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 Section
þ
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 March 31,September 30, 2009
OR
¨
Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934OR

For the transition period                    to                    
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to
 
Commission File NumberNumber: 0-29901
 
CAVITATION TECHNOLOGIES, INC.Cavitation Technologies, Inc.
(Exact name of registrantRegistrant as specifiedSpecified in its charter)Charter)
 
Nevada20-4907818
(State or other jurisdictionOther Jurisdiction of
incorporationIncorporation or organization)Organization)
(IRSI.R.S. Employer
Identification No.)
 
10019 Canoga Ave
Chatsworth, CaliforniaCANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of principal executive offices)Principal Executive Offices)
 
818-718-0905(818) 718-0905
(Issuer’sRegistrant’s telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of Each Class:Name of Each Exchange on Which Registered:
NoneOver the Counter (Bulletin Board)
(Former name, former address and former fiscal year, if changed since last report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.001 par value
 
Indicate 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

Indicate 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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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    YESdays.  Yes þ     NONo ¨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).
¨ Yes o     NONo þx

On May 7, 2009,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 28,605,88328,380,178 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,”DOCUMENTS INCORPORATED BY REFERENCE:
“accelerated filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.None.

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

CAVITATION TECHNOLOGIES, INC.
Form 10-Q
For the Three and Nine Months Ended March 31, 2009
TABLE OF CONTENTS
 
Page
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
Balance Sheets as of March 31, 2009 (Unaudited) and June 30, 20084
Statements of Operations (Unaudited) for the three and nine months ended March 31, 2009 and 20085
Statement of Stockholders’ Deficit (Unaudited) for the period from January 29, 2007 (inception) to March 31, 20096
Statements of Cash Flows (Unaudited) for the nine months ended March 31, 2009 and 20087
Notes to Financial Statements (Unaudited)8
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations15
Item 3Quantitative and Qualitative Disclosures About Market Risk19
Item 4Controls and Procedures19
PART II – OTHER INFORMATION
Item 1.Legal Proceedings20
Item 2.Unregistered Sales of Equity Securities and use of Proceeds20
Item 3.Defaults Upon Senior Securities20
Item 4.Submission of Matters to a Vote of Security Holders20
Item 5.Other Information20
Item 6.Exhibits and Reports20
Signatures21

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 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” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be “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 Form 8-K filed on November 14, 2008, which provided Form 10 type disclosures as 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.We qualify all the 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

  March 31,  June 30, 
  2009  2008 
  (unaudited)    
ASSETS      
       
Current assets:      
Cash and cash equivalents $2,084  $310,929 
Prepaid expenses and other current assets  1,757   1,445 
Total current assets  3,842   312,374 
         
Property and equipment, net  19,665   25,306 
Other assets  9,500   9,500 
  $33,006  $347,180 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
Current liabilities:        
Accounts payable and accrued expenses $167,943  $56,706 
Deferred revenue  26,000   - 
Convertible notes payable, net of discounts  225,901   - 
Line of credit  636,917   627,856 
Total current liabilities  1,056,761   684,562 
         
Commitments and contingencies        
         
Stockholders' deficit:        
         
Preferred stock ,$0.001 par value, 10,000,000 shares authorized, 111,111 shares and 0 shares issued and outstanding as of March 31, 2009 and June 30, 2008, respectively  111   - 
         
Common stock, $0.001 par value, 100,000,000 shares authorized, 28,605,883 shares and  18,906,961 shares are issued and outstanding as of March 31, 2009 and June 30, 2008, respectively  28,606   18,907 
Additional paid-in capital  3,525,183   2,373,372 
Deficit accumulated during the development stage  (4,577,655)  (2,729,661)
Total stockholders' deficit  (1,023,755)  (337,382)
Total liabilities and stockholders' deficit $33,006  $347,180 

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

4
 
  (Unaudited)    
  September 30,  June 30, 
  2009  2009 
       
ASSETS      
       
Current assets:      
Cash and cash equivalents $7,029  $5,038 
Prepaid expenses and other current assets  1,875   2,341 
Total current assets  8,904   7,379 
         
Property and equipment, net  80,234   62,753 
Other assets  9,500   9,500 
Total assets $98,638  $79,632 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
         
Current liabilities:        
Accounts payable and accrued expenses $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 
Loan payable  627,876   - 
Total current liabilities  1,424,100   1,245,532 
         
         
Commitments and contingencies        
         
Stockholders' deficit:        
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  7,207,432   4,148,926 
Deficit accumulated during the development stage  (8,569,019)  (5,344,598)
Total stockholders' deficit  (1,325,462)  (1,165,900)
Total liabilities and stockholders' deficit $98,638  $79,632 

CAVITATION TECHNOLOGIES, INC.
Statements of Operations (Unaudited)

              January 29, 2007, 
              Inception, 
  Three Months Ended  Nine Months Ended  Through 
  March 31,  March 31,  March 31, 
  2009  2008  2009  2008  2009 
                
General and administrative expenses $460,170  $81,694  $1,469,702  $118,533  $1,962,043 
Research and development expenses  79,079   1,848,567   257,625   1,858,795   2,392,439 
Total operating expenses  539,249   1,903,261   1,727,327   1,977,328   4,354,482 
Loss from operations  (539,249)  (1,903,261)  (1,727,327)  (1,977,328)  (4,354,482)
Interest expense  (48,593)  (10,101)  (69,912)  (36,579)  (124,538)
Loss before income taxes  (587,842)  (1,940,362)  (1,797,239)  (2,013,907)  (4,479,020)
Income tax expense  -   -   -   -   - 
Net loss $(587,842) $(1,940,362) $(1,797,239) $(2,013,907) $(4,479,020)
Dividend  -   -   (50,756)  -   (98,635)
Net loss available to common stockholders $(587,842) $(1,940,362) $(1,847,995) $(2,013,907) $(4,577,655)
                     
Net loss available to common stockholders per share:                    
Basic and Diluted $(0.02) $(0.14)  (0.08) $(0.14)    
                     
Weighted average shares outstanding:                    
Basic and Diluted  28,455,922   14,331,210   24,359,739   14,331,210     

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

5

CAVITATION TECHNOLOGIES, INC.

Statements of Changes in Stockholders’ Deficit (Unaudited)
  
Preferred Stock
 
Common Stock
  Additional  Accumulated    
  
Shares
  
Amount
 
Shares
  
Amount
  
Paid-In Capital
  
Deficit
  
Total
 
                          
Issuance of common stock for services on January 29, 2007, inception       14,331,210  $14,331  $6 ,669  $-  $21,000 
Net loss                   (533,185)  (533,185)
                          
Balance at December 31, 2007  -  $-  14,331,210  $14,331  $6 ,669  $(533,185) $(512,185)
                            
Preferred stock sold for cash         1,119,199   1,119   498,881       500,000 
Common stock issued as payment for services         3,456,551   3,457   1,819,943       1,823,400 
Warrants issued in connection with sale of preferred stock                 47,879   (47,879)    
Net loss                     (2,148,597)  (2,148,597)
                            
Balance at June 30, 2008  -  $-  18,906,961  $18,907  $2,373,372  $(2,729,661) $(337,382)
                            
Stock option compensation                 194,030       194,030 
Net loss                     (488,458)  (488,458)
                            
Balance at September 30, 2008  -  $-  18,906,961  $18,907  $2,567,402  $(3,218,119) $(631,810)
                            
Preferred stock sold in connection with reverse merger         279,800   280   124,720       125,000 
Redemption of shares         (436,761)  (437)  437       - 
Bio shares outstanding before reverse merger         9,280,178   9,280   (9,2 80)       - 
Common stock issued as payment for services         350,000   350   454,250       454,600 
Warrants issued in connection with issuance of convertible debt                 26,357       26,357 
Warrants issued in connection with sale of preferred stock                 5 0,756   (50,756)   - 
Stock option compensation                 4,590       4,590 
Net loss                     (720,938)  (720,938)
                            
Balance at December 31, 2008   -  $  -  28,380,178  $28,380  $3,219,232  $(3,989,813) $(742,201)
                            
Preferred stock sold for cash  111,111    111          99,889       100,000 
Warrants issued in connection with issuance of convertible debt                 22,888       22,888 
Common stock issued as payment for services         225,705   226   183,174       183,400 
                           - 
Net loss                     (587,842)  (587,842)
                            
Balance at March 31, 2009  111,111  $  111  28,605,883  $28,606  $3,525,183  $(4,577,655) $(1,023,755)
 
See accompanying notes, which are an integral part of these financial statements
 
6
 
CAVITATION TECHNOLOGIES, INC.
(a Development Stage Company)
Consolidated Statements of Operations (Unaudited)
 
Statements of Cash Flows (Unaudited)  

        January 29, 2007, 
  Three Months Ended  Three Months Ended  
Inception,
Through
 
  September 30,  September 30,  September 30, 
  2009  2008  2009 
          
General and administrative expenses $3,077,874  $348,946  $5,664,617 
Research and development expenses  62,965   129,875   2,501,463 
Total operating expenses  3,140,839   478,821   8,166,080 
Loss from operations  (3,140,839)  (478,821)  (8,166,080)
Interest expense  (83,582)  (9,637)  (236,114)
Loss before income taxes  (3,224,421)  (488,458)  (8,402,194)
Income tax expense  -   -   - 
Net loss $(3,224,421) $(488,458) $(8,402,194)
             
Net loss available to common stockholders per share:            
Basic and Diluted $(0.03) $(0.01)    
             
Weighted average shares outstanding:            
Basic and Diluted  103,111,510   56,720,883     
        Inception, 
        Through 
  Nine Months Ended March 31,  March 31, 
  2009  2008  2009 
          
Operating activities:         
Net loss $(1,797,239) $(2,013,907) $(4,479,020)
Adjustments to reconcile net loss to net cash used in operating activities:            
Depreciation and amortization  5,641   2,703   11,047 
Warrants issued in connection with convertible notes payable  40,147   -   40,147 
             
Common stock issued for services  638,000   1,823,400   2,482,390 
Stock option compensation  198,620   -   198,620 
Effect of changes in:            
Prepaid expenses and other current assets  (312)  (7,226)  (1,757)
Deposits  -   -   (9,500)
Accounts payable and accrued expenses  111,237   16,187   167,952 
Deferred revenue  26,000   -   26,000 
Net cash used in operating activities  (777,906)  (178,843)  (1,564,121)
             
Investing activities:            
             
Purchase of Property and Equipment  -   (5,145)  (30,712)
Net investing activities  -   (5,145)  (30,712)
             
Financing activities:            
Proceeds from line of credit borrowings  9,061   172,799   636,917 
Proceeds from sales of preferred stock  225,000   500,000   725,000 
Proceeds from convertible notes payable  235,000   -   235,000 
Net cash provided by financing activities  469,061   672,799   1,596,917 
Net increase (decrease) in cash  (308,845)  488,816   2,084 
Cash, beginning of period  310,929         
Cash, end of period $2,084  $488,811  $2,084 
             
Supplemental disclosures of cash flow information:            
Cash paid for interest $32,905  $32,950  $76,147 
Cash paid for income taxes $-  $-  $1,850 
Supplemental disclosure of non-cash investing and financing activities:            
Dividend issued to preferred stockholders, as converted $50,756  $-  $98,635 
Conversion of preferred to common shares in reverse merger $625,000  $-  $625,000 

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

7
CAVITATION  TECHNOLOGIES, INC.
(a Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited)
 

  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
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)
MARCH 31,September 30, 2009
 
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”).  Underticker symbol CVAT. Our stock is also traded on the termsBerlin 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.

Note 2 – Summary of the Transaction, Bio performed a 7.5-to-1 forward stock splitSignificant Accounting Policies

Basis of its outstanding shares of common stock.  Bio issued 18,750,000 (post forward split) of its shares of common stockPresentation and assumed 410,000 warrants and 675,000 common stock options in exchange for 100% of the outstanding shares of the Company.  Immediately after the Transaction, there were a total of 28,030,178 shares of common stock outstanding, consisting of 18,750,000 shares owned by the Company, as well as an additional 9,280,178 owned by others.    The warrants converted to options to purchase 460,646 shares of Bio Common StockGoing Concern

The exchangeCompany is a development stage entity as of Hydro options and warrants for Bio options and warrants constituted a modification of their original grantsSeptember 30, 2009 as defined in SFAS No. 123(R). Accordingly,by the Company made an assessment of the difference in their fair values immediately prior to, and immediately after the Transaction. Due to the relatively short period of time between the original issuance date and the Transaction date, as well as the fact that the holders received fewer options in Bio than they had in Hydro, there was no additional compensation expense recognized as a result of this modification.

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 own over 80% of the outstanding shares of Bio after theFinancial Accounting Standard Board Accounting Standard Codification (ASC) 915. Successful completion of the transaction.

Given these circumstances,Company’s development programs and ultimately the Transaction is accounted for as a capital transaction rather than as a business combination.  That is, the Transaction is equivalent to the issuanceattainment 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 ofprofitable operations of Hydro.

The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States 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 presentation are included herein. Operating results for the three month period March 31, 2009 are not indicative of the results that maybe expected for the fiscal year ending June 30, 2009.  These unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Form 8-K filed November 14, 2008.

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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.  The Company uses estimates in valuing  stock options, warrants and common stock issued for services,dependent on future events including, among other items.
Revenue Recognition
The Company recognizes revenues in accordancethings, our ability to the Securities and Exchange Commission Staff Accounting Bulletin (“SAB” 101, Revenue Recognition, as amended by SAB 104. As of March 31, 2009 the Company received a deposit fromaccess potential markets; secure financing; develop a customer of $26,000 relating to a sales order not yet completed.  This amount has been reflected in deferred revenue on the accompanying balance sheet as of March 31, 2009.  As of March 31, 2009 the Company has not recognized any revenue from the sales of its bio-diesel fuel production systems.

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 assetsbase; attract, retain, and the satisfaction of liabilities in the normal course of business. Historically, the Company has no revenue, has incurred significant losses,motivate qualified personnel; and has not demonstrated the ability to generate sufficient cash flows from operations to satisfy its liabilities and sustain operations.

develop strategic alliances. The Company has no significant operating history and, from January 29, 2007 (inception), through March 31,September 30, 2009 has generated a cumulative net loss of $4,479,020.$8,402,194. The Company also has negative cash flow from operations and a stockholders’ deficit. The accompanying financial statements for the three months and nine months ended March 31, 2009 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.

4. 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 April 2008, the Financial Accounting Standards Board, or FASB issued FASB Staff Position (“FSP”) No. FAS 142-3 “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP 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 FASB Statement No. 141 (revised 2007), “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company will adopt this FSP beginning July 1, 2009 and it is not believed that this will have an impact on the Company’s financial position, results of operations or cash flows.for the three months ended September 30, 2009 and September 30, 2008 are not necessarily indicative of results to be expected for fiscal year 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 September 28, 2009 for a description of the Company’s Basis of Presentation.

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 been eliminated through consolidation.
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In MayFair Value Measurement
Effective January 1, 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).”  FSP APB 14-1 addresses instruments commonly referred to as Instrument C from Emerging Issues Task Force No.  90-19, which requiresCompany adopted the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer's option.  FSP APB 14-1 requires that issuersprovisions 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 the debt. FSP APB 14-1 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. Early application is not permitted. Management is currently evaluating the impact of the adoption of this statement; however, but believes any impact with respect to future debt transactions could be material.

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 September 2006, the FASB issued SFAS No. 157, FairASC 820, “Fair Value Measurements. SFAS No.157Measurements”. ASC 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 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. We do not anticipate that the adoptionimplementation of this accounting pronouncement will have a material effect on our  financial statements.

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 willstandard 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.

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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.

5.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 of March 31,Diluted 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, 2009, the Company had 545,646750,646 stock options and 436,4501,540,901 warrants outstanding to purchase common stock that were not included in the diluted net loss per common share due to the options and warrants beingbecause their effect would be anti-dilutive. In addition, the Company had $235,000111,111 shares of convertible notes payableSeries A Preferred Stock outstanding, (see Note 8) which are convertible into 375,000 shares of common stock of the Company thatstock. These items were not included in the calculation of diluted net loss per common share due to the amounts beingbecause their effect would be anti-dilutive. 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.

6.
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Note 4 - Property and equipmentEquipment

Property and equipment consisted of the following as of March 31,September 30, 2009 (unaudited) and June 30, 2008.2009.
 
  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 
  March 31,  June 30, 
  2009  2008 
         
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  (11,047)  (5,406)
         
  $19,665  $25,306 

Depreciation expense for the three months ended March 31,September 30, 2009 and 2008 amounted to $3,379$3,539 and $1,132,$1,131 respectively.  Depreciation expense for the nine months ended March 31, 2009 and 2008 amounted to $5,641 and $2,703, respectively.

7. 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 4.25% (1% plus 3.25% prime rate) at March 31, 2009+ 2.75% and 6% (1% plus 5% prime rate) at June 30, 2008.will be repaid 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 assets. The balance outstanding under thisthe loan was $627,876 on September 30, 2009 and under the line of credit was $636,917 at March 31, 2009 and $627,856 aton June 30, 2008.  The maturity date of this loan was Jan 2, 2009, but was extended to May 1, 2009.  This line of credit is personally guaranteed by the Company’s major shareholders and Board members, and secured by the assets of the Company.

8. Note 6 - Convertible Notes Payable

In December 2008,Convertible Notes Payable
On August 17, 2009, $180,000 in convertible notes payable plus accrued interest were converted into 374,125 shares of restricted common stock (1,122,375 after 3 for 1 forward split effective October 12, 2009). Immediately prior to the conversion, the Company entered into a Note and Warrant Purchase Agreement (the “Agreement”), wherechanged the Company issued an aggregate of $125,000 of notes payable which accrue interest at rate of 12% per annum and are due on April 30, 2009.  In January, 2009 the Company entered into an additional Agreement where the Company issued an aggregate of $110,000 of notes payable which accrue interest at rate of 12% per annum and are due on April 11, 2009. Under the terms of the Agreements, the lenders may convert all principal and accrued interest into shares of the Company’s common stock at a conversion rate to be equal to 75% of the average closing price of the Company’s closing stock for the 10 days immediately preceding the conversion request.

In addition, in accordance with the Agreements, the Company issued to the lenders warrants to purchase an aggregate of 156,666 shares of the Company’s common stock at an exercise price of between $1.25 and $1.50 per share.  The warrants are vested immediately and have a contractual life of 3.75 to 4 years.  The fair value of each warrant was estimated on the date of grant using the Black-Scholes valuation model with input assumptions of (1) volatility of 148%, (2) expected life of 1.5 to 2 years, (3) risk free rates ranging from 0.68% to 1.60% and (4) expected dividends of zero.  The total fair value of the warrants issued amounted to $49,246, which was recorded as a discount to the face value of the convertible notes payable.  As of March 31, 2009 (unaudited), the remaining discount amounted to $9,099 and the carrying value of the convertible notes payable amounted to $225,901.

 
Note 7 – Common and Preferred Stock, Options and Warrants
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Common

9. Stockholders’ Equity

Authorized shares – As a result of the merger with Bio (see Note 2) the Company was authorized under its Amended and Restated Certificate of Incorporation to issue Common Stock only.  On March 17,September 30, 2009, the Company filed Amended and Restated Articleshad received $289,684 in deposits from individuals for the purpose of Incorporation and created two  new seriesinvesting into common stock. The amount of preferred stock, the first of which$289,684 is designated Series A Preferred Stock and the second of which is designated as Series B Preferred Stock ..  The total number of shares ofreflected in Common Stock whichSubscription Deposit on the accompanying balance sheet as of September 30, 2009. During October 2009, this corporation shall have authority to issue is 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors. Each share of Common Stock and Preferred Stock has a par value of $.001.

Series A Preferred Stock The total number of shares of this preferred stock which this corporation shall have the authority to issue is 5,000,000 shares of Preferred Stock at a purchase price equal to the closing price of the Company’s Common Stock the business day immediately preceding the purchase by the Subscriber. Each share of this preferred stock has a par value of $.001, together with warrants, exercisable for a number of shares of common stock of the Company, $.001 par value per share equal to 100% of the number of shares of Common Stock that would be issuable upon initial conversion of the Preferred Stock, atamount plus an exercise price of $1.25 per share.  This stock is convertible into shares of Common Stock of the Company at any time at the election of the holder.
Series B Preferred Stock.  The Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock.  The Board of Directors can establish the rights, preferences and privileges of the Series B Preferred Stock.  There are no shares of Series B Preferred Stock outstanding.
Series A-1 Preferred Stock – As a result of the merger with Bio (see Note 2) the Company no longer has any Preferred Stock authorized or issued except as noted above. Following is a discussion about Preferred Stock issuances prior to the Bio merger.
On March 31, 2008, the Company issued 200,000 units comprised of five shares of its Series A-1 Preferred Stock (total of 1,000,000 preferred shares) and one warrant to purchase one share of common stock at $0.75 per shareadditional $50,216 for a total consideration of $500,000.

On October 3, 2008, the Company issued 210,000 units comprised of five$339,900 was converted to 680,000 shares of its Series A-1 Preferred Stock (total of 1,050,000 preferred shares) and one warrant to purchase one share ofrestricted 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, $400,000 was used to purchase 50.5% of the outstanding shares of Bio (see Note 2), and the remaining $125,000 was distributed to the Company.stock.

On October 24, 2008, in connection with the reverse merger (see Note 2), all shares of Series A-1 Preferred Stock were converted to common shares of Bio. The accompanying financial statements have retroactively shown the recapitalization for all periods presented. As a result, there is no Preferred stock shown in the balance sheets or statements of stockholders’ deficit.

Dividends – The holders of the Series A Preferred Stock and Series A-1 Preferred Stock wereare 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 in preference to any payment of any dividend on Common Stock. After payment of such dividends, any additional dividends declaredSeptember 30 and March 30. Dividends shall be payable entirely to the holders of Common Stock. The right of the holders of Series A Preferred Stock to receive dividends shallaccrue and be cumulative and shall accrue to holders of Series A Preferred Stock if such dividends arewhether or not they have been declared. Dividends may be paid in any prior year.
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 stockholders of record on January 29, 2007.

On October 24, 2008, the Company entered into a share exchange agreement with Bio in which Bio acquired all 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.

The common stock activity for all periods presented in the accompanying financial statements have been restated to give retroactive recognition to these stock splits and the conversion to Bio shares. 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.

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Warrants – On March 31, 2008 in conjunction withcash or through 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 stockholders 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 2.5 years, (3) risk free rate of 1.79%, and (4) expected dividends of zero.

On October 3, 2008, in conjunction with the issuance of a total of 1,050,000 shares of Series A-1 Preferred Stock, the Company issued 210,000 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 $50,291, 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 2.5 years, (3) risk free rate of 1.86%, and (4) expected dividends of zero.

On October 24, 2008, in connection with the Bio transaction (see Note 2), 410,000 warrants in Hydro converted to 279,800 warrants in Bio.

In December 2008, the Company issued an aggregate of 83,333 warrants to purchase shares of the Company’s common stock at an exercise price of $1.50 per share (see Note 8).

On March 17, 2009, , in conjunction with the issuance of a total of 111,111additional shares of Series A Preferred Stock at the Company issued 111,111 warrants to purchase sharesCompany’s option. For the first quarter ending September 30, 2009, accrued dividends of common$1,500 were recognized as interest expense.
Stock Options

There were 750,646 stock at an exercise price of $1.25 per share.  The warrants vest immediately and have a contractual life of 3.75 years.  The total valueoptions outstanding June 30, 2009 before consideration of the warrants3 for 1 forward stock split which occurred October 12, 2009.  There were no options issued amountedduring the first quarter of fiscal 2010.  For details on Stock Options, please refer to $20,808.  The value was determined using the Black-Scholes valuation model with input assumptions of (1) volatility of 64%, (2) expected life of 3.75 years, (3) risk free rate of 1.70%, and (4) expected dividends of zeroour 10-K submitted September 28, 2009.

10. Share Based CompensationWarrants

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 sharesA summary of the Company’s common stock at a weighted average exercise price of $1.68 per share.  The options vested immediatelywarrant activity and have a contractual life of 10 years.  The total valuerelated information for the quarter ended September 30, 2009 and the year ended June 30, 2009 before consideration of the options issued on August3 for 1 2008 amounted to $194,030,forward stock split which is included in general and administrative expenses in the accompanying statement of operations.occurred October 12, 2009.

On October 1, 2008, the Company issued 15,000 stock options to purchase shares of the Company’s common stock at an exercise price of $1 per share.  The options vest immediately and have a contractual life of 10 years.  The total value of the options issued on October 1, 2008 amounted to $4,590, which is included in general and administrative expenses in the accompanying statement of operations.
 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         
3

On October 24, 2008 675,000 options in Hydro were converted to 460,646 options in Bio (see Note 2)

On October 28 the Company issued 85,000 stock options to purchase shares of the Company’s common stock at an exercise price of $2 per share.  The options vest immediately. Of the 85000 options issued, 50,000 have a contractual life of nine months from issuance and the remaining 35,000 have a contractual life of ten years. The total value of the options issued on October 28, 2008 amount to $21, which is included in general and administrative expenses in the accompanying statements of operations.

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.

13
fiscal year ended June 30, 2009:

Expected life inLife3.0 years0.38 - 5.0
Stock price volatilityPrice Volatility64% -148%
Risk free interest rateFree Interest Rate0.68% - 1.60% 1.6%
Expected dividendsDividendsNone
Forfeiture rate0%

The following summarizes the activity of the Company’s stock options for the nine months ended March 31, 2009:

        Weighted-    
        Average    
     Weighted-  Remaining    
     Average  Contractual  Aggregate 
     Exercise  Life  Intrinsic 
  
Options
  
Price
  
(Years)
  
Value
 
                
Outstanding at July 1, 2008  -  $-   -  $ - 
Granted  545,646   1.72   9.38   - 
Exercised  -   -         
Forfeited  -   -         
Outstanding at March 31, 2009  545,646   1.72   9.38   - 
                 
Vested and expected to vest at March 31, 2009  545,646   1.72   9.38   - 
                 
Exercisable at March 31, 2009  545,646   1.72   9.38   - 
There were no options exercised as of March 31, 2009.  There is no unvested compensation as of March 31, 2009.  The weighted average grant date fair value of options granted during the nine months ended March 31, 2009 amounted to $0.26 per share.Note 8 - Income Taxes

11.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 2), 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 MarchSeptember 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.
144
In December 2007 the FASB issued ASC 805 (formerly SFAS No. 141 revised 2007), Business Combinations, 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’s financial statements will depend on the nature and extent of the Company’s future acquisition activities.
In March 2008, the FASB issued ASC 815-10-50 (formerly SFAS No. 161 and an amendment of 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 adoption 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 significant 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 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 September 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 for 1 forward split of our common shares. The stock split requires retroactive restatement of all historical shares outstanding. The accompanying Statement of Changes to Stockholder’s Deficit was restated to give retroactive recognition of the forward stock split. All references to the number of shares in the Consolidated Financial Statements are presented on a pre-split basis. On October 7, 2009, we filed an amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada to authorize and increase the number of authorized shares of common stock to 1,000,000,000 (par value $0.001) and to effect a 3 for 1 forward split of all outstanding shares. The effective date for the forward split was October 12, 2009.
5

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
 
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 Reactor Skid).  The initial focus of the Company’s research and development is the generation of products for our target market of US and International bio-diesel producers.  We expect that the first commercial installation of the Bioforce 9000 reactor skid system will be operational in May of 2009 in Moberly, Missouri.  The Company’s success will depend in part on its ability to obtain patents, maintain trade secrets, and operate without infringing onNANO Reactor Skid System which performs 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 March 31, 2009 and 2008 

The following is a comparison of the results of operations for the Company for the three months ended March 31, 2009 and 2008.
  Three Months Ended       
  March 31,       
  2009  2008  
 $ Change
  % Change  
                 
General and administrative expenses $460,170  $81,694  $388,607   463.3%
Research and development expenses  79,079   1,848,567   (1,769,488)  -95.7%
Total operating expenses  539,249   1,930,261   (1,391,012)  -72.1%
Loss from operations  (539,249)  (1,930,261)  1 ,391,012)  -72.1%
Interest expense  (48,593)  (10,101)  (38,493)  381.1%
Loss before income taxes  (587,842)  (1,940,362)  1 ,352,520   -69.7%
Income tax expense  -   -   -   0.0%
Net loss $(587,842) $1,940,362) $1 ,352,520   -69.7%
Sales
We had no sales for the three months ended March 31, 2009 or 2008.  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 $388,607, or 543%, forproduction of biodiesel. We believe the three months ended March 31, 2009 as compared to 2008.  In 2009, we issued shares of common stock to consultants in payment for their services to the Company which resulted in expenses of $183,400. We had no such expenses in 2008.  In addition, we incurred increased salary and related expenses of approximately $157,075 in 2009 resulting from the Company having more employees.  We also incurred increased legal and accounting fees of approximately $61,442 in 2009 due primarily to expenses incurred in conjunction with the Company’s reverse merger transaction and costs associated with management engaging an outside accounting consultant during the quarter ended March 31, 2009.

15
Research and Development Expenses
Our research and development expenses decreased by $1,769,488, or 96% for the three months ended March 31, 2009 as compared to 2008.  The decrease resulted from fewer costs associated with the Company’s fabrication and prototype development
Interest Expense
Interest expense for the three months ended March 31, 2009 increased by $38,493 to $48,593 as compared to 2008.

Results of Operations for the nine months ended March 31, 2009 compared to the nine months ended March 31, 2008
  Nine Months Ended       
  March 31,       
  2009  2008  $ Change  % Change 
             
General and administrative expenses $1,469,702  $118,533  $1,351,169   1139.9%
Research and development expenses  257,625   1,858,795   (1,601,170)  -86.1%
Total operating expenses  1,727,327   1,977,328   (250,001)  -12.6%
Loss from operations  (1,727,327)  (1,977,328)  250,001   -12.6%
Interest expense  (69,912)  (36,579)  (33,333)  91.1%
Loss before income taxes  (1,797,239)  (2,013,907)  2 16,668   -10.8%
Income tax expense  -   -   -   0.0%
Net loss $(1,797,239) $(2,013,907) $2 16,668   -10.8%
Sales
We had no sales for the nine months ended March 31, 2009 or 2008. In December 2008, we received a deposit for the saleapplication of our first operational bio-diesel production system. As the specifics of the sale had not yet been finalized, we deferred this revenue until such time as we have a fully documented contract of sale. We believe this will be during our fiscal fourth quarter ending  June 30, 2009.
Generaltechnology can dramatically reduce operating costs and Administrative Expenses
improve yields in comparison to competitive solutions. Our generalheadquarters and administrative expenses increased by $1,351,169, or 1,140%, for the nine months ended March 31, 2009 as compared to 2008.  In 2009, we issued shares of common stock to consultantsonly office is in payment for their services to the Company which resulted in expenses of $638,000.  We had no such expenses in 2008.  We also issued stock options to employees as compensation in 2009 resulting in increased expense of $198,620.  We had no such expenses in 2008.  In addition, we incurred increased salary and related expenses of approximately $285,744 in 2009 resulting from the Company having more employees.  We also incurred increased legal and accounting fees of approximately $177,450 in 2009 due primarily to expenses incurred in conjunction with the Company’s reverse merger transaction and costs associated with management engaging an outside accounting consultant during the quarter ended March 31, 2009.
Research and Development Expenses
Our research and development expenses decreased by $1,601,170, or 86% for the nine months ended March 31, 2009 as compared to 2008.  The decrease related primarily to fewer costs associated with fabrication and prototype development.
Interest Expense
Interest expense increased by $33,333, or 91.1% for the nine months ended March 31, 2009 as compared to 2008. Interest expense for the nine months ended March 31, 2009 increased as compared to 2008 primarily as a result of the Company’s amortization of convertible debt issued in December 2008 and in February 2009 in the amount of $40,146. We had no such expenses in 2008.

16
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 March 31, 2009, 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 shares of our preferred stock and on October 3, 2008, we raised $125,000 through the sale of 1,050,000 shares of our preferred stock.  We also raised an additional $125,000 through the issuance of convertible notes payable in December 2008 and an additional $110,000 through the issuance of convertible notes payable in February 2009.  We raised an additional $100,000 in March 2009 through the sale of 111,111 shares of our Series A preferred stock
As of March 31, 2009, we had cash of $2,084 as compared to $310,929 at June 30, 2008.  The decrease in cash is primarily due to the cash used in operations for the nine months ended March 31, 2009.  
As of March 31, 2009, our total current liabilities, excluding our outstanding line of credit balance and convertible notes payable, were $167,943, compared to $56,706 at June 30, 2008. Current liabilities at March 31, 2009 included accounts payable, accrued liabilities and deferred revenue, and represented primarily outstanding amounts for deferred revenue, salaries and professional fees.Chatsworth, California.
 
We have no significant operating history and from January 29, 2007 (inception),(date of inception) through March 31,September 30, 2009, we have generated a net loss of $4,479,020.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.
 
Recently Issued Accounting PronouncementsOur 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
 
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 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 inis a change in current practice.comparison

In April 2008, the Financial Accounting Standards Board, or FASB issued FASB Staff Position (“FSP”) No. FAS 142-3 “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP 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 FASB Statement No. 141 (revised 2007), “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company will adopt this FSP beginning July 1, 2009 and it is not believed that this will have an impact on the Company’s financial position, results of operations or cash flows.

In May 2008,for the FASB issued FSP No. APB 14-1, “AccountingCompany for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).”  FSP APB 14-1 addresses instruments commonly referred to as Instrument C from Emerging Issues Task Force No.  90-19, which requires the issuer to settle the principal amount in cashthree months ended September 30, 2009 and the conversion spread in cash or net shares at the issuer's option.  FSP APB 14-1 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 the debt. FSP APB 14-1 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. Early application is not permitted. Management is currently evaluating the impact of the adoption of this statement; however, but believes any impact with respect to future debt transactions could be material.2008.
 
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.
  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%

 
17
Revenues

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 effectiveWe had no revenue for the Companythree months ended September 30, 2009 or 2008. For the three month period ended September 30, 2009, we recorded Deferred Income of $7,480 as a deposit 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.

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 combinationpotential future sale/lease/license. We expect 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 isable 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.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants,General 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.Administrative Expenses
 
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 discussionOur general 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”)

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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 Hydroadministrative expenses increased $2,728,928 for the net assets of Bio.three months ended September 30, 2009.  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.

Given these circumstances, the Transaction is accounted for as a capital transaction rather than as a business combination.  That is, the Transaction is equivalentattributable largely to the issuance of stock by Hydro for the net assets of Bio, accompanied by a recapitalization.  The accounting5,700,000 common shares (pre-split) distributed as incentive and valued at $4,560,000 (of which $2,587,871 is identicalexpensed in this quarter)  to that resulting from a reverse acquisition. Because the Transaction is accounted for as a capital transaction,consultants, service providers and it occurred priorother key personnel who contributed to the filingsuccess of this Form 10-Q, these financial statements represent the financial conditionCompany. We had no such expenses in 2008.  The other two major expenses in the first quarter of fiscal 2010 were consulting fees of $296,022 and resultsprofessional fees of operations$125,981 for legal, audit, and accounting. This compares with no consulting fees and $56,186 in professional fees in the first quarter of Hydro.fiscal 2009.
 
Use of Estimates
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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 development of new product lines and technology.  These costs are primarily payroll and payroll related expenses and costs of various sample parts.  Research and development costs are expensed as incurred.Capital Resources

Cash

As of September 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 was 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 assets.

Common Stock

In 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.

ItemITEM 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 March 31,June 30, 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 March 31,June 30, 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 an effort to mitigate and remediate someassessing the effectiveness of these material weaknesses, management engaged an outside accounting consultant during the quarter ended  March 31, 2009.  In addition, we have started to identify ways to improve our standards and procedures, including upgrading and establishing controls over the accounting system to ensure we have appropriate internal control over financial reporting.
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.


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.
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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.

On March 17, 2009, the Company issued 111,111 shares of Series A Preferred Stock along with a warrant to purchase 111,111 shares of Common Stock at a purchase price of $1.25 per share.  The common stock and the warrant were issued to a foreign accredited investor for a purchase price of $100,000.00

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.

On March 16, 2009, we amended our certificate of incorporation to (i) increase the number of authorized shares to 110,000,000; (ii) designate 5,000,000 shares as Series A Preferred Stock and (iii) designate 5,000,00 shares as Series B Preferred Stock with the rights, preferences and privileges to be determined by the Board. We submitted the matter to our shareholder via written consent and a majority of the outstanding shares voted in favor of the amendment.
Item 5 – Other Information

None
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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

In accordance with article 8 of regulation S-X, CTI is a Smaller Reporting Company and financial schedules are not required for Smaller Reporting Companies.
 
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SIGNATURES

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

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.
   
May/s/  R.L. HartshornChief Financial OfficerNovember 13, 2009
R.L. Hartshorn(Principal Financial Officer and Accounting Officer)  
By:  /s/ Roman Gordon
Roman Gordon, Chief Executive Officer

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