location is our headquarters in Chatsworth, California. We have four employees and have engaged approximately 40 consultants and independent contractors over the past two years.

From a legal perspective, Bio acquired Hydro. However from an accounting perspective, the Transaction is viewed as a recapitalizationNote 2 – Summary of Hydro accompanied by an issuance of stock by Hydro for the net assets of Bio. This is because Bio did not have operations immediately prior to the merger, and following the merger, Hydro is the operating company. Hydro's officers and directors will serve as the officers and directors of the new combined entity. Additionally, Hydro's stockholders will own over 80% of the outstanding shares of Bio after the completion of the transaction.Significant Accounting Policies

Given these circumstances, the Transaction is accounted for as a capital transaction rather than as a business combination. That is, the Transaction is equivalent to the issuanceBasis of stock by Hydro for the net assets of Bio, accompanied by a recapitalization. The accounting is identical to that resulting from a reverse acquisition. Because the Transaction is accounted for as a capital transaction,Presentation and it occurred prior to the filing of this Form 10-Q, these financial statements represent the financial condition and results of operations of Hydro.Going Concern

The accompanying unaudited financial statementsCompany is a development stage entity as of September 30, 2009 as defined by the Financial Accounting Standard Board Accounting Standard Codification (ASC) 915. Successful completion of the Company have been prepared in accordance with accounting principles generally accepted inCompany’s development programs and ultimately the United Statesattainment of America for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and Article 10 of Regulation S-X under the Exchange Act. Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentationprofitable operations are included herein. Operating results for the three month period September 30, 2008 are not indicative of the results that maybe expected for the fiscal year ending June 30, 2009. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Form 8-K for the period ended June 30, 2008.
Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. We use estimates in valuing our stock options, warrants and common stock issued for services,dependent on future events including, among other items.

7

3. Management’s Plan

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Historically, the Company has no revenue, has incurred significant losses, and has not demonstrated thethings, our ability to generate sufficient cash flows from operations to satisfy its liabilitiesaccess potential markets; secure financing; develop a customer base; attract, retain, and sustain operations.

motivate qualified personnel; and develop strategic alliances. The Company has no significant operating history and, from January 29, 2007 (inception), through September 30, 2008, has2009 generated a cumulative net loss of $3,170,240.$8,402,194. The Company also has negative cash flow from operations and a stockholders’ deficit. The accompanying financial statements for the three months ended September 30, 2008 have been prepared in conformity with generally accepted accounting principles, which contemplate continuation ofnegative net equity. To date the Company as a going concern.has been funded by private equity and debt. Although management believes that the company will be able to successfully fund its operations, there can be no assurance that the Company will be able to do so or that the company will ever operate profitably.

Management’s plan regarding this uncertainty is to raise additional debt and/or equity financing to fund future 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 the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the companyCompany may curtail its operations.

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.

3. Recent Accounting Standards

Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) change periodically. Changes in such standards may have an impact on the Company’s future financial position. The following are a summary of recent accounting developments.

In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No, 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation ofaccompanying unaudited consolidated financial statements for nongovernmental entities that are presentedof the Company have been prepared in conformityaccordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles inprinciples. In the United States. SFAS 162 will be effective 60 days following the SEC’s approval.opinion of management, all adjustments considered necessary for a fair presentation have been included. The Company does not expect that this statement will result in a change in current practice.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.  SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations for the three months ended September 30, 2009 and cash flows. SFAS No. 161 is effectiveSeptember 30, 2008 are not necessarily indicative of results to be expected for fiscal years beginningyear ending June 30, 2010. For further information, please refer to Notes to Consolidated Financial Statements - “Significant Accounting Policies” of the Company’s Form 10-K for the year ended June 30, 2009 as filed with the Securities and Exchange Commission (SEC) on or after November 15, 2008, with earlier adoption allowed. We do not anticipate thatSeptember 28, 2009 for a description of the adoptionCompany’s Basis of this accounting pronouncement willPresentation.
Principles of Consolidation
The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. All significant inter-company transactions and balances have a material effect on our financial statements.been eliminated through consolidation.

In February
1
Fair Value Measurement
Effective January 1, 2008, the FASB issued FASB Staff Position No. 157-2, Effective DateCompany adopted the provisions of FASB Statement No. 157, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.  Therefore, we will delay application of SFAS 157 to our nonfinancial assets and nonfinancial liabilities.  We do not anticipate that the delayed adoption of this accounting pronouncement will have a material effect on our financial statements.

In September 2006, the FASB issued SFAS No. 157, FairASC 820, “Fair Value MeasurementsMeasurements”. SFAS No.157ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with GAAP,generally accepted accounting principles and expands disclosures about fair value measurements. The provisionsimplementation of SFAS No. 157 are effective for the Company for fiscal years beginning January 29, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

8

In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.  SFAS No. 160 establishes accounting and reporting standards for the non--controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests, of which the Company currently has none.  All other requirements of SFAS No. 160 shall be applied prospectively.  SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company anticipates that SFAS No. 160 willthis standard did not have any significant impact on the Company’s consolidated financial statements.positions, results of operations, or cash flows. The carrying amounts of cash and cash equivalents, accounts payable and other accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of outstanding debt issued pursuant to credit agreements approximate fair value because interest rates over the term of these instruments approximate current market interest rates.

In December 2007,Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the FASB issued SFAS No. 141(revised 2007), Business Combinations, which revises current purchase accounting guidance in SFAS 141, Business Combinations. SFAS No. 141RUnited States of America (“U.S.”) requires mostmanagement to make estimates and assumptions that affect the reported amounts of assets acquired and liabilities, assumeddisclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our stock options, warrants, and common stock issued for services, among other items. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized when: an arrangement exists; delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectibility is reasonably assured. The Company recognizes revenues in accordance with ASC 605 Revenue Recognition.  During the first quarter of fiscal 2010, the Company received a business combinationdeposit of $7,480 from a customer relating to an order for our Bioforce 9000 NANO Reactor Skid System. Because this transaction has not yet been fully completed, this amount has been reflected in deferred revenue on the accompanying balance sheet as of September 30, 2009.
Cash
The Company considers all 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.
Property and Equipment
Property and equipment presented at cost, less accumulated depreciation and amortization. Depreciation and amortization are 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 and amortization 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
Stock-Based Compensation
Compensation costs related to stock options are determined in accordance with ASC 718, “Share-Based Payments”. Under this method, stock-based compensation cost is measured at theirthe grant date based on the fair values asvalue of the date of acquisition. SFAS No. 141R also modifies the initial measurementaward and subsequent remeasurement of contingent consideration and acquired contingencies, and requires that acquisition related costs beis recognized as expense as incurred rather than capitalized as partover the applicable vesting period of the coststock award using the straight-line method.
Income Taxes
The Company accounts for income taxes under the liability method which requires the recognition of deferred income tax assets and liabilities for the acquisition. SFAS No. 141R is effectiveexpected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for fiscalthe tax consequences in future years beginning after December 15, 2008of differences between the tax bases of assets and isliabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be applied prospectively to business combinations occurring after adoption.realized. The impactprovision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred income tax assets and liabilities.
Advertising costs
Advertising costs incurred in the normal course of SFAS No. 141R on the Company’s financial statements will depend on the nature and extent of the Company’s future acquisition activities.operations are expensed as incurred.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option of Financial AssetsResearch and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 did not have any significant impact on the Company’s financial statements.Development Costs

In September 2006,R&D expenses relate primarily to the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pensiondevelopment, design, and Other Postretirement Plans. FAS-158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcaretesting of preproduction prototypes and other postretirement plans in their financial statements. The provisions of SFAS No. 158models and are effective for the Companyexpensed as of the end of the fiscal year ending June 30, 2008. The adoption of SFAS No. 158 did not have any significant impact on the Company’s financial statements.incurred.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the United States Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future financial statements.

4.Note 3 -Net Loss per CommonPer Share – Basic and Diluted

The Company computes loss per common share using SFAS No. 128, ASC 260, Earnings Per Share. The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period.  The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive potential common shares were issued. As ofDiluted EPS uses the treasury stock method or the if-converted method, where applicable, to compute the potential dilution that would occur if stock-based awards and other commitments to issue common stock were exercised.
On September 30, 2008,2009, the Company had 660,000750,646 stock options and 200,0001,540,901 warrants outstanding to purchase common stock that were not included in the diluted net loss per common share due tobecause their effect would be anti-dilutive. In addition, the options and warrants being anti-dilutive. Additionally, thereCompany had 111,111 shares of Series A Preferred Stock outstanding, which are convertible into 375,000 shares of common stock. These items were no adjustments tonot included in the calculation of diluted net loss to determine net loss available to common stockholders. As such, the basic and diluted loss per common share equals the net loss, as reported, divided by the weighted average common shares outstanding for the respective periods.because their effect would be anti-dilutive.

5.
2
Note 4 - Property and equipmentEquipment

Property and equipment consisted of the following as of September 30, 20082009 (unaudited) and June 30, 2008.

2009.
9
  Sept 30,  June 30, 
  2009  2009 
         
Leasehold improvements $2,475  $2,475 
Furniture and fixtures  26,837   26,837 
Office equipment  1,400   1,400 
Equipment  65,680   44,660 
    Property and Equipment (gross)   96,392    75,372  
Less: accumulated depreciation  (16,158)  (12,619)
    Property and Equipment (net) $    80,234  $    62,753 

  
September 30,
 
 June 30,
 
  
2008
 
 2008
 
  
(unaudited)
    
       
Leasehold improvements $2,475 $2,475 
Furniture and fixtures  26,837  26,837 
Office equipment  1,400  1,400 
        
   30,712  30,712 
        
Less: accumulated depreciation  (6,537) (5,406)
        
  $24,175 $25,306 

Depreciation expense for the three months ended September 30, 20082009 and 20072008 amounted to $3,539 and $1,131 and $786, respectively.

6. Line of CreditNote 5 -Bank Loan

On February 2,7, 2007, the Company contracted a $700,000 revolving line of credit from National Bank of California. TheOn August 1, 2009, the revolving line of credit was replaced by a one-year variable rate loan which matures August 1, 2010.  This loan bears interest at Prime plus 1%, which was 6% (1% plus 5% prime rate) at+ 2.75% and will be repaid with equal monthly installments of $7,396 beginning September 30, 20081, 2009. A final payment of $599,322 is due August 1, 2010. This loan is secured by personal guarantees of the Company’s principals and June 30, 2008.assets. The balance outstanding under thisthe loan was $627,876 on September 30, 2009 and under the line of credit was $636,917 at September 30, 2008 and $627,856 aton June 30, 2008. The maturity date2009.
Note 6 - Convertible Notes Payable
Convertible Notes Payable
On August 17, 2009, $180,000 in convertible notes payable plus accrued interest were converted into 374,125 shares of this loan was July 2, 2008, but was extendedrestricted common stock (1,122,375 after 3 for 1 forward split effective October 12, 2009). Immediately prior to January 2, 2009. This linethe conversion, the Company changed the conversion rate to be equal to 75% of credit is personally guaranteed bythe average closing price of the Company’s principals, and secured bystock for the assets of10 days immediately preceding the Company.conversion request.

7. Stockholders’ Equity

Authorized sharesNote 7 – The Company is currently authorized under its Amended and Restated Certificate of Incorporation to issue two classes of stock, designated Common Stock and Preferred Stock. The total number of shares of Common Stock which this corporation shall have authority to issue is 50,000,000 shares. Total number of shares of Preferred Stock which this corporation shall have authority to issue is 10,000,000 shares, of which 4,000,000 shares are designated Series A Preferred Stock and 2,000,000 are designated as Series A-1 Preferred Stock. The remaining 4,000,000 wholly unissued shares of Preferred Stock may be issued from time to time in one or more series, with rights, preferences and privileges established by the Board of Directors. Each share of Common Stock and Preferred Stock, has a par valueOptions and Warrants
Common
On September 30, 2009, the Company had received $289,684 in deposits from individuals for the purpose of $.001.

Series A Preferredinvesting into common stock. The amount of $289,684 is reflected in Common Stock – As Subscription Deposit on the accompanying balance sheet as of September 30, 2008, the Company had not issued shares of its Series A Preferred Stock.
Series A-1 Preferred Stock – As of September 30, 2008, the Company issued 200,000 units comprised of five shares of its Series A-1 Preferred Stock and one warrant to purchase one share of common stock at $0.75 per share2009. During October 2009, this amount plus an additional $50,216 for a total consideration of $500,000.$339,900 was converted to 680,000 shares of restricted common stock.
 
Conversion Rights – Shares of Series A and A-1 Preferred Stock are convertible, at the option of the holder thereof, at any time into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Issuance Price by the Conversion Price in effect at the time of conversion. The Issuance Price for the Series A Preferred Stock shall be $2.00 and the Issuance Price for the Series A-1 Preferred Stock shall be $0.50. The Conversion Price for the Series A Preferred Stock shall initially be $2.00, and the Conversion Price for the Series A-1 Preferred Stock shall initially be $0.50. The number of shares of Common Stock into which a share of Series A Preferred Stock or Series A-1 Preferred Stock is convertible is hereinafter referred to as the “Conversion Rate” of the Series A Preferred Stock or Series A-1 Preferred Stock, as the case may be.
 
Dividends – The holders of the Series A Preferred Stock and Series A-1 Preferred Stock shall beare entitled to receive , out of any funds legally available, therefore, dividends at the rate of $0.12 and $0.05 per share6% per annum, respectively, payable on September 30 and March 30. Dividends shall accrue and be cumulative whether or not they have been declared. Dividends may be paid in preference to any paymentcash or through the issuance of any dividend on Common Stock. After payment of such dividends, any additional dividends declared shall be payable entirely to the holders of Common Stock. The right of the holdersshares of Series A Preferred Stock at the Company’s option. For the first quarter ending September 30, 2009, accrued dividends of $1,500 were recognized as interest expense.
Stock Options

There were 750,646 stock options outstanding June 30, 2009 before consideration of the 3 for 1 forward stock split which occurred October 12, 2009.  There were no options issued during the first quarter of fiscal 2010.  For details on Stock Options, please refer to receive dividends shall be cumulative,our 10-K submitted September 28, 2009.

Warrants

A summary of the Company’s warrant activity and shall accrue to holdersrelated information for the quarter ended September 30, 2009 and the year ended June 30, 2009 before consideration of Series A Preferred Stock if such dividends are not paid in any prior year.the 3 for 1 forward stock split which occurred October 12, 2009.

 Warrants  Weighted Average Exercise Price 
 Sept 30, 2009  
June 30, 2009
  Sept, 30, 2009  June 30, 2009 
Outstanding, beginning of qtr/year 1,510,901   136,480  $1.32  $1.10 
Granted 30,000   1,374,421  $1.25   1.34 
Exercised —   —   —   — 
Forfeited —   —   —   — 
Expired —   —   —   — 
Outstanding — end of qtr/yr. 1,540,901   1,510,901  $1.32   1.32 
 Exercisable at end of qtr/yr. 1,540,901   1,510,901  $1.32  $1.32 
Weighted average fair value of    warrants granted during the qtr/yr.:$0.17  $0.24         
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Liquidation Preference – In the event of any liquidation, dissolution or winding up of the corporation, either voluntary or involuntary, the holders of Series A Preferred Stock and Series A-1 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of Common Stock by reason of their ownership thereof, the amount of $.50 per share for each share of Series A Preferred Stock and Series A-1 Preferred Stock then held by them, representing a total liquidation value of $500,000 September 30, 2008 and June 30, 2008, and, in addition, an amount equal to unpaid dividends on the Series A or A-1 Preferred Shares, as the case may be, but no more. If the assets and funds thus distributed among the holders of Series A and A-1 Preferred Stock are insufficient to permit the payment to such holders of their full preferential amount, then the entire assets and funds of the corporation legally available for distribution shall be distributed among the holders of Series A and A-1 Preferred Stock in proportion to the full aforesaid preferential amounts to which such holder is entitled. After payment or setting apart of payment has been made to the holders of Series A and A-1 Preferred Stock of the preferential amounts so payable to them, the holders of Common Stock shall be entitled to receive pro rata the remaining assets of the corporation. In the event of a liquidation, winding up or dissolution in which the value of the corporation, or assets of the corporation, or the value received by the shareholders of the corporation exceeds $250,000,000, then the holders of the Series A Preferred Stock shall not receive the liquidation preference mentioned above, but shall, instead, share on a pro-rata, as converted basis, with the holders of Common Stock in the liquidation value.
Stock Split - In March 2008, the board of directors approved a 2,100-to-1 forward stock split of the Corporation’s common stock, which was distributed on March 31, 2008 to shareholders of record on January 29, 2007. Shareholders’ equity, and common stock activity for all periods presented have been restated to give retroactive recognition to the stock split. In addition, all references in the financial statements and notes to financial statements, to weighted average number of shares, per share amounts, and market prices of the Company’s common stock have been restated to give retroactive recognition to the stock split.

Warrants – On March 31, 2008 in conjunction with the issuance of 1,000,000 shares of preferred stock, the Company issued 200,000 warrants to purchase shares of common stock at an exercise price of $0.75 per share. The warrants vest immediately and have a contractual life of 5 years. The total value of the warrants issued amounted to $47,879, which has been reflected as a dividend to preferred shareholders in the accompanying financial statements. The value was determined using the Black-Scholes valuation model with input assumptions of (1) volatility of 148%, (2) expected life of 5 years, (3) risk free rate of 1.79%, and (4) expected dividends of zero.

8. Share Based Compensation

On July 21, 2008, the Company adopted the 2008 Stock Option Plan (the “Plan”) that provides for the granting of stock options to certain key employees. The Plan reserves 4,000,000 shares of common stock. Options under the Plan are to be granted at no less than fair market value of the shares at the date of grant.

 On August 1, 2008, the Company issued 660,000 stock options to purchase shares of the Company’s common stock at a weighted average exercise price of $1.68 per share. The options vested immediately and have a contractual life of 10 years. The total value of the options issued on August 1, 2008 amounted to $194,030, which is included in general and administrative expenses in the accompanying statement of operations for the three months ended September 30, 2008.

The fair value of each option awardthe warrants granted during the first quarter of fiscal 2010 is estimated at $5,173. The fair value of these warrants was estimated onat the date of grant using the Black-Scholes option valuationoption-pricing model The expected volatility was based on volatilitieswith the following range of other publicly traded development stage companies inassumptions for the Company’s industry. The expected term of the options granted was estimated to represent the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Assumptions used to calculate the fair value of the options issued are as follows.

fiscal year ended June 30, 2009:
11

Expected Life3.0 years
Stock Price Volatility  
Three Months
64%		 
Ended
September 30,
2008
Risk Free Interest Rate   
Expected life in years5.01.6% 
Stock price volatility148%
Risk free interest rate3.2%
Expected dividendsDividends None 
Forfeiture rate0%

A summary of option activity as of September 30, 2008, and changes during the period then ended is presented below:

       
Weighted-
   
       
Average
   
    
 Weighted-
 
Remaining
   
    
 Average
 
Contractual
 
Aggregate
 
    
 Exercise
 
Life
 
Intrinsic
 
  
Options
 
 Price
 
(Years)
 
Value
 
           
Outstanding at June 30, 2008  - $-  - $- 
Granted  660,000  1.68  9.96  - 
Exercised  -  -       
Forfeited  -  -       
Outstanding at September 30, 2008  660,000  1.68  9.96  - 
              
Vested and expected to vest at September 30, 2008  660,000  1.68  9.96  - 
              
Exercisable at September 30, 2008  660,000  1.68  9.96  - 

There were no options exercised as of September 30, 2008. There is no unvested compensation as of September 30, 2008.Note 8 - Income Taxes

9. The Company accounts for income taxes in accordance with ASC 740, Income Taxes

. Under Accounting Principles Board Opinion No. 28, ASC 270, Interim Financial Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections.

Hydro, in its capacity as the operating company taking over Bio’s income tax positions in addition to its own positions after October 24, 2008 (see Note 1), The Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the combined entityCompany will generate net operating losses in the year ending June 30, 2009,2010, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax has been recorded as of and for the period ended September 30, 2009.

ASC 740-10, Accounting for Uncertainty in Income Taxes, indicates criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in the financial statements. ASC 740-10 includes a higher standard that tax benefits must meet before they can be recognized in a company’s financial statements. As the Company has no uncertain tax positions as defined in ASC 740, there are no corresponding unrecognized tax benefits. Any future changes in the unrecognized tax benefit will have no impact on the Company’s effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months. It is the Company’s policy to classify income tax penalties and interest, if any, as part of general and administrative expense in its Statements of Operations. The Company has not incurred any interest or penalties since inception.

The Company files income tax returns with state and federal jurisdictions. The Company’s state and federal income tax returns for the tax years ended December 31, 2007 and June 30, 2008 are subject to examination by the taxing authorities as of June 30, 2009. The Company has sustained significant net operating losses since inception and has generated corresponding net operating loss carryforwards. We are in the process of evaluating those losses. At June 30, 2009 and 2008, based on the weight of available evidence, including cumulative losses in recent years and expectations of future taxable income, we determined that it was not more likely than not that our deferred income tax assets would not be realized. Consequently we have recorded a 100% valuation allowance which is presented as a reduction of our deferred income tax asset which principally arose from our net operating loss carryforwards.

Note 9 - Lease Agreements

On January 9, 2007, the Company entered into a 3-year lease agreement for approximately 6,000 square feet of office space located at 10019 Canoga Ave., Chatsworth, CA 91311. The lease provides for monthly rental payments including parking and utilities of $4,750 for the first 12 months, and cost of living adjustments according to the Consumer Price Index for All Urban Customers at a rate not less than 3% per annum, and not greater than 6% per annum. The lease expires February 15, 2010. As of September 30, 2009, the Company has a security deposit of $9,500 associated with this lease.

Note 10 – Recent Accounting Standards

Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) change periodically. Changes in such standards may have an impact on the Company’s future financial position. The following are a summary of recent accounting developments.
In February 2007, the FASB issued ASC 825, (formerly SFAS No. 159), The Fair Value Option of Financial Assets and Financial Liabilities. ASC 825 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. ASC 825 is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007. The adoption of ASC 825 did not have a significant impact on the Company’s financial statements.
In December 2007, the FASB issued ASC 810 (SFAS No. 160), Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51. ASC 810 establishes accounting and reporting standards for the non—controlling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests of which the Company currently has none. All other requirements of ASC 810 shall be applied prospectively. ASC 810 is effective for fiscal years beginning after December 15, 2008. The adoption of ASC 810 did not have a significant impact on the Company’s financial statements.

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10. In December 2007 the FASB issued ASC 805 (formerly SFAS No. 141 revised 2007), Business CombinationsSubsequent Events

On October 1,, which revises current purchase accounting guidance in ASC 805, Business Combinations. ASC 805 requires most assets acquired and liabilities assumed in a business combination to be measured at their fair values as of the date of acquisition. ASC 805 also modifies the initial measurement and subsequent re-measurement of contingent consideration and acquired contingencies, and requires that acquisition related costs be recognized as expense as incurred rather than capitalized as part of the cost of the acquisition. ASC 805 is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to business combinations occurring after adoption. The impact of ASC 805 on the Company issued 15,000 stock options to purchase sharesCompany’s financial statements will depend on the nature and extent of the Company’s common stock atfuture acquisition activities.
In March 2008, the FASB issued ASC 815-10-50 (formerly SFAS No. 161 and an exercise priceamendment of $1.00 per share.FASB Statement No. 133), Disclosures about Derivative Instruments and Hedging Activities. ASC 815 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. ASC 815 is effective for fiscal years beginning on or after November 15, 2008 with earlier adoption allowed. The options vest immediatelyadoption of ASC 815 on the Company’s financial statements will depend on the nature and extent of the Company’s future use of hedging and derivatives.
In April 2008 the Financial Accounting Standards Board issued ASC 350-30 (formerly FASB Staff Position No. FAS 142-3) “Determination of the Useful Life of Intangible Assets.” This ASC discusses the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this ASC is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under ASC 805, “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). This ASC is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted this FSP beginning July 1, 2009 and it did not have a contractualsignificant impact on the Company’s financial position, results of operations, or cash flow.
In May 2008 the FASB issued ASC 470-20 (formerly FSP No. APB 14-1), “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement).” ASC 470-20 addresses instruments commonly referred to as Instrument C which requires the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer's option. ASC 470-20 requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity, and then accreting the resulting discount on the debt as additional interest expense over the expected life of 10 years.the debt. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective application to all periods presented. The adoption of this accounting pronouncement did not have a material effect on our financial statements.
In May 2009 FASB issued ASC 855 (formerly SFAS 165), Subsequent Events effective for interim and annual financial periods ending after June 15, 2009. The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. It also includes the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. It addresses the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This pronouncement had no material impact on the Company’s financial statements.
In June 2009 FASB issued ASC 810 (formerly SFAS 167 which is an amendment to FASB Interpretation No. 46), Consolidation of Variable Interest Entities, to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This Statement requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This Statement eliminates the quantitative-based risks and rewards calculation previously required for determining the primary beneficiary of a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009.  This pronouncement had no material impact on the Company’s financial statements.
On April 9, 2009 the FASB Issued ASC 825 (formerly Staff Position FAS 107-1 and APB 28-1), Interim Disclosures about Fair Value of Financial Instruments. This requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This ASC also requires those disclosures in summarized financial information at interim reporting periods. This ASC shall be effective for interim reporting periods ending after June 15, 2009. This pronouncement had no material impact on the Company’s financial statements.

In June 2009 FASB issued ASC 105 (formerly SFAS 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This ASC identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. ASC 105 arranges these sources of GAAP in a hierarchy for users to apply accordingly. The GAAP hierarchy will include only two levels of GAAP: authoritative and non-authoritative. This Codification supersedes all existing non-SEC accounting and reporting standards. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. In the Board’s view, the adoption of this ASC will not change GAAP, and as a result, will not have a material impact on the company’s financial statements.

Note 11 – Subsequent Events

In accordance with ASC 855, “Subsequent Events”, the Company has performed a review of events subsequent to the balance sheet date through November 13, 2009, the date that the consolidated financial statements were issued.
 
On OctoberSeptember 24, 2009, our Board of Directors authorized an increase in authorized common shares from 100,000,000 to 1,000,000,000 as well as a 3 2008, the Company issued 210,000 units comprisedfor 1 forward split of fiveour common shares. The stock split requires retroactive restatement of all historical shares outstanding. The accompanying Statement of its Series A-1 Preferred Stock (total of 1,050,000 preferred shares) and one warrantChanges to purchase one share of common stock at $0.75 per share for total proceeds of $525,000, which were placed in escrow. Upon the closing of escrow on October 3, 2008, $400,000Stockholder’s Deficit was usedrestated to purchase the 50.5%give retroactive recognition of the outstanding shares of Bio and $125,000 was distributedforward stock split. All references to the Company.

number of shares in the Consolidated Financial Statements are presented on a pre-split basis. On October 3, 2008,7, 2009, we filed an amendment to our Articles of Incorporation with the Company consummated stock purchase agreements under which they purchased the sharesSecretary of Bio common stock for a purchase price of $400,000. This resulted in the Company owning 1,262,500 shares of a total of 2,500,000 shares outstanding, or 50.5%State of the outstanding securities.
On October 24, 2008,State of Nevada to authorize and increase the Company entered into a share exchange agreement with Bio in which Bio acquired allnumber of the outstanding shares of the Company’s shareholders (see Note 2). Under the terms of the share exchange agreement, Bio performed a 7.5-to-1 forward stock split of its outstanding shares of common stock. Bio issued 18,750,000 (post forward split) of itsauthorized shares of common stock to 1,000,000,000 (par value $0.001) and assumed 410,000 warrants and 675,000 common stock options in exchangeto effect a 3 for 100%1 forward split of all outstanding shares. The effective date for the outstanding shares of the Company.forward split was October 12, 2009.
 
Had the Transaction occurred at the beginning of the quarter ended September 30, 2008, the pro forma loss per share would have been $0.02, assuming a total of 28,030,178 shares of Bio common stock outstanding after the impact of the Transaction and forward stock split.

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ItemITEM 2.  Management’s Discussion and Analysis or Plan of Operation.Financial Condition and Results of Operations.
 
The following discussion and analysis of should be read in conjunction with the Company’sour 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
 
Overview
Hydrodynamic Technology, Inc. dba Cavitation Technologies, Inc (Company) was incorporated January 29, 2007, in California. We have one office in Chatsworth, California.

We are a development stage enterprise that designs and engineers NANO technology based systems that use our patents pending, multi-stage, continuous flow-through, hydrodynamic cavitation reactors. We are a “GreenTech” company whose goal is primarily engagedto monetize our patent pending technologies that we feel have unique, useful, and environmentally friendly commercial applications in markets such as vegetable oil refining, renewable fuels, water recycling and desalination, alcoholic beverage enhancement, water-oil emulsions, and crude oil yield enhancement. Research and development has led to products which include the development ofGreen D De-gumming System, a bio-diesel fuel productionvegetable oil refining system, (Bioforce 9000 and the Bioforce 9000 NANO Reactor Skid). The initial focus ofSkid System which performs the Company’s research and development is the generation of products for our target market of US and International bio-diesel producers. The Company’s success will depend in part on its ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company.
Results of Operations for the Three Months Ended September 30, 2008 and 2007
The following is a comparison of the results of operations for the Company for the three months ended September 30, 2008 and 2007.

  
Three Months Ended
     
  
September 30,
     
  
2008
 
2007
 
$ Change
 
% Change
 
          
General and administrative expenses $348,946 $21,388 $327,558  1531.5%
Research and development expenses  129,875  5,617  124,258  2212.2%
Total operating expenses  478,821  27,005  451,816  1673.1%
Loss from operations  (478,821) (27,005) (451,816) 1673.1%
Interest expense  (9,637) (14,946) 5,309  -35.5%
Loss before income taxes  (488,458) (41,951) (446,507) 1064.4%
Income tax expense  -  -  -  0.0%
Net loss $(488,458)$(41,951)$(446,507) 1064.4%
Sales
We had no sales for the three months ended September 30, 2008 or 2007. We expect to be able to achieve salestransesterification process during the fiscal year ending June 30, 2009.
General and Administrative Expenses
Our general and administrative expenses increased by $327,558, or 1,531.5%, forproduction of biodiesel. We believe the three months ended September 30, 2008 as compared to 2007. In 2008, we issued stock options to employees and consultants in payment for their services to the Company. This issuance resulted in a onetime expense of $194,030. We had no such expenses in 2007. In addition, we incurred increased salary and related expenses of approximately $44,000 in 2008 resulting from the Company having more employees. We also incurred increased legal and accounting fees of approximately $54,000 in 2008 due primarily to expenses incurred in conjunction with the Company’s reverse merger transaction.

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Research and Development Expenses
Our research and development expenses increased by $124,258, or 2,212.2% for the three months ended September 30, 2008 as compared to 2007. The increase related primarily to additional expenses during 2008 associated with fabrication and prototype development, as well as the cost of raw feed stock for testing our Bio Force system.
Liquidity and Capital Resources
Our principal source of funds has been from borrowings under a line of credit agreement, as well as money raised from the sale of preferred stock. At September 30, 2008, we had borrowings of $636,917 compared with $627,856 at June 30, 2008. In addition, on March 31, 2008, we raised $500,000 through the sale of 1,000,000 sharesapplication of our preferred stock.
As of September 30, 2008, we had cash of $84,919 as comparedtechnology can dramatically reduce operating costs and improve yields in comparison to $310,929 at June 30, 2008. The decreasecompetitive solutions. Our headquarters and only office is in cash is primarily due to the cash used in operations for the three months ended September 30, 2008.
As of September 30, 2008, our total current liabilities, excluding our outstanding line of credit balance, were $144,205, compared to $69,206 at June 30, 2008. Current liabilities at September 30, 2008 included accounts payable and accrued liabilities, and represented primarily outstanding amounts for salaries and professional fees.Chatsworth, California.
 
We have no significant operating history and from January 29, 2007 (inception),(date of inception) through September 30, 2008,2009, we have generated a net loss of $3,170,240 since inception.losses aggregating $8,402,194. Management’s plan is to raise additional debt and/or equity financing to fund future 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 the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the companyCompany may curtail its operations.
 
Our success depends in part on our ability to obtain patents, maintain trade secrets, and operate without infringing on the proprietary rights of others both in the United States and other countries. We have seven patent applications pending in the US along with three PCT applications. We intend to apply for new patents on a regular basis. Our patents pending apply to potential commercial applications in markets such as vegetable oil processing, renewable fuels production, water recycling and desalination, water–oil emulsions, crude oil yield enhancement, water-oil emulsions, blending systems, alcoholic beverage enhancement, and algae processing. There can be no assurances that patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted hereunder will provide proprietary protection or competitive advantage to the Company.
We are a public company with stock traded on the Over the Counter Bulletin Board with ticker symbol CVAT. Our stock is also traded on the Stuttgart Stock Exchange with symbol WTC. Our only location is our headquarters in Chatsworth, California. We have four employees and have engaged approximately 40 consultants and independent contractors over the past two years.
Results of Operations
Recently Issued Accounting PronouncementsThe following is a comparison of the results of operations for the Company for the three months ended September 30, 2009 and 2008.
 
In May 2008,
  Three Months Ended       
  September 30,       
  2009  2008  $ Change  % Change 
                 
General and administrative expenses $3,077,874  $348,946  $   2,728,928   782%
Research and development expenses  62,965   129,875   (66,910)   -52%
Total operating expenses  3,140,839   478,821   2,662,018   556%
Loss from operations  (3,140,839)  (478,821)     (2,662,018)  556%
Interest expense  (83,582)  (9,637)  (73,945)  767%
Loss before income taxes  (3,224,421)  ( 488,458)  (2,735,963)   560%
Income tax expense  -   -   -   0.0%
Net loss $(3,224,421) $(488,458) $(2,735,963)   560%
Revenues

We had no revenue for the FASB issued SFAS No. 162, The Hierarchythree months ended September 30, 2009 or 2008. For the three month period ended September 30, 2009, we recorded Deferred Income of Generally Accepted Accounting Principles. SFAS No, 162 identifies the sources of accounting principles and the framework$7,480 as a deposit for selecting the principlesa potential future sale/lease/license. We expect to be used in the preparation of financial statements for nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 will be effective 60 days following the SEC’s approval. The Company does not expect that this statement will result in a change in current practice.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.  SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2008, with earlier adoption allowed. We do not anticipate that the adoption of this accounting pronouncement will have a material effect on our financial statements.

In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilitiesable to fiscal years beginning after November 15, 2008.  Therefore, we will delay application of SFAS 157 to our nonfinancial assets and nonfinancial liabilities.  We do not anticipate that the delayed adoption of this accounting pronouncement will have a material effect on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company for fiscal years beginning January 29, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.

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In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.  SFAS No. 160 establishes accounting and reporting standards for the non--controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests, of which the Company currently has none.  All other requirements of SFAS No. 160 shall be applied prospectively.  SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company anticipates that SFAS No. 160 will not have any significant impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, which revises current purchase accounting guidance in SFAS 141, Business Combinations. SFAS No. 141R requires most assets acquired and liabilities assumed in a business combination to be measured at their fair values as of the date of acquisition. SFAS No. 141R also modifies the initial measurement and subsequent remeasurement of contingent consideration and acquired contingencies, and requires that acquisition related costs be recognized as expense as incurred rather than capitalized as part of the cost of the acquisition. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to business combinations occurring after adoption. The impact of SFAS No. 141R on the Company’s financial statements will depend on the nature and extent of the Company’s future acquisition activities.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option of Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 did not have any significant impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. FAS-158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. The provisions of SFAS No. 158 are effective for the Company as of the end ofachieve revenue during the fiscal year ending June 30, 2008. The adoption of SFAS No. 158 did not have any significant impact on the Company’s financial statements.2010.

In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 (“FIN-48”), Accounting for Uncertainty in Income Taxes—An interpretation of FASB Statement No. 109. FIN-48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement of Financial Accounting Standards No.109, Accounting for Income Taxes. This Interpretation prescribes a recognition thresholdGeneral and measurement attributeAdministrative Expenses
Our general and administrative expenses increased $2,728,928 for the financial statement recognitionthree months ended September 30, 2009.  This is attributable largely to the issuance of 5,700,000 common shares (pre-split) distributed as incentive and measurementvalued at $4,560,000 (of which $2,587,871 is expensed in this quarter)  to consultants, service providers and other key personnel who contributed to the success of a tax position taken or expected to be takenthe Company. We had no such expenses in a tax return. In addition, FIN-48 provides guidance on de-recognition, classification, interest2008.  The other two major expenses in the first quarter of fiscal 2010 were consulting fees of $296,022 and penalties, accountingprofessional fees of $125,981 for legal, audit, and accounting. This compares with no consulting fees and $56,186 in interim periods, disclosure, and transition. FIN-48 is effective forprofessional fees in the Company infirst quarter of fiscal years beginning January 29, 2007. The adoption of FIN-48 did not have any significant impact on the Company’s financial statements.2009.
 
We do not believe that the adoption of the above recent pronouncements will have a material effect on the Company’s consolidated results of operations, financial position, or cash flows.
Critical Accounting Policies
The foregoing discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial statements.
Basis of Presentation
On October 24, 2008, the Company effected a transaction with Bio Energy, Inc., a non-operating shell company (“Bio”) (the “Transaction”)

From a legal perspective, Bio acquired Hydro. However from an accounting perspective, the Transaction is viewed as a recapitalization of Hydro accompanied by an issuance of stock by Hydro for the net assets of Bio. This is because Bio did not have operations immediately prior to the merger, and following the merger, Hydro is the operating company. Hydro's officers and directors will serve as the officers and directors of the new combined entity. Additionally, Hydro's stockholders will own over 80% of the outstanding shares of Bio after the completion of the transaction.

166

Given these circumstances, the Transaction is accounted for as a capital transaction rather than as a business combination. That is, the Transaction is equivalent to the issuance of stock by Hydro for the net assets of Bio, accompanied by a recapitalization. The accounting is identical to that resulting from a reverse acquisition. Because the Transaction is accounted for as a capital transaction, and it occurred prior to the filing of this Form 10-Q, these financial statements represent the financial condition and results of operations of Hydro.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. We use estimates in valuing our stock options, warrants and common stock issued for services, among other items.
Research and Development Costs

Research and development costs consistDevelopment
R&D declined from $129,875 to $62,965 as we focused more resources on advertising and marketing our existing products and fewer resources on developing potential commercial products. Nevertheless, we did continue to conduct R&D on our NANO Technology for potential commercial applications in markets such as vegetable oil refining, water recycling and desalination, alcoholic beverage enhancement, crude oil yield enhancement, and water-diesel emulsion.
Interest Expense
Interest expense increased 767% to $83,582 with $63,601 attributable to amortization of expendituresdiscount on convertible debt. This amount arose as we converted the debt into restricted common shares at a 25% discount to the market price. Interest charges on our bank loan amounted to $17,556 as the bank line of credit converted to a 1-year loan with equal monthly payments of $7,396 starting August 1, 2009.  Interest charges of $9,637 for the researchfirst quarter in fiscal 2009 were attributable to our bank line of credit.
Liquidity and developmentCapital Resources

Cash

As of new product linesSeptember 30, 2009, we had cash of $7,029 compared to $5,038 at June 30, 2009.    
Working Capital

As of September 30, 2009 total current liabilities, excluding the aforementioned bank loan, were $796,224, compared to $608,615 at June 30, 2009. This increase is attributable largely to Common Stock Subscription Deposit of $289,684 which represents deposits from individuals to be converted to common stock. The Common Stock Subscription Deposit of $289,684 partially off-sets the $180,000 convertible debt converted into shares as discussed above. Accrued salary for the president of the company increased to $249,955 from $202,590. Accounts payable increased to $172,378 from $109,311.

Convertible Notes Payable
On August 17, 2009, $180,000 in convertible notes payable plus $10,803 in accrued interest were converted into 374,125 shares of restricted common stock (pre-3 for 1 split). Immediately prior to the conversion, the Company changed the conversion rate to be equal to 75% of the average closing price of the Company’s stock for the 10 days immediately preceding the conversion request. This 25% discount from the market price amounted to $63,601 and technology. These costs are primarily payrollwas recognized as Interest Expense in the Consolidated Statement of Operations.
Bank Line of Credit

At September 30, 2009, we had borrowings of $627,876 from the National Bank of California versus $636,917 on June  30, 2009 on a line of credit from the same bank.  On August 1, 2009, the previous revolving line of credit was replaced by a one-year variable rate loan which matures August 1, 2010.  This loan bears interest at Prime + 2.75% with equal monthly installments of $7,396 beginning September 1, 2009.  A final payment of $599,322 is due August 1, 2010. This loan is secured by personal guarantees of the Company’s principals and payroll related expenses and various sample parts. Research and development costs are expensed as incurred.assets.

Common Stock

ItemIn addition to the 374,125 shares (pre-split) mentioned above, under Convertible Notes Payable, we also issued 5,700,000 common shares (pre-split) distributed as incentive and valued at $4,560,000 (of which $2,587,8721, is expensed in the current quarter) to consultants, service providers and others. We also issued 279,337 common shares (pre-split) valued at $217,411 for services rendered.

Cash Flow
Net Cash Used in Operating Activities amounted to $237,632 in the first quarter of fiscal 2010 compared with $235,071 for the same 3-month period in fiscal 2009.

It is our intent to raise additional debt and/or equity financing to fund operations. In addition, we expect to fund our operations from revenue generated in fiscal 2010. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should we fail to obtain such financing, the company may curtail its operations.

ITEM 3.  Quantitative and Qualitative Disclosures Aboutabout Market RiskRisk.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item pursuant to paragraph (e) of Regulation S-K. item.

ItemITEM 4.Controls and Procedures

Management’s Report on Internal Control over Financial ReportingDisclosures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as of SeptemberJune 30, 2008,2009, the end of the period covered by this quarterlyannual report. Based on their evaluation, our principal executive officer and principal financial officer concluded that, due to the existence of material weaknesses, our disclosure controls and procedures are not effective as of SeptemberJune 30, 2008.2009.
 
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Report of Management identifiedon Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material weaknesses which were reportedeffect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Our management has evaluated, under the supervision and with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“the Exchange Act”). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Current Report on Form 8-K, filed withExchange Act reports is (1) recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission on November 14, 2008, under Risk FactorsCommission’s rules and Management's Discussionforms and Analysis(2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Our Principal Executive Officer and Principal Financial Officer do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of Financial Conditionachieving their objectives and Resultsour principal executive and financial officer have determined that our disclosure controls and procedures are not effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of Operations. Therethe system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no changes to the identified material weaknesses.assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Furthermore, smaller reporting companies face additional limitations. Smaller reporting companies employ fewer individuals and find it difficult to properly segregate duties. Often, one or two individuals control every aspect of the Company's operation and are in a position to override any system of internal control. Additionally, smaller reporting companies tend to utilize general accounting software packages that lack a rigorous set of software controls.
In assessing the effectiveness of our internal control over financial reporting, we use the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Based on the evaluation,our assessment using those criteria, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, there have been no changeswe concluded that for the period ending June 30, 2009, our internal controls over financial reporting are ineffective. We are searching for additional capital in order to be in a position to address these material weaknesses. We are also assessing how we can improve our internal control over financial reporting duringwith the current employees in an effort to remedy these deficiencies. This annual report does not include an attestation report of our last fiscal quarter, identified in connection with that evaluation, that has materially affected, or is reasonably likely to materially affect, ourindependent registered public accounting firm regarding internal control over financial reporting. The Company has hired consultants to help remediate the internal control weaknesses. 

17

There were no significant changes in the Company’s internal controls over financial reporting or in other factors during the three months ended September 30, 2009 that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. We are continuing our efforts in these regards in order to fully remedy previously reported material weaknesses and to ensure that all of our controls and procedures are adequate and effective.
PART II
– OTHER INFORMATION

Item 1.1  Legal Proceedings

We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds

On October 24, 2008, Bio Energy, Inc, completed an acquisition of all the outstanding shares of Hydrodynamic Technology, Inc, In connection with this transaction, Bio Energy, Inc.We issued 18,750,000 shares of its commonno stock to investors in the shareholdersfirst quarter of Hydrodynamic Technology, Inc. in exchange for all the outstanding shares of Hydrodyanamic Technology, Inc..fiscal 2010.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Submission of Matters to a vote of Securities Holders.

On October 6, 2008, we amended our certificateSeptember 24, 2009, the Board of incorporationDirectors authorized an increase in outstanding common shares from 100,000,000 to (i) change our name from Bio Energy,Inc. to Cavitation Technologies, Inc.; (ii) effect1,000,000,000 (par value $0.001as well as authorizing a 7.53 for 1 forward split of our outstanding securities and (iii) increase our authorized shares of Common Stock to 100,000,000. We submitted the matter to our shareholder via written consent and acommon shares. A majority of the outstanding sharesshareholders voted in favor of the amendment.forward split. The articles of incorporation were amended and submitted to the Secretary of State of the State of Nevada on October 7, 2009. The forward split became effective October 12, 2009 in the State of Nevada and was declared effective by FINRA on October 28, 2009. We have incorporated the impact of the forward split into these financial statements.

Item 5 – Other Information

None
8

Item 6 – Exhibits

The following documents are filed as part of this report:

Consolidated balance sheets September 30, 2009 and June 30, 2009

Consolidated statements of operations — Quarter ended September 30, 2009 and September 30, 2008, and the period from January 29, 2007 (date of inception) through September 30, 2009

Consolidated statements of changes in stockholders’ deficit — Period from January 29, 2007 (date of inception) through September 30, 2009
Consolidated statements of cash flows — Quarter ended September 30, 2009 and September 30, 2008, and the period from January 29, 2007 (date of inception) through September 30, 2009

Notes to consolidated financial statements — September 30, 2009

The following exhibits are included as a part of this report by reference:

3.1 Amendment to Certificate of Incorporation

31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATUREIn accordance with article 8 of regulation S-X, CTI is a Smaller Reporting Company and financial schedules are not required for Smaller Reporting Companies.
 
Pursuant to the requirements of the Securities Exchange Act ofSIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURETITLEDATE
/s/ Roman GordonChief Executive Officer and DirectorNovember 13, 2009
Roman Gordon
(Principal Executive Officer)
Chairman of the Board
/s/  Igor GorodnitskyPresidentNovember 13, 2009
Igor Gorodnitsky   
 CAVITATION TECHNOLOGIES, INC.

November 18, 2008 /s/  R.L. Hartshorn		 
Chief Financial Officer 
November 13, 2009
R.L. HartshornBy:  /s/ Roman Gordon
 
Roman Gordon, Chief Executive(Principal Financial Officer and Accounting Officer)
 
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