The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.





Overview of Our Business

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

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

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













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Inflation and potential recession

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

Management's Plan of Operation

We are continuously engaged in manufacturing of our Nano Reactor® and Nano Neutralization® Systems which are designed to help refine vegetable oils such as soybean, canola and rapeseed. Additionally, we have developed LPN™'s that provide commercial opportunity in industrial water treatment, enhancement of alcoholic beverages, and MLPN being utilized in a consumer small home appliance.

During the year ended June 30, 2022, we incurred net loss of $619,000 and used cash in operating activities of $484,000. As of June 30, 2022, we have a working capital deficiency of $30,000 and a stockholders' surplus of $1,110,000.

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

Our agreement with Enviro WaterTek signed in March of 2019, has generated sales of LPN™'s and recurring revenue stream in our fiscal 2022, resulting in aggregate revenue of $46,000

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

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

Critical Accounting Policies and Revenue Recognition

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

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













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Revenue Recognition

The Company follows the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the services it transfers to its clients.

Revenue from sale of our Nano Reactor®and LPN™ is recognized when products are shipped from our manufacturing facilities as this is our sole performance obligation under these contracts and we have no continuing obligation to the customer.

The Company also recognizes revenue from its share of gross profit to be earned from distributors, as defined, which we treat as variable consideration and recognize using the most likely amount method. Estimates are available from our distributor which are considered in the determination of the most likely amount. However, given the lack of control over the sale to the end customer and the lack of history of prior sales, the amount of gross profit revenue recognized is limited to the actual amount of cash received under the contract which the Company has determined is not refundable and that a significant future reversal of cumulative revenue under the contract will not occur.

In addition, the Company also recognizes revenues from usage fees of certain reactors. Usage fees are recognized based on actual usage by the customer.





Leases

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

Equity Method Investment

The Company accounts for investments in entities in which the Company has significant influence over the entity's financial and operating policies, but does not control, using the equity method of accounting. The equity method investments are initially recorded at cost, and subsequently increased for capital contributions and allocations of net income, and decreased for capital distributions and allocations of net loss. Equity in net income (loss) from the equity method investment is allocated based on the Company's economic interest. The Company assesses its investment in equity method investments for recoverability, and if it is determined that a loss in value of the investment is other than temporary, the Company writes down the investment to its fair value. The Company does not believe that the value of its equity method investment was impaired as of June 30, 2022.





Share-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

Recent Accounting Pronouncements

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







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Results of Operations

Below is summary comparing fiscal 2022 and fiscal 2021.





                                          For the Years Ended
                                                June 30,
                                         2022             2021          $ Change        % Change

Revenue                               $ 1,619,000      $   537,000     $ 1,082,000            201%
Revenue-related party                      46,000           21,000          25,000            119%
Cost of revenue                           (41,000 )        (20,000 )       (21,000 )          105%
Gross profit                            1,624,000          538,000       1,086,000            202%

General and administrative expenses     1,728,000        1,264,000         464,000             36%
Impairment of equipment                   178,000                -         178,000            100%
Research and development expenses          17,000           21,000          (4,000 )         (19)%
Total operating expenses                1,923,000        1,285,000         638,000             50%

Income (loss/) from operations           (299,000 )       (747,000 )       448,000             68%

Gain on forgiveness of PPP Loan           104,000          104,000               -              -%
Loss on settlement of liabilities        (371,000 )              -        (371,000 )        (100)%
Loss from equity method investment        (48,000 )              -          26,000            100%
Interest expense                           (5,000 )         (6,000 )         1,000             17%
Net income (loss)                     $  (619,000 )    $  (649,000 )   $   115,000           (18)%




Revenue

During the year ended June 30, 2022, revenue increased by $1,107,000 to $1,665,000 and it was derived primarily from the sales of our Nano Reactor® and CTi Nano Neutralization Systems to Desmet of $592,000 and share in gross profit of $1,027,000. In addition, the Company also recorded an aggregate revenue of $46,000 from the sale of LPN™ and water processing to Enviro Watertek, LLC.

During the year ended June 30, 2021, our revenue was $558,000 and it was derived from the sale of our Nano Reactor® and CTi Nano Neutralization Systems to Desmet of $541,000, in addition, we recorded an aggregate revenue of $17,000 from the sale of LPN™ and water processing usage fee to Enviro Watertek, LLC.





Operating Expenses

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

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







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Net Loss

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

Liquidity and Capital Resources

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

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

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





Going concern

During the year ended June 30, 2022, we incurred a net loss of $619,000 and used cash in operating activities of $484,000. These factors, among others, raise substantial doubt about our ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company's independent registered public accounting firm, in its report on our June 30, 2022 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern. The Company's financial statements do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable to continue as a going concern.

Management's plan is to generate income from operations by continuing to license its technology globally. Additionally, we anticipate generating revenues from our agreements with EW and ABI.

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

Off-balance Sheet Arrangements

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

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