Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K**
|                                                                                                                                                             |       |                                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                            | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| ** **                                                                                                                                                       | ** ** | ** **                                                                                              |
| **For the fiscal year ended March 31, 2010**                                                                                                                |
| ** **                                                                                                                                                       | ** ** | ** **                                                                                              |
| **or**                                                                                                                                                           |
| ** **                                                                                                                                                       | ** ** | ** **                                                                                              |
| **o**                                                                                                                                                            | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                       | ** ** | ** **                                                                                              |
| **For the transition period from             to           ** |

 

**Commission file number: 1-06732**

 

**WASTE2ENERGY HOLDINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **26-2255797**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employee Identification No.) |
| * *                                                        | * *   | * *                             |
| **1 Chick Springs Road, St 218, Greenville, SC**                | * *   | **29609**                            |
| (Address of Principal Executive Offices)                        | * *   | (Zip Code)                           |

 

Registrant’s telephone number, including area code:

**(864) 679-1625**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 
| ** ** | **Title of Each Class**                    | ** ** | **Name of Each Exchange on Which Registered** | ** ** |
|------------|--------------------------------------------|------------|-----------------------------------------------|------------|
|       | Common  Stock, $0.0001 par value per share |       |                                          |       |

 

Securitiesregistered pursuant to Section 12(g) of the Act:**None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes  ̈    No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes o      No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x      No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o      No o

 

Indicate by check mark if disclosureof delinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K.  x

 

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

 
| Large  accelerated filer  ̈                                       |   | Accelerated  filer o         |
|-----------------------------------------------------------------------|--------|------------------------------|
|                                                                  |   |                         |
| Non-accelerated  filer o(Do not check if a smaller reporting company) |   | Smaller  reporting Company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o    No  x

 

As of September 30,2009, the aggregate market value of the registrant’s common stock held bynon-affiliates of the registrant was $36,001,221. The aggregate market valuewas computed by using the closing price of the common stock as of that date onthe OTC:BB. (For purposes of calculating this amount only, all directors andexecutive officers of the registrant have been treated as affiliates.)

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date.

 
| **Class of  Stock**         | ** ** | **Shares  as of June 21, 2010** |
|----------------------------------|------------|--------------------------------------|
| Common  Stock, $0.0001 par value |       | 50,702,742                           |

 

 

 

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**TABLE OF CONTENTS UPDATE**

 

| ** **                                            | **Page**                                                                                                            |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                                |
| Cautionary Note  Regarding Forward-Looking Statements | 3                                                                                                                   |
| Availability Of  Information                          | 3                                                                                                                   |
|                                                  |                                                                                                                |
| **PART I**                                            |                                                                                                                |   |
| Item 1.                                               | Business                                                                                                            | 4 |
| Item 1A.                                              | Risk Factors                                                                                                        | 17 |
| Item 1B.                                              | Unresolved  Staff Comments                                                                                          | 26 |
| Item 2.                                               | Properties                                                                                                          | 26 |
| Item 3.                                               | Legal Proceedings                                                                                                   | 26 |
| Item 4.                                               | Removed and Reserved                                                                                                | 26 |
|                                                  |                                                                                                                |   |
| **PART II**                                           |                                                                                                                |   |
| Item 5.                                               | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 27 |
| Item 6.                                               | Selected Financial  Data                                                                                            | 27 |
| Item 7.                                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 28 |
|                                                  | Results  of Operations                                                                                              | 30 |
|                                                  | Year Ended March 31, 2010 vs. Year Ended March 31,  2009                                                            | 30 |
|                                                  | Liquidity and Capital Resources                                                                                     | 31 |
| Item 7A.                                              | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 34 |
| Item 8.                                               | Financial  Statements and Supplementary Data                                                                        | 35 |
| Item 9.                                               | Changes In  and Disagreements With Accountants on Accounting and Financial Disclosure                               | 92 |
| Item 9A(T).                                           | Controls and  Procedures                                                                                            | 92 |
| Item 9B.                                              | Other Information                                                                                                   | 93 |
|                                                  |                                                                                                                |   |
| **PART III**                                          |                                                                                                                |   |
| Item 10.                                              | Directors,  Executive Officers and Corporate Governance                                                             | 94 |
| Item 11.                                              | Executive  Compensation                                                                                             | 96 |
| Item 12.                                              | Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                     | 98 |
| Item 13.                                              | Certain Relationships and Related  Transactions, and Director Independence                                          | 99 |
| Item 14.                                              | Principal Accountant Fees and  Services                                                                             | 100 |
|                                                  |                                                                                                                |   |
| **PART IV**                                           |                                                                                                                |   |
| Item 15.                                              | Exhibits - Financial Statement  Schedules                                                                           | 101 |
|                                                  |                                                                                                                |   |
| **OTHER**                                             |                                                                                                                |   |
|                                                  | Signatures                                                                                                          | 104 |

 

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

Certain statements in this AnnualReport on Form 10-K may constitute “forward-looking” statements as defined inSection 27A of the Securities Act of 1933 (the “Securities Act”), Section 21Eof the Securities Exchange Act of 1934 (the “Exchange Act”), the PrivateSecurities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made bythe Securities and Exchange Commission (“SEC”), all as may be amended from timeto time. Forward-looking statements include, but are not limited to, statementsthat express our intentions, beliefs, expectations, strategies, predictions orany other statements relating to our future activities or other future eventsor conditions.  These statements arebased on current expectations, estimates and projections about our businessbased, in part, on assumptions made by management.  Forward-looking statements can be identifiedby, among other things, the use of forward-looking language, such as the words “plan,”“believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,”“would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words,or the negative of these terms or other variations of these terms or comparablelanguage, or by discussion of strategy or intentions. These statements are notguarantees of future performance and involve risks, uncertainties andassumptions that are difficult to predict. Therefore, actual outcomes andresults may, and are likely to, differ materially from what is expressed orforecasted in the forward-looking statements due to numerous factors, includingthose described above and those risks discussed from time to time in thisAnnual Report on Form 10-K, including the risks described under “Risk Factors,”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in this report and in other documents which we file with theSecurities and Exchange Commission. In addition, such statements could beaffected by risks and uncertainties related to our ability to raise anyfinancing which we may require for our operations, competition, governmentregulations and requirements, pricing and development difficulties, our abilityto make acquisitions and successfully integrate those acquisitions with ourbusiness, as well as general industry and market conditions and growth rates,and general economic conditions. Any forward-looking statements speak only asof the date on which they are made, and we do not undertake any obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date of this report.

 

**AVAILABILITY OF INFORMATION**

 

You may read and copy anymaterials the Company files with the SEC at the SEC’s Public Reference Room at100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of such materialsalso can be obtained free of charge at the SEC’s website, www.sec.gov, or bymail from the Public Reference Room of the SEC, at prescribed rates. Pleasecall the SEC at 1-800-SEC-0330 for further information on the operation of thePublic Reference Room.  The SEC maintainsan Internet site that contains reports, proxy and information statements, andother information regarding issuers that file electronically with the SEC.  This information can be accessed at the website http://www.sec.gov.

 

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**PART I**

 

**Item 1.*  *BUSINESS**

 

The terms “we,” “our,” “ours,”“us,” “Waste2Energy” and “Company” refer to Waste2Energy Holdings, Inc. and itssubsidiaries.

 

**AboutWaste2Energy Holdings, Inc.**

 

We are in the business ofdesigning, engineering, manufacturing and installing waste to energy conversionplants.  We are organized as a holdingcompany which was incorporated in Delaware on March 11, 2008. We conduct our operationsthrough subsidiaries which are engaged predominantly in the businesses ofengineering design and project management of the construction of waste toenergy conversion facilities.

 

Our corporate headquartersis located in Greenville, South Carolina.  Currently, we have only one other operating facility, a leased officespace in Dumfries Scotland which currently serves as the Company’s mainengineering and technology operating center.

 

**Overview**

 

We intend to compete in thegrowing worldwide market for waste-to-energy systems that simultaneouslydestroy waste and generate green energy. Our business plan calls for us todesign, manufacture and install small footprint, simple, cost-effectivegasification technologies that are scalable, modular, environment friendly androbust enough to operate in harsh and remote environments. We providecustomized engineering solutions that will enable our current and futurecustomers to convert solid waste streams traditionally destined for landfill orincineration into clean, renewable energy.

 

We intend to target thelocal waste-to-energy sector in the small to mid-range market — from one tonbatch systems all the way up to the continuous 500 metric ton per day (TPD)range — not large centralized plants such as those operated by waste-to-energycompanies like Covanta or Wheelabrator who typically develop major facilitiesin the 1,000+ TPD range.  We intend tofocus on providing any customers we obtain with the technologies to recover thelatent energy in municipal solid waste, construction and demolition debris,industrial and commercial waste, and biomass.

 

To date we have financed ouroperations and acquisitions through private placements of our securities.  To date we have generated limited revenues,have substantial operating losses and accumulated deficit since our inceptionin April 2007.

 

**Basis ofBusiness Model**

 

Our current proposedbusiness model and strategic focus will be on sales of plant and equipmentincorporating our technology to: (i) facility based waste generators (e.g.,hospitals, mining camps, military) with simultaneous waste disposal and energyrequirements, (ii) dedicated waste management and alternative energy companieswith the resources to advance integrated waste to energy projects, and (iii) municipalitiesand their contractors.  We believe we cangenerate revenues and profits from the sales of our plant and equipment.

 

We also believe we have nearterm revenue generating potential in operations, service and maintenancecontracts. Over the longer term, we will seek to obtain carried interestparticipation in selected customer projects and, as and if we develop aproposed licensing program, we believe we will be able to generate licensingand royalty income.

 

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**RecentHistory**

 

Since our incorporation inApril, 2007, the Company has focused time and resources in six main areas:

 

1.               Acquisition of Enerwaste Internationaland EnerWaste Europe;

2.               Execution of the DARGAVELProject in Dumfries, Scotland;

3.               Managing the consequences ofthe collapse of the Icelandic banking system and the subsequent closure of ouroperations in Iceland;

4.               Replicating, on an outsourcedbasis in close proximity to Dumfries, the design, engineering and manufacturingcapability that we previously had in Iceland;

5.               Development of ourintellectual property; and

6.               Business development effortswith respect to generation of a sales pipeline, new contracts and theidentification of partners who we can enter into strategic alliances with forsupply of equipment as we continue to grow the business.

 

As of March 31, 2010, theDargavel project was essentially complete, pending the completion of work byother non-related vendors who were responsible for components of the facilitythat are impacted by our control system, most notably the energy recoverybackend of the plant.  Our customer hasbeen successfully processing waste through the facility during the fourthquarter of fiscal 2010.

 

We have continued to refineand develop our intellectual property with respect to the controlling systemsfor the Continuous Batch Oxidation System (“cBOS”) utilized at the Dargavelfacility.  We have applied for a patentwith respect to our internally developed control system which remains pendingas of this filing.

 

During the past year we haveidentified a number of potential projects for the Company.  For certain projects, the discussions havesignificantly advanced to the point of letters of intent.  For others, we have entered into PreliminaryEngineering Design Studies (“PEDS”) with our customers to do a thoroughpreliminary study of the potential waste to energy project.  The PEDS provides a customer with layouts,specifications, process parameters, and definitive pricing.  The Company cannot predict the outcome of theongoing discussions with prospective customers or whether those customers whohave entered into an agreement with the Company for a PEDS study will elect toinitiate a project upon conclusion of the study.

 

**ReverseMerger**

 

On May 6, 2009, the Companyentered into an Agreement and Plan of Merger (the “Merger Agreement”) withWaste2Energy Acquisition Co., a Delaware corporation and wholly-owned subsidiaryof the Company (the “Subsidiary”) and Waste2Energy, Inc (“Waste2Energy”).  On May 28, 2009, the Company, Subsidiary andWaste2Energy entered into Amendment No. 1, dated as of May 28, 2009, to theMerger Agreement (“Amendment No.1”). Pursuant to Amendment No. 1, the definition of Acquisition Shares wasrevised to mean 45,981,770 shares of Waste2Energy and Section 5.19(e) of theMerger Agreement was revised to note that the issued and outstanding sharecapital of Waste2Energy consists of 45,981,770 issued and outstandingshares.  (The Merger Agreement as amendedby Amendment No. 1 is hereinafter referred to as the “Merger Agreement”).

 

Pursuant to the MergerAgreement, on May 28, 2009 (the “Closing Date”), the Subsidiary merged with andinto Waste2Energy resulting in Waste2Energy becoming a wholly-owned subsidiaryof the Company (the “Merger”). Pursuant to the Merger Agreement, the Companyissued 45,981,770 shares of common stock (the “Common Stock”) of the Company(the “Acquisition Shares”) to the shareholders of Waste2Energy, representingapproximately 96% of the issued and outstanding Common Stock following the closingof the Merger and the private placement that closed concurrently with theMerger Agreement, and warrants to purchase 18,760,000 shares of Common Stock(the “Acquisition Warrants”) to the warrant holders of Waste2Energy at exerciseprices ranging from $.10 to $.75. Pursuant to the Merger Agreement, theoutstanding shares of common stock and warrants to purchase shares of commonstock of Waste2Energy were cancelled.

 

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The acquisition ofWaste2Energy was treated as a recapitalization, and the business ofWaste2Energy became the business of the Company. At the time of therecapitalization, the Company was not engaged in any active business.

 

The accounting rules forrecapitalizations require that beginning May 28, 2009, the date of therecapitalization, our balance sheet includes the assets and liabilities ofWaste2Energy, Inc., and our equity accounts were recapitalized to reflect thenet equity of Waste2Energy, Inc. The financial conditions and results ofoperations for the periods prior to May 28, 2009 reflect the financialcondition and operating results of Waste2Energy, Inc.

 

In July 2009, following theMerger, the Company (formerly known as Maven Media Holdings, Inc) changed itsname to Waste2Energy Holdings Inc.

 

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**The GlobalWaste Management Market**

 

We believe waste presents amajor challenge to our civilization.  TheCompany believes discarded materials need to be efficiently collected, treated,recycled or disposed.  The Companybelieves, whether located in urban or rural areas, every sector of the economyneeds to address the challenge of waste management.  The Company believes our advanced thermalprocesses permit various types of waste to be safely and efficiently handled ata state-of-the-art facility, which we believe provides major benefits for thewaste producer, the local community and the environment.

 

As such, we will be subjectto intense competition with, among others, landfill and recycling/compostingand other waste-to-energy technologies in the global waste management market.

 

In developing our growthstrategy and marketing plans, we took into consideration that landfill space isincreasingly at a premium, and, in Europe, is being phased out. We also believethat island economies (the Caribbean etc.), being based on garbage-aversetourism with expensive electricity, will be natural markets and that the globaleconomic drivers of higher waste disposal costs, higher electricity costs,higher congestion costs and higher energy costs will make waste-to-energy amore competitive solution.

 

Waste is a local feedstockthat does not gain value when transported distances. This means that plant sizehas to be both scalable down and up and modular to satisfy feedstock supplyconsiderations and allow for future expansion.

 

**Technology**

 

**GasificationProcess in General**

 

Gasification is a processthat converts carbon-containing materials, such as coal, petroleum coke,municipal solid waste, or biomass, into a synthesis gas (syngas) and ash.Gasification occurs when a carbon-containing feedstock is exposed to elevatedtemperatures and/or pressures in the presence of controlled, limited amounts ofoxygen.

 

The heart of agasification-based system is the gasifier. Gasification technologies differ inmany respects but share certain general production characteristics. Thefeedstock reacts in the gasifier with oxygen (and/or steam) at high temperatureand pressure in an oxygen starved atmosphere to produce a syngas and ash.Syngas is primarily hydrogen, carbon monoxide and other gaseous constituents,the proportions of which can vary depending upon the conditions in the gasifierand the type of feedstock. It can be used as a basic chemical building block inthe production of high value energy products such as diesel or electricity.

 

**Waste2Energy’sProcess**

 

We believe our gasificationprocess follows the same basic principles as described above but isdifferentiated by the following features:

 

·                  Most gasifiers requirefeedstock that has been through a process of pretreatment - either drying,sorting, shredding or sizing.  Our BOSTMtechnologies require no such pretreatment as all waste goes straight into the primarychamber.  The CORTM system is optimized for biomass and willfunction more efficiently with MSW feed stocks if glass, masonry and metals arepre-sorted.

·                  In W2eTM’s systems, the syngas isoxidized at very high temperatures in a secondary combustion chamber to ensurecomplete destruction of all remaining hydrocarbon compounds.  The result is a stream of very hot (>1000Deg C) waste flue gas. The thermal power of this waste stream can becaptured in a waste heat recovery boiler and be used in a simple steam cycle orOrganic Rankine Cycle (ORC), utilizing a refrigerant gas to drive a turbinecoupled to an electric generator. Alternatively, or in conjunction with power recovery, steam may be usedfor district heating, thermal desalination or in other industrial processes.

 

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·                  Typically, the waste fluegas is treated as an integral part of the BOSTM process train. W2eTM’s treatment utilizescommercially available systems that add sodium bicarbonate for acidneutralization; urea to minimize nitrous oxides, activated carbon to removetrace dioxins, furans, and heavy metals; and a filter bag house to collectscrubber consumables and any residual fly ash.

·                  A Continuous Emission Monitoring(CEM) system monitors and logs air emissions. The cBOSTM plant in Husavik, Iceland, currentlymeets and exceeds the stringent EU regulations covering emissions (EUregulations are currently more onerous than US EPA standards).

 

**Waste2EnergyProducts**

 

Our business plan calls forus to build small footprint, simple, cost-effective technologies that arescalable, modular, environment friendly and robust enough to operate in harshand remote environments.  Although we havelimited revenues, we have developed three technology platforms which are ownedby us:

 

 

We neither own any interestnor receive any revenues and/or other income from the aboveplants/installations.

 

The technology platform bestsuited to a particular application is selected primarily on the basis of thefeedstock specifications as shown in the tabulation below.

 

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**BOSTMProducts**

 

We believe the BatchOxidation SystemTM will be our primary catalyst for growth in the globalwaste-to-energy industry due to a wide range of benefits and severalfirst-to-market advantages. The Standard BOS (sBOSTM) was originally developed inthe US as a modular approach to small scale facility based waste disposal, withthe added benefit that it is able to recover energy in the form of hot water,steam and/or electricity. The inability of the sBOSTM to provide acontinuous production of energy over a 24 hour period of operation led to thedevelopment of the Continuous Batch Oxidation System (cBOSTM ).

 

The sBOSTM accepts solid orliquid (in small quantities) waste or other forms of waste and is distinguishedby its ability to accept untreated waste. No preparation is required in theform of separation, shredding etc.  Evenlarge motor tires and animal carcasses can be fed directly into the primarycells.  Gasification is done at acontrolled temperature above 600 Deg C with minimum airflow, which facilitatesa complete gasification of the mixed waste, allows metals to be ejected insolid form with the ash (from whence they can be removed and recycled),sterilizes any medical waste and minimizes the production of airborneparticulates. The bottom ash, which is the solid residue left in the primarycells, is also non-toxic/hazardous and can safely be sent as inert landfill, orbe used for drainage fill or as aggregate in concrete, cement block, andasphalt road surfacing.  The reduction involume of bottom ash is between 90% and 95% of the initial waste.

 

The syngas generated in theprimary gasification chamber is oxidized in a secondary combustion chamber tocompletely destroy remaining hydrocarbons. The hot flue gases are released withor without further treatment depending on the nature of the feedstock and theemission regulations at the site.

 

A basic sBOSTM unit goesthrough the following cycle during a 24 hour period:

 

 

With this sequence webelieve it is possible to recover reasonable amount of thermal energy for only6+ hours of operation in any 24 hour period. Full power recovery is unlikely tobe economically justifiable but steam production for heating or laundry may bevery attractive to a hospital or hotel.

 

By combining four BOSTMprimary gasifier chambers it is possible to obtain continuous power output bystaggering the operational sequence by six hours as shown below:

 

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This is the basis of our ContinuousBatch Oxidation System (cBOSTM ) technology.  The basic cBOSTM system has anominal capacity of 60 Tonnes Per day and consists of four primary gasificationchambers feeding one secondary oxidation chamber. For larger requirements thebasic four-primary module can be replicated on the same site to produce a muchlarger plant, the ultimate size being limited only by the logistics oftransporting and handling the waste. With its modular design, continuous poweroutput and ability to meet current stringent emission standards, the cBOSTM iswell suited to process Municipal Solid Waste (“MSW”) from residentialcommunities of 20,000 to 100,000 in Europe or North America (larger in Africa,Asia & Latin America) or to tackle industrial waste piles of tiresetc. At present we believe there is very little industrial scale gasificationof biomass or MSW and we see this as a significant opportunity as we believethere are few systems, if any, which are as versatile as the BOSTM that meet orexceed both EU and EPA emission standards.

 

**ContinuousOxidation Reactor (CORTM)**

 

We believe the CORTM is alow-cost gasification and oxidation system in which both processes are carriedout in the same vertical chamber. Like the BOSTM, the CORTM gasifies at lowtemperature and then oxidizes at high temperature thus giving extremely cleanemissions. It has a mechanical feed system and is optimized for largequantities of biomass or other *consistent*waste feedstock from 50 to 500 tons per day and is also modular. This systemcan be supplied with or without energy capture for the production of steam orelectricity. Biomass feedstocks include wood chips from forestry operations;construction leftovers such as sawdust and wood debris; agricultural residueslike corn stalks, rice and wheat straw as well as much of the content of MSW(if properly pre-treated).

 

We believe the advantages ofthe CORTM are:

 

·                  Low capital costs as aresult of simple modular construction

·                  Scalability

·                  Short lead time and rapiddeployment (basic system)

·                  Gasification and oxidationoccur in the same vertical chamber, with the upper oxidation section reactingat high temperature to minimize emission issues

·                  Ease of repair andmaintenance

 

The CORTM is a continuousfeed gasifier (as opposed to batch operation) and this dictates that the feedmaterial must be relatively consistent in chemistry and physicalcomposition.  There are MSW andindustrial waste streams that have such properties, particularly if somepretreatment such as sorting, densification or dewatering is done.  De-ashing is also carried out on a continuousbasis as the tower does not cool down.

 

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**Market Size**

 

We believe the municipalsolid waste (MSW) market is the largest addressable market for ourtechnologies. The following chart derived from the US Energy Information Agencyshows the latent thermal energy in various components of MSW:

 
| **Renewable**         | ** ** | **Million  BTU/ton** | ** ** |
|-----------------------|------------|----------------------|------------|
| Textiles              |       | 13.8                 |       |
| Wood                  |       | 10.0                 |       |
| Food                  |       | 5.2                  |       |
| Yard  trimmings       |       | 6.0                  |       |
| Newspaper             |       | 16.0                 |       |
| Corrugated  Cardboard |       | 16.5                 |       |
| Mixed  paper          |       | 6.7                  |       |
| Leather               |       | 14.4                 |       |

 
| **Non-Renewable** | ** ** | **Million  BTU/ton** | ** ** |
|-------------------|------------|----------------------|------------|
| Plastics          |       |                 |       |
| PET               |       | 20.5                 |       |
| HDPE              |       | 19.0                 |       |
| PVC               |       | 16.5                 |       |
| LDPE/LLDPE        |       | 24.1                 |       |
| PP                |       | 38.0                 |       |
| PS                |       | 35.6                 |       |
| Other             |       | 20.5                 |       |
| Rubber            |       | 26.9                 |       |

 

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The market potential webelieve is therefore significant.  Thechart opposite shows that the US alone generates in excess of 250 million tonsof MSW per year. We believe that the percentage of this that is processed in awaste-to-energy faculty will increase with the availability of smaller scaleprocessing technologies, such as our BOSTM and CORTM.

 

 

***Chart from US Environmental Protection Agency******(http://www.epa.gov/epawaste/basic-solid.htm)***

 

Based on the rates above, asingle 60 TPD cBOSTM could potentially handle the waste generatedby a town of 25,000 inhabitants and in the process produce approximately 2MW ofelectricity (depending on the actual composition of the MSW).

 

In addition to MSW, weintend to target construction and demolition waste (sometimes referred to as “debris”)which generally includes a mix of wood, cardboard, metal, plastics, asphalt,brick and concrete. According to Waste Management, Inc., a large wasteprocessing company in the US, there is more than 130 million tons of this mixedwaste stream generated each year in the US alone. Of this, they report thatonly one fifth is currently recycled. We believe our BOSTM can be used for handlingthis waste stream and recovering recyclable elements.

 

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**TargetMarkets and Customer Profile**

 

Our target markets andpotential customers for each product are tabulated below.

 

 

**Competition**

 

We will face extremelyintense competition from known and unforeseen competitors in differentindustries.  Moreover, as we have limitedassets, personnel and other related items, most, if not all, of our competitorswill have more financial resources, experience and personnel.

 

We currently believe ourprimary competition comes from landfill and recycling facilities as well assuppliers of incineration equipment designed to handle MSW.  Because incinerators employ single-stageoxidation, carried out at much lower temperatures than used by our BOSTMtechnology, they face a greater challenge with emissions control andcleaning.  This raises the initialcapital cost of the equipment. Additionally, incineration systems are not usually suited to smallerapplications.

 

We are aware of severalgasification technologies that are potential competitors. There are also plasmatechnologies that are being marketed for MSW processing, including by AlterNRGa Canadian company formed to acquire and commercialize Westinghouse’s plasmatechnology which is an expensive process.

 

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We believe the BOSTM has thefollowing competitive advantages over these technologies - and other continuoussystems that require pre-treatment of waste:

 

·                  Capital & OperatingCosts.  In continuous processes, thewaste needs to be sorted and shredded. The sorting removes solid metals and pieces of unshreddable materialsuch as bricks.  In the W2eTM BOSTM noshredding or sorting is needed as everything goes straight into the primarychamber.  This means the capital andoperational costs of a BOSTM are both significantly lower for an equivalent sizeof plant.

·                  Complexity.  The mechanism for feeding continuous systemsis automatic and mechanical thus adding considerable complexity than that ofthe BOSTM which is loaded through a simple hydraulically operated lid.

·                  Operational Flexibility.  The BOSTM normally runs with four primaries toeach secondary.  During maintenance,however, it is possible to continue to run on three primaries while the fourthis being serviced.  Furthermore, ourprimaries cool off daily as part of their normal cycle, thus allowing minormaintenance to be carried out without any disruption to the normal operation.  In contrast, a traditionally designedcontinuous system has to be completely shut down and cooled off before anymaintenance is done.

·                  Consistency of Feed.  Unlike the BOSTM, other continuous systemsrequire that the feedstock must be consistent in order for the mechanicalhandling to work effectively.

·                  Fly-ash and otherParticulates.  The BOSTMhas no turbulence in the primary chamber and thus creates almost no fly-ash orother particulates.  Additional filteringsystems have to be used in continuous systems in order to cope with theparticulates in the flue gas emissions.

 

In addition to AlterNRG,there are other emerging technologies such as waste2tricity but, to the best ofour knowledge, these technologies are unproven with no commercial references.We believe that the “first mover” advantages of the fully permitted plant inHusavik, Iceland and proven technology in multi-applications givesWaste2Energy a head start over emerging competitors.

 

**GovernmentRegulation**

 

We are subject to a numberof foreign and domestic laws, regulations and guidelines, including laws andregulations relating to health and safety, the conduct of operations, theprotection of the environment and the manufacture, management, transportation,storage and disposal of certain materials used in the Company’s operations.Management believes that the Company is in compliance with such laws,regulations and guidelines; however, changes to such laws, regulations andguidelines due to environmental changes, unforeseen environmental effects,general economic conditions and other matters beyond our control may cause adverseeffects to our operations. We have invested financial and managerial resourcesto ensure compliance with applicable laws, regulations and guidelines and willcontinue to do so in the future. Although such expenditures have not,historically, been material to the Company, such laws regulations andguidelines are subject to change. Accordingly, it is impossible for the Companyto predict the cost or impact of such laws, regulations or guidelines on itsfuture operations. It is not expected that any changes to these laws,regulations or guidelines would affect our operations in a manner materiallydifferent than they would affect other gasification companies of a similarsize.

 

We are subject to variousenvironmental laws and regulations enacted in the jurisdictions in which weoperate which govern the manufacture, importation, handling and disposal ofcertain materials used in our operations. We are in the process of establishingprocedures to address compliance with current environmental laws and regulationsand we monitor our practices concerning the handling of environmentallyhazardous materials. However, there can be no assurance that our procedureswill prevent environmental damage occurring from spills of materials handled bythe Company or that such damage has not already occurred. On occasion,substantial liabilities to third parties may be incurred. We may have thebenefit of insurance maintained by the Company or the operator; 

 

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however, the Company maybecome liable for damages against which it cannot adequately insure or againstwhich it may elect not to insure because of high costs or other reasons.

 

Our customers are subject tosimilar environmental laws and regulations, as well as limits on emissions tothe air and discharges into surface and sub-surface waters. While regulatorydevelopments that may follow in subsequent years could have the effect ofreducing industry activity, we cannot predict the nature of the restrictionsthat may be imposed. We may be required to increase operating expenses orcapital expenditures in order to comply with any new restrictions orregulations.

 

**IntellectualProperty**

 

Having completed the initialPatent Cooperation Treaty (PCT) filing process, we are now proceeding withnational and/or regional filing of our patent applications.  We have patents pending on certain aspects ofour Batch Oxidation System in North America, Europe, and key countries in Asia,Middle East, Africa and South America. The Company intends to begin the process of filing for additionalpatents in the near future.

 

In addition to futureengineering developments and patent filings, our intellectual property consistsof trade secrets and know-how for the operation, management and control ofgasification processes, especially related to unsorted municipal waste streams.This is further enhanced by the technical documentation and support necessarynot only to operationalize these systems, but also to bring them successfullythrough the local and regional permitting processes and the appropriateregulatory oversight agencies. We are in an ongoing process of furthercodifying this knowledge base for the future benefit of licensees we are ableto obtain, if any.

 

We also intend, subject toavailable funds among other factors, to pursue not only the development ofadditional IP but also its proactive acquisition when we identify opportunitiesto strengthen our proprietary position.

 

**Employees**

 

As of the date of the filingof this report, we have eleven (11) employees, all of whom are full-time, two (2) ofwhich are executive officers. We consider our employee relations to be good.

 

**Researchand Development**

 

For the period from April 1,2008 to March 31, 2010, we expended no funds on research and development.

 

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**Item 1A. * *RISK FACTORS**

 

**RISKFACTORS**

 

The following risk factorscould have a material adverse effect on our business, financial condition andresults of operations.

 

***We are not currently profitable and may never become profitable.***

 

We have a history of losses(approximately $11,720,669 from continuing operations for the year ended March 31,2010), have an aggregate accumulated deficit (approximately $30,428,744 throughMarch 31, 2010), expect to incur additional substantial operating lossesfor the foreseeable future and we may never achieve or maintainprofitability.  We also expect toexperience negative cash flow for the foreseeable future as we fund our operatinglosses and capital expenditures. As a result, we will need to generatesignificant revenues in order to achieve and maintain profitability.  We may not be able to generate these revenuesor achieve profitability in the future. Our failure to achieve or maintainprofitability could negatively impact the value of our Common Stock andinvestors would in all likelihood lose their entire investment.

 

***Our independent registered auditors have expressed substantial doubtabout our ability to continue as a going concern.***

 

Our audited financialstatements for the fiscal year ended March 31, 2010 included anexplanatory paragraph that such financial statements were prepared assumingthat we would continue as a going concern. As discussed in Note 2 to theconsolidated financial statements included with this Report, we have incurred asignificant operating loss of $11,720,669 and used cash of $5,201,892 forcontinuing operations which resulted in an accumulated deficit of $30,428,744and a working capital deficiency of $6,634,820 as of March 31, 2010. Theseconditions raise substantial doubt about our ability to continue as a goingconcern. Management’s plans regarding these matters also are described in Note2 to the financial statements.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

***To date we have had significant operating losses, an accumulateddeficit and have had limited revenues and do not expect to be profitable for atleast the foreseeable future, and cannot predict when we might becomeprofitable, if ever.***

 

As discussed elsewhereherein, we have been operating at a substantial operating loss each year sinceour inception, have a substantial accumulated deficit and we expect to continueto incur substantial losses for the foreseeable future.  In addition, we expect to incur substantialoperating expenses in order to fund the expansion of our business. As a result,we expect to continue to experience substantial negative cash flow for theforeseeable future and cannot predict when, or if, we might becomeprofitable.  We will need to generatesignificant revenues in order to achieve and maintain profitability. We may notbe able to generate sufficient revenue to fund our operations or achieveprofitability in the future. Even if we do achieve profitability, we may not beable to sustain profitability. If we are not able to generate revenuessufficient to fund our operations through product sales or if we are not ableto raise sufficient funds through investments by third parties, it would resultin our inability to continue as a going concern and, as a result, our investorswould lose their entire investment.

 

***We have a limited operating history upon which an evaluation of ourprospects can be made. We may never achieve profitability.***

 

We were organized on April 10,2007 and have had only limited operations since our inception upon which toevaluate our business prospects. As a result, investors do not have access tothe same type of information in assessing their proposed investment as would beavailable to purchasers in a company with a history of prior substantialoperations. We face all the risks inherent in a new business, including theexpenses, lack of adequate capital and other resources, difficulties,complications and delays frequently encountered in connection with 

 

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conducting operations,including capital requirements and management’s potential underestimation ofinitial and ongoing costs. We also face the risk that we may not be able toeffectively implement our business plan. If we are not effective in addressingthese risks, we will not operate profitably and we may not have adequateworking capital to meet our obligations as they become due.

 

***We have incurred significant debt to finance our operations to date***

 

As of July 1, 2010, wehad total debt outstanding of $10,393,166. Of this amount, $9,538,113 represents our 12% Senior ConvertibleDebentures which are due one year from date of issue, with the first amountsdue for repayment on October 1, 2010. The balance of the debt represents short term promissory notes, whichare currently in default.  We have notreceived a formal notice of default from any of the noteholders.  We will need to obtain new contracts andgenerate revenue and cash flow from our operations and/or seek additionalfinancing in order to meet our repayment obligations under these debtinstruments.  If we are unable to raiseadditional capital or generate cash from operations, we may not be able toservice the outstanding debt.  There canbe no assurance that financing will be available in amounts or on terms commerciallyacceptable to us, if at all.

 

***If our strategy is unsuccessful, we will not be profitable and ourstockholders could lose their investment.***

 

We do not believe there aretrack records for companies pursuing our strategy, and there is no guarantee thatour strategy will be successful or profitable. If our strategy is unsuccessful,we will fail to meet our objectives and not realize the revenues or profitsfrom the business we pursue, which would cause the value of the Company todecrease, thereby potentially causing in all likelihood, our stockholders tolose their investment.

 

***We may not be able to effectively control and manage our proposedgrowth business plan, which would negatively impact our operations.***

 

If our business and marketsgrow and develop, of which there are no assurances, it will be necessary for usto finance and manage expansion in an orderly fashion. We may face challengesin managing expanding service offerings and in integrating any acquiredbusinesses with our own. Such eventualities will increase demands on ourexisting management, workforce and facilities. Failure to satisfy increaseddemands could interrupt or adversely affect our operations and causeadministrative inefficiencies.

 

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***We may be unable to successfully execute any of our identified businessopportunities or other business opportunities that we determine to pursue.***

 

We currently have a limitedcorporate infrastructure. In order to pursue business opportunities, we willneed to continue to build our infrastructure and operational capabilities. Ourability to do any of these successfully could be affected by any one or more ofthe following factors:

 

·      our ability to raisesubstantial additional capital to fund the implementation of our business plan;

·      our ability to execute ourbusiness strategy;

·      the ability of our productsto achieve market acceptance;

·      our ability to manage theexpansion of our operations and any acquisitions we may make, which couldresult in increased costs, high employee turnover or damage to customerrelationships;

·      our ability to attract andretain qualified personnel;

·      our ability to manage ourthird party relationships effectively;

·      our ability to accuratelypredict and respond to the rapid technological changes in our industry and theevolving demands of the markets we serve;

·      challenges and issuesrelated to the proprietary technology of the Company;

·      delays in obtaining, orconditions imposed by, regulatory approvals;

·      breakdown or failure ofequipment or processes; and

·      major incidents and/orcatastrophic events such as fires, explosions, earthquakes or storms.

 

Our failure to adequatelyaddress any one or more of the above factors could have a significant impact onour ability to implement our business plan and our ability to pursue otheropportunities that arise, which could result in investors losing their entireinvestments.

 

***Our business depends on the development of strong brands, and if we donot develop and enhance our brands, our ability to attract and retain customersmay be impaired and our business and operating results may be harmed.***

 

We believe that our “BatchOxidation SystemTM,” or “BOSTM,” Standard BOSTM or sBOSTM “Continuous Batch Oxidation SystemTM “ or “cBOSTM “ and “ContinuousOxidation ReactorTM,” or “CORTM,” brands will be a critical part of our business.Developing and enhancing these brands may require us to make substantialinvestments with no assurance that these investments will be successful. If wefail to promote and develop our brands, or if we incur significant expenses (orsignificantly greater expenses than allocable) in this effort, our business,prospects, operating results and financial condition will be harmed. Weanticipate that developing, maintaining and enhancing our brands will becomeincreasingly important, difficult and expensive.

 

***Our operations may be negatively affected by currency exchange ratefluctuations.***

 

Our assets, earnings andcash flows are influenced by a wide variety of currencies due to the geographicdiversity of the countries in which we currently operate or plan on operatingin. Fluctuations in the exchange rates of those currencies, if we are able tocommence operation in different countries, may have a significant impact on ourfinancial results. Given the dominant role of the US currency in our affairs,the US dollar is the currency in which we present financial performance. It isalso the natural currency for borrowing and holding surplus cash. We do notgenerally believe that active currency hedging provides long-term benefits toour shareholders. We may consider currency protection measures appropriate inspecific commercial circumstances, subject to strict limits established by ourBoard. Therefore, in any particular year, currency fluctuations may have asignificant and material adverse impact on our financial results.

 

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***Economic, political and other risks associated with international salesand operations could adversely affect our proposed business.***

 

Because we currently intendto sell our products worldwide, our proposed business is subject to risksassociated with doing business internationally. In addition, our employees,contract manufacturers, suppliers and job functions may be located outside theU.S. Accordingly, our future results could be harmed by a variety of factors,including, but not limited to:

 
| · |   | interruption to  transportation flows for delivery of parts to us and finished goods to our  customers; |
|--------|--------|---------------------------------------------------------------------------------------------------------|
| · |   | changes in foreign  currency exchange rates;                                                            |
| · |   | changes in a specific  country’s or region’s political, economic or other conditions;         |
| · |   | trade protection measures  and import or export licensing requirements;                                 |
| · |   | negative consequences from  changes in tax laws;                                                        |
| · |   | difficulty in staffing and  managing widespread operations;                                             |
| · |   | differing labor  regulations;                                                                           |
| · |   | differing protection of  intellectual property;                                                         |
| · |   | unexpected changes in  regulatory requirements; and                                                     |
| · |   | geopolitical turmoil,  including terrorism and war.                                                     |

 

***Our intellectual property rights are valuable, and any inability to protectthem could reduce the value of our products and brands.***

 

Our intellectual propertyrights are important assets for us. We have patents pending on the controlmechanisms and proprietary processes of our Batch Oxidation SystemTM, or BOSTM,continuous-batch process thermal gasification technology in Iceland and underthe Patent Cooperation Treaty (which includes nearly all of the majorindustrialized countries). In addition, as a result of being “first-to-market”we have gained a significant amount of know-how and expertise related to thedesign and operation of these plants. Various events outside of our controlpose a threat to our intellectual property rights. For example, effectiveintellectual property protection may not be available in every country in whichour products are distributed. Also, the efforts we have taken to protect ourproprietary rights may not be sufficient or effective. Any significantimpairment of our intellectual property rights could harm our business or ourability to compete. Also, protecting our intellectual property rights is costlyand time consuming. Any increase in the unauthorized use of our intellectualproperty could make it more expensive to do business and harm our operatingresults.

 

***We may be unable to protect our intellectual property from infringementby third parties.***

 

Our business plan is significantlydependent upon exploiting our intellectual property. There can be no assurancethat we will be able to control all of the rights for all of our intellectualproperty. We may not have the resources necessary to assert infringement claimsagainst third parties who may infringe upon our intellectual property rights.Litigation can be costly and time consuming and divert the attention andresources of management and key personnel.

 

***In providing our products we could infringe on the intellectual propertyrights of others, which may cause us to engage in costly litigation and, if wedo not prevail, could also cause us to pay substantial damages and prohibit usfrom selling our services.***

 

Third parties may assertinfringement or other intellectual property claims against us. We may have topay substantial damages, if it is ultimately determined that our servicesinfringe a third party’s proprietary rights. Even if claims are without merit,defending a lawsuit takes significant time, may be expensive and may divertmanagement’s attention from our other business concerns.

 

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***Changing laws, rules and regulations and legal uncertainties couldincrease the regulation of our business and therefore increase our operatingcosts.***

 

We are subject to a numberof foreign and domestic laws, rules, regulations and guidelines, includinglaws, rules, and regulations relating to health and safety, the conduct ofoperations, the protection of the environment and the manufacture, management,transportation, storage and disposal of certain materials used in the Company’soperations. Management believes that the Company is in compliance with suchlaws, regulations and guidelines; however, changes to such laws, regulationsand guidelines due to environmental changes, unforeseen environmental effects,general economic conditions and other matters beyond our control may causeadverse effects to our operations. We have invested financial and managerialresources to ensure compliance with applicable laws, regulations and guidelinesand will continue to do so in the future. Although such expenditures have not,historically, been material to the Company, such laws, regulations andguidelines are subject to change. Accordingly, it is impossible for the Companyto predict the cost or impact of such laws, regulations or guidelines on itsfuture operations. It is not expected that any changes to these laws,regulations or guidelines would affect our operations in a manner materiallydifferent than they would affect other gasification companies of a similarsize.

 

***We may become liable for damages for violations of environmental lawsand regulations.***

 

We are subject to variousenvironmental laws and regulations enacted in the jurisdictions in which weoperate which govern the manufacture, importation, handling and disposal ofcertain materials used in our operations. We are in the process of establishingprocedures to address compliance with current environmental laws andregulations and we monitor our practices concerning the handling ofenvironmentally hazardous materials. However, there can be no assurance thatour procedures will prevent environmental damage occurring from spills ofmaterials handled by the Company or that such damage has not already occurred.On occasion, substantial liabilities to third parties may be incurred. We mayhave the benefit of insurance maintained by the Company or the operator;however, the Company may become liable for damages against which it cannotadequately insure or against which it may elect not to insure because of highcosts or other reasons.

 

Our customers are subject tosimilar environmental laws and regulations, as well as limits on emissions tothe air and discharges into surface and sub-surface waters. While regulatorydevelopments that may follow in subsequent years could have the effect ofreducing industry activity, we cannot predict the nature of the restrictionsthat may be imposed. We may be required to increase operating expenses orcapital expenditures in order to comply with any new restrictions orregulations.

 

***We may become subject to liabilities relating to risks inherent in thegasification industry, for which we may not be adequately insured.***

 

Our operations are subjectto risks inherent in the gasification industry, such as equipment defects,malfunction, failures and natural disasters. These risks and hazards couldexpose the Company to substantial liability for personal injury, loss of life,business interruption, property damage or destruction, pollution and otherenvironmental damages.

 

While we believe ourinsurance coverage addresses all material risks to which we are exposed and isadequate and customary in our current state of operations, such insurance issubject to coverage limits and exclusions and may not be available for therisks and hazards to which the Company is exposed. In addition, no assurancecan be given that such insurance will be adequate to cover our liabilities orwill be generally available in the future or, if available, that premiums willbe commercially justifiable. If we were to incur substantial liability and suchdamages were not incurred by insurance or were in excess of policy limits, orif we were to incur such liability at a time when we are not able to obtainliability insurance, our business, results of operations and financialcondition could be materially adversely affected.

 

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***We******may******face intense competition and may not be able tosuccessfully compete.***

 

The Company currently hasfew competitors in the capacity range we target. However, there can be noassurance that such competitors will not substantially increase the resourcesdevoted to the development and marketing of products and services that competewith those of the Company or that new or existing competitors will not enterthe market in which the Company is active.

 

***Our ability to compete and grow is dependent on access to adequatesupplies of labor, equipment, parts and components.***

 

Our ability to compete andgrow will be dependent on our having access, at a reasonable cost and in atimely manner, to skilled labor, equipment, parts and components. Failure ofsuppliers to deliver such skilled labor, equipment, parts and components at areasonable cost and in a timely manner would be detrimental to our ability tocompete and grow. No assurances can be given we will be successful inmaintaining our required supply of skilled labor, equipment and components. Itis possible that the final costs of the major equipment contemplated by ourcapital expenditure program may be greater than the funds available to theCompany, in which circumstances we may curtail, or extend the timeframes forcompleting, our capital expenditure plans. This could have a material adverseeffect on our financial results.

 

***The prices we will receive for our end products are uncertain.***

 

The prices we receive forour end products will be dependent on demand for them, the computed internalrate of return of the project and supporting legislation. There is no provenmarket for gasification products, and there can be no assurance that thepricing of these products will be at levels anticipated by the Company. Allsuch estimates for the pricing of our end products are currently uncertain.

 

***We rely on key personnel and, if we are unable to retain or motivate keypersonnel or hire qualified personnel, we may not be able to grow effectively.***

 

Our success depends in largepart upon the abilities and continued service of our executive officers andother key employees, particularly Mr. Peter Bohan, President and ChiefExecutive Officer. There can be no assurance that we will be able to retain theservices of such officers and employees. Our failure to retain the services of our key personnel could have amaterial adverse effect on the Company.  In order to support our projected growth, we will be required toeffectively recruit, hire, train and retain additional qualified managementpersonnel.  Our inability to attract andretain the necessary personnel could have a material adverse effect on theCompany.  We have “key man” insurance on Mr. Bohan.

 

***We have a limited customer base and the timing of expanding ourcustomer base could result in a material impact on our financial condition andresults of operations.***

 

Our businesss operations todate have been largely dependent on generating revenues from one (1) customer,ASCOT Environmental Ltd.  Our contractwith that customer is complete and we do not expect to generate any additionalrevenue related to the Dargavel Project with Ascot.  While we continue to discuss projects with anumber of prospective customers, and have secured some small contracts relatedto perform initial engineering studies, there is no guarantee we will obtainnew customers.

 

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***The Chairman of our Board of Directors (and sole board member) was adefendant in prior litigation alleging violation of the Federal Securitieslaws, which may prevent or make more difficult listing on a national exchangeand/or NASDAQ.***

 

Christopher d’Arnaud-Taylor,our Chairman, formerly served as a member of the Board of Directors andChairman of Global Energy Holdings Corp (formerly Xethanol, Inc.), apublicly traded company.  In October 2006,Mr. d’Arnaud-Taylor was named with others as a defendant in a class actionlawsuit alleging various violations of the Securities Exchange Act of 1934 and Rule 10b-5thereunder.  The matter was subsequentlysettled and Mr. d’Arnaud-Taylor and the other defendants expressly deniedliability.  Although settled without anyadmission of guilt, an application made by the Company to list its securitieson a national stock exchange may be viewed unfavorably as a result of the priorlegal action.  There can be no assurancethat Mr. d’Arnaud-Taylor’s actions and/or involvement in the priorlitigation will not negatively impact and/or prevent the Company’s ability tobe listed on an exchange and/or NASDAQ, even if the Company were to meet suchlisting qualifications, which it will not for the foreseeable future.

 

***Risks Related to the Common Stock***

 

***There is limited trading of our Common Stock.***

 

Our Common Stock iscurrently traded on the Pink Sheets. However, to date there has been limitedtrading market for the Common Stock, and we cannot give an assurance that atrading market will develop. The lack of an active, or any, trading market willimpair a stockholder’s ability to sell his shares at the time he wishes to sellthem or at a price that he considers reasonable.  An inactive market will also impair ourability to raise capital by selling shares of capital stock and will impair ourability to acquire other companies or assets by using common stock asconsideration.

 

***Stockholders may have difficulty trading and obtaining quotations forour common stock.***

 

Our Common Stock does nottrade, and the bid and asked prices for our Common Stock on the Pink Sheets mayfluctuate widely in the future. As a result, investors may find it difficult todispose of, or to obtain accurate quotations of the price of, our securities.This severely limits the liquidity of our Common Stock, and would likely reducethe market price of our Common Stock and hamper our ability to raise additionalcapital.

 

***The market price of our Common Stock is likely to be highly volatileand subject to wide fluctuations.***

 

Dramatic fluctuations in theprice of our Common Stock may make it difficult to sell our Common Stock. Themarket price of our Common Stock is likely to be highly volatile and could besubject to wide fluctuations in response to a number of factors that are beyondour control, including:

 

·      dilution caused by ourissuance of additional shares of common stock and other forms of equitysecurities, in connection with future capital financings to fund our operationsand growth, to attract and retain valuable personnel and in connection withfuture strategic partnerships with other companies;

·      variations in our quarterlyoperating results;

·      announcements that ourrevenue or income are below or that costs or losses are greater than analysts’expectations;

·      the general economicslowdown;

·      sales of large blocks of ourcommon stock;

·      announcements by us or ourcompetitors of significant contracts, acquisitions, strategic partnerships, jointventures or capital commitments; and

·      fluctuations in stock marketprices and volumes.

 

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These and other factors arelargely beyond our control, and the impact of these risks, singly or in theaggregate, may result in material adverse changes to the market price of ourCommon Stock and/or our results of operations and financial condition.

 

***The ownership of our Common Stock is highly concentrated in ourofficers and directors.***

 

Based on the 50,702,742shares of Common Stock outstanding as of June 21, 2010, our executiveofficers and directors beneficially own approximately 24% of our outstandingCommon Stock. As a result, they have the ability to exercise control over ourbusiness by, among other items, their voting power with respect to the electionof directors and all other matters requiring action by stockholders. Suchconcentration of share ownership may have the effect of discouraging, delayingor preventing, among other items, a change in control of the Company.

 

***Our issuance of Common Stock upon exercise of outstanding warrants maydepress the price of the Common Stock and make it more difficult to raise additionalfinancing.***

 

As of July 1, 2010, wehave 50,702,742 shares of Common Stock outstanding and warrants to purchase anadditional 34,566,444 shares of Common Stock outstanding which are exercisableat prices ranging from $.25 to $1.25 per share.   Included in the total are 2,411,261 warrantswith an exercise of $.01 per share the Company is obligated to issue to aplacement agent.  The issuance of sharesof Common Stock upon exercise of outstanding warrants (including the Warrants)and options could result in substantial dilution to our stockholders, which mayhave a negative effect on the price of our Common Stock and make it moredifficult to raise additional financing.

 

***Over 21,000,000 shares of our outstanding Common Stock were purchasedby our founders at a price of $.01 per share.***

 

At the time we were formed,we issued an aggregate of 21,112,500 shares of Common Stock at a price of $.01per share to 31 individuals and entities including 6,000,000 shares to ourcurrent officers and directors.  In addition,pursuant to a Private Placement Memorandum dated August 15, 2007, weissued 11,867,080 shares to 123 accredited investors at a price of $.50 pershare.  In connection with such sale, wealso issued the placement agent 1,500,000 shares and a six-year warrant topurchase 1,000,000 additional shares at an exercise price of $0.50 pershare.  The low purchase price for suchshares may make it more likely that the shares will be sold at lower tradingprices. The sale of such shares into the market could have a depressive effecton the trading price of our Common Stock, if then traded.

 

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***The Common Stock will be subject to the “penny stock” rules of theSEC, which may make it more difficult for stockholders to sell the CommonStock.***

 

The Securities and ExchangeCommission has adopted Rule 15g-9 which establishes the definition of a “pennystock,” for the purposes relevant to us, as any equity security that has amarket price of less than $5.00 per share or with an exercise price of lessthan $5.00 per share, subject to certain exceptions. For any transactioninvolving a penny stock, unless exempt, the rules require:

 
|   | · | that a broker or dealer  approve a person’s account for transactions in penny stocks; and                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | the broker or dealer  receive from the investor a written agreement to the transaction, setting  forth the identity and quantity of the penny stock to be purchased. |

 

In order to approve a person’saccount for transactions in penny stocks, the broker or dealer must:

 
|   | · | obtain financial  information and investment experience objectives of the person; and                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | make a reasonable  determination that the transactions in penny stocks are suitable for that  person and the person has sufficient knowledge and experience in financial  matters to be capable of evaluating the risks of transactions in penny  stocks. |

 

The broker or dealer mustalso deliver, prior to any transaction in a penny stock, a disclosure scheduleprescribed by the Commission relating to the penny stock market, which, inhighlight form:

 
|   | · | sets forth the basis on  which the broker or dealer made the suitability determination; and                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------|
|   | · | that the broker or dealer  received a signed, written agreement from the investor prior to the  transaction. |

 

Disclosure also has to bemade about the risks of investing in penny stocks in both public offerings andin secondary trading and about the commissions payable to both the broker-dealerand the registered representative, current quotations for the securities andthe rights and remedies available to an investor in cases of fraud in pennystock transactions. Finally, monthly statements have to be sent disclosingrecent price information for the penny stock held in the account andinformation on the limited market in penny stocks.

 

The regulations applicableto penny stocks may severely affect the market liquidity for the Common Stockand could limit an investor’s ability to sell the Common Stock in the secondarymarket.

 

***As an issuer of “penny stock,” the protection provided by the federalsecurities laws relating to forward looking statements does not apply to theCompany.***

 

Although federal securitieslaws provide a safe harbor for forward-looking statements made by a publiccompany that files reports under the federal securities laws, this safe harboris not available to issuers of penny stocks. As a result, the Company will nothave the benefit of this safe harbor protection in the event of any legalaction based upon a claim that the material provided by the Company contained amaterial misstatement of fact or was misleading in any material respect becauseof the Company’s failure to include any statements necessary to make the statementsnot misleading. Such an action could hurt our financial condition.

 

***The Company has not paid dividends in the past and does not expect topay dividends for the foreseeable future. Any return on investment may be limited to the value of the CommonStock.***

 

No cash dividends have beenpaid on the Common Stock. We expect that any income received from operationswill be devoted to our future operations and growth. The Company does notexpect to pay cash dividends in the near

 

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future. Payment of dividendswould depend upon our profitability at the time, cash available for thosedividends, and other factors as the Company’s board of directors may considerrelevant. If the Company does not pay dividends, the Common Stock may be lessvaluable because a return on an investor’s investment will only occur if theCompany’s stock price appreciates.

 

**Item1B:  UNRESOLVED STAFF COMMENTS**

 

**NotApplicable.**

 

**Item2:  PROPERTIES**

 

We lease approximately 1,450square feet of office space in Greenville, South Carolina which serves as theCompany’s corporate headquarters on a month to month basis The Company hasentered into a new lease in South Carolina which will become effective uponcompletion of the buildout of the office space The new space will beapproximately 3,500 square feet and the lease will be for a term of five yearsfrom commencement.  We also leaseapproximately 1,340 square feet of office space in Dumfries Scotland whichserves as the base of our engineering and technical operations.

 

**Item3:  LEGAL PROCEEDINGS**

 

For information regardinglegal proceedings, see*Item 8. FinancialStatements And Supplementary Data — Note 10. Commitments and Contingencies*,which information is incorporated herein by reference.

 

**Item4:   (REMOVED AND RESERVED)**

 

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**PART II**

 

**Item 5:**  **MARKET FORREGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES**

 

Our common stock is eligiblefor quotation on the Pink Sheets under the symbol WTEZ.PK.  There is very little trading in our stock andthere is no established public trading market for our common stock.  The Company has not paid dividends on itscommon stock and does not anticipate paying dividends in the foreseeablefuture.  As of June 21, 2010 therewere approximately 244 holders of record of the Common Stock.

 

The following table setsforth the closing bid and ask stock prices of our common stock since July 29,2009, when the shares became eligible for quotation on the OTC:BB andsubsequently on the Pink Sheets.

 
| ** **      | ** ** | **Year Ended  March 31, 2010** | ** ** | **Year Ended  March 31, 2009** | ** ** |
|-----------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **High**                            | ** ** | **Low**                             | ** ** | **High** | ** ** | **Low** | ** ** |
|            |       |                                |       |                                |       |   |   |   |   |
| First  Quarter  |       | N/A                                 |       | N/A                                 |       | N/A |   | N/A |   |
| Second  Quarter |       | $                                   | 1.21       |                                | $          | 1.01 |   | N/A |   | N/A |   |
| Third  Quarter  |       | $                                   | 1.06       |                                | $          | 0.65 |   | N/A |   | N/A |   |
| Fourth  Quarter |       | $                                   | 7.50       |                                | $          | 0.13 |   | N/A |   | N/A |   |

 

*NOTE:  The table above reflects trading from July 29,2009 through March 31, 2010 under the ticker symbol WTEZ.   Prior to July 29, 2009, there was noactive trading market under the Company’s previous ticker symbol MVMH.*

 

**Securities Authorized forIssuance Under Equity Compensation Plans**

 

The Company has not adoptedany equity compensation plan as of March 31, 2010.

 

**UnregisteredSales of Equity Securities.**

 

Not applicable.

 

**Item 6:  SELECTED FINANCIAL DATA**

 

Not Applicable.

 

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**Item 7.****                                       ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**ForwardLooking Statements and Associated Risks**

 

Some of the statementscontained in this Form 10-K that are not historical facts are “forward-lookingstatements” which can be identified by the use of terminology such as “estimates,”“projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or thenegative or other variations, or by discussions of strategy that involve risksand uncertainties. We urge you to be cautious of the forward-lookingstatements, that such statements, which are contained in this Form 10-K,reflect our current beliefs with respect to future events and involve known andunknown risks, uncertainties and other factors affecting our operations, marketgrowth, services, products and licenses. No assurances can be given regardingthe achievement of future results, as actual results may differ materially as aresult of the risks we face, and actual events may differ from the assumptionsunderlying the statements that have been made regarding anticipated events.Factors that may cause actual results, our performance or achievements, orindustry results, to differ materially from those contemplated by suchforward-looking statements include without limitation:

 

·                                          Our ability toattract and retain management;

 

·                                          Our ability toraise capital when needed and on acceptable terms and conditions;

 

·                                          The intensityof competition; and

 

·                                          Generaleconomic conditions.

 

All written and oralforward-looking statements made in connection with this Form 10-K that areattributable to us or persons acting on our behalf are expressly qualified intheir entirety by these cautionary statements. Given the uncertainties thatsurround such statements, you are cautioned not to place undue reliance on suchforward-looking statements.

 

**Plan ofOperation**

 

We intend to compete in thegrowing worldwide market for waste-to-energy systems that simultaneouslydestroy waste and generate green energy. Our business plan calls for us todesign, manufacture and install small footprint, simple, cost-effectivegasification technologies that are scalable, modular, environment friendly androbust enough to operate in harsh and remote environments. We intend to providecustomized engineering solutions that we believe will enable our current andfuture customers to convert solid waste streams traditionally destined forlandfill or incineration into clean, renewable energy.

 

We intend to target thelocal waste-to-energy sector in the small to mid-range market — from one tonbatch systems all the way up to the continuous 500 metric ton per day (TPD)range — not large centralized plants such as those operated by waste-to-energycompanies like Covanta or Wheelabrator who typically develop major facilitiesin the 1,000+ TPD range.  We intend to focus on providing anycustomers we obtain with the technologies to recover the energy trapped inmunicipal solid waste, construction and demolition debris, industrial andcommercial waste, and biomass.

 

Major Contract to Date

 

To date our primary projecthas been the DARGAVEL, project, which consists of a 120 ton-per-daycBOSTM system with power recovery. Equipment for the DARGAVEL project was being manufactured at ourtechnology center and manufacturing plant in Keflavik, Iceland.  InSeptember, 2008, Iceland was the first country to collapse under thestresses of the emerging global economic downturn.  Operating conditions in Iceland became

 

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impossible.  To protect its currency, the Government ofIceland suspended foreign exchange transactions such that there was no moneycoming in or leaving the country.

 

This financial freeze inIceland had a serious impact on our subsidiary EnerWaste Europe, Ltd. (“EWE”) becauseit was unable to pay its sub-contractors in the UK.  This, in turn, had a negative impact on theDARGAVEL project to the extent that EWE was unable to complete the project.  Then, in October 2008, Icelandic banks,including Glitner Bank, the lender to EWE, were nationalized and placed inreceivership and the Icelandic banking system collapsed.  By thattime however, most of the plant and equipment for DARGAVEL that EWE hadmanufactured in Iceland had been shipped to Scotland for installation andcommissioning.  The supply contract forthe DARGAVEL project between EWE and our customer was terminated and, on November 10,2008 a new agreement was entered into between a Waste2Energy subsidiary inthe United Kingdom and our customer for completion of the cBOSTM installation atDARGAVEL.  The DARGAVEL project wassubstantially complete by the end of our fiscal year ended March 31,2010.  The Company expects officialtakeover to occur of the operating site by early in the second fiscal quarterof our fiscal year ended March 31, 2011.

 

EWE was placed ininvoluntary receivership in February 2009. On February 23, 2010, the insolvency proceedings were concluded bythe Administrator.  The Company has beendissolved and the Company has no further interests in or obligations withrespect to EWE.

 

**GoingConcern**

 

The Company’s consolidatedfinancial statements for the year ended March 31, 2010 have been preparedassuming that it will continue as a going concern.  To date the Company has generated limitedrevenues, has substantial operating losses and an accumulated deficit since itsinception in April 2007.  TheCompany incurred a net loss from continuing operations of $11,720,669 and used$5,201,892 of cash in continuing operations for the year ended March 31,2010.  At March 31, 2010, the Company had a working capitaldeficit of $6,634,820, limited financial resources available to pay ongoingfinancial obligations as they became due and a $30,428,744 accumulateddeficit.  These conditions raise substantialdoubt about the Company’s ability to continue as a going concern.  These consolidated financial statements donot include any adjustments relating to the recovery of assets or theclassification of liabilities should the Company be unable to continue as agoing concern.

 

The Company has principallyfinanced its operations for the year ended March 31, 2010 using proceedsfrom short term borrowings primarily from the sale of its 12% SeniorConvertible Debentures in a series of private placement transactions (see Note8 to the Consolidated Financial Statements).

 

Management believes theCompany’s ability to continue operations is dependent on its ability tocontinue to raise capital.  At thepresent time, we have no commitments for any additional financing.  If the Company is unable to raise additionalcapital or encounters unforeseen circumstances, it may be required to takeadditional measures to conserve liquidity, which could include, but notnecessarily be limited to, curtailing its operations, suspending the pursuit ofits business plan, and controlling overhead expenses.  The Companycannot provide any assurance that it will raise additional capital as necessarynor can it provide any assurance that new financing will be available to it oncommercially acceptable terms, if at all.

 

On January 22, 2010,the Company received notice from The Financial Industry Regulatory Authority(FINRA) that shares of the Company’s common stock were no longer eligible fortrading on the OTC Bulletin Board (“OTCBB”), as a result of the Company’sdelayed filing of its’ Form 10Q for the quarter ended June 30,2009.  The Company’s common stock iscurrently traded on the OTC “Pink Sheets”.

 

Amarket maker has filed a Form 15C2-11 with FINRA in order to enable theCompany’s common stock to again be quoted on the OTCBB, although there can beno assurance that this will occur.  Management believes that the abilityto raise additional capital could be negatively impacted as a result of itssecurities not being traded on an active trading market.

 

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**CriticalAccounting Policies**

 

The Company’s significantaccounting policies are described in Note 3 to the Consolidated FinancialStatements; we believe that all of these involve the application of significantjudgment and discretion by management and are therefore “critical” accountingpolicies.  Several accounting policiesrequire the application of significant judgment by management in selecting theappropriate assumptions for calculating financial estimates.  By their nature, these judgments are subjectto an inherent degree of uncertainty.  Webase our estimates and judgments on historical experience, terms of existingcontracts, observance of trends in the industry, information provided bycustomers and outside sources and various other assumptions that we believe tobe reasonable under the circumstances.

 

**Results ofOperations**

 

**For theYear Ended March 31, 2010 compared to the Year Ended March 31, 2009**

 

The Company currentlyreceives revenue from three principal sources: 1) revenue associated with thecompletion of preliminary engineering design study (PEDS) for prospectivecustomers who are evaluating a larger project; 2) revenue associated with muchlarger projects such as the DARGAVEL project; and 3) revenue from the sale ofsmaller pieces of equipment.   Contractrevenue was $1,250,168 and $3,956,300 for the years ended March 31, 2010and 2009, respectively, a decrease of $2,706,132 or approximately 68%.  The decrease in revenue was due primarily tothe fact that a substantial amount of the work under the DARGAVEL contract,determined using the percentage of completion method, was completed in theprior fiscal year, resulting in a higher revenue recognition in thatperiod.  Due to cost overruns on theproject by both the Company and the customer, it was determined in the fourthquarter of our current fiscal year that no further amounts would be collectibleunder the contract from our customer, resulting in the company not recognizingany additional revenue under the contract subsequent to that determination.

 

Cost of revenues totaled$1,910,727 in the year ended March 31, 2010, compared to $6,890,224 in theprior year period, a decrease of $4,979,497, or 72%.  Of these amounts, contract costs totaled$1,848,964 and $5,938,423 for the years ended March 31, 2010 and 2009,respectively, a decrease of $4,089,459 or approximately 69%.  Contract costs include all costs incurred todate as well as estimated future costs on the contract,  as provisions for anticipated losses are madein the period in which they become determinable for contracts accounted forunder the percentage of completion method. As described above, the activity associated with the DARGAVEL projectwas significantly greater in the prior fiscal year and as such the costs weremuch higher in that period.  The Companyhad a realized gross loss of $660,559 in the current year compared to a loss of$2,933,924 in the prior year, the majority of which related to the DARGAVELcontract.  Additionally, the prior yearincluded a loss of $835,079 on the cancellation of the contract which EWE hadwith our customer.  This contract wasterminated as a result of the economic collapse of the Icelandic economy.  Upon cancellation, another subsidiary,Waste2Energy (Isle of Man) entered into a new agreement with the customer.

 

Selling, general andadministrative expenses for the year ended March 31, 2010 were $7,277,703compared to $8,010,730 for the year ended March 31, 2009, a decrease of$733,027 or approximately 9%.  Thisdecrease is primarily due to decreased compensation expense of approximately$1,679,000, decreased consulting fees of approximately $879,000, theamortization of intangibles associated with EWE of approximately $417,000during the prior year and other net decreases of approximately $6,000.  Such decreases were partially offset byincreased legal and accounting fees of approximately $1,083,000, increasedoutside services, primarily contract employees, of approximately $299,000,increased corporate insurance expense of approximately $136,000, increasedfranchise taxes of approximately $113,000, increased rent of approximately$73,000 and the recording of an allowance for uncollectible amounts due under acontract of approximately $544,000 during the current year.  Stock based compensation expense included inconsulting fees and compensation expense was approximately $86,000 and$330,000, respectively, for the year ended March 31, 2010, and $3,500,000and $1,302,000, respectively, for the year ended March 31, 2009.

 

In January 2009 theCompany determined that the value of its Technology and Goodwill assetsassociated with the acquisition of EWE (which no longer is an active operatingentity) were fully impaired, and the value of these assets were written offduring the year ended March 31, 2009. The value of Technology written off totaled

 

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$10,538,029 and the value ofGoodwill written off totaled $496,594.

 

Operating Loss for the yearended March 31, 2010 was $7,938,262 compared to Operating Loss of $21,979,277for the year ended March 31, 2009. The decrease in the Operating Loss is the result of the factorsdiscussed above.

 

Other Income (Expense), Netfor the year ended March 31, 2010 was $(3,782,407) and for the year ended March 31,2009 was $670,520, for a net change of $(4,452,927).  This change is comprised of the followingincreases: (1) increase in Interest expense of approximately $6,688,000,primarily due to the issuance of the 12% Senior Convertible Debentures duringthe current year.  Interest expenseincludes interest, amortization of deferred financing costs, amortization ofdiscount and the issuance of warrants to the Placement Agent related to the 12%Senior Convertible Debentures.; (2) the inclusion in the prior year ofGain on net liabilities included in bankruptcy of EWE of approximately$2,987,000; (3) an increase in the year over year Loss on deemedextinguishment of debt of approximately $650,000; (4) current year Loss onextinguishment of debt of approximately $188,000; and (5) Other income(expense) of approximately $11,000 in the prior year.  Such increases were partially offset by thefollowing decreases: (1) current year non-cash Gain on change in fairvalue of derivative liability, associated with the 12% Convertible Debentures,of approximately $3,469,000; (2) current year Gain on legal settlement ofapproximately $1,511,000 related to the reduction of a previously recordedliability associated with a legal settlement with the former owner of EnerwasteInternational; (3) change in Foreign currency exchange (loss) gain ofapproximately $584,000; and (4) prior year Loss on equity methodinvestment of approximately $507,000.

 

We had no income tax for theyear ended March 31, 2010 compared to $3,868,222 for the year ended March 31,2009.  Deferred tax assets related to netlosses incurred in the current year have been fully reserved against as theCompany does not have a sufficient history of income to conclude that it ismore likely than not that these tax benefits will be realized to offset futureincome.  The prior year benefit was a resultof the write off of the deferred tax liabilities that were generated in thepurchase accounting of EWE and to the related intangibles which have beendetermined to be impaired.

 

Income (Loss) FromDiscontinued Operations was $24,274 for the year ended March 31, 2010compared to ($233,613) for the year ended March 31, 2009.

 

Net Loss for the year ended March 31,2010 was $11,696,395 compared to $17,674,148 for the year ended March 31,2009.  The decrease in the Net Loss isthe result of the factors discussed above.

 

**Liquidityand Capital Resources**

 

We have incurred operatinglosses since inception.  As of March 31,2010, we had $138,945 in cash compared to $27,360 in cash at March 31,2009.  As of March 31, 2010, we hada working capital deficiency of $6,634,820 compared to a deficiency of$6,308,582 at March 31, 2009.  Netcash used in operating activities for the twelve months ended March 31,2010 was $5,201,892, compared with net cash used of $941,832 for the priorperiod.  Net cash used in operatingactivities was comprised of loss from continuing operations adjusted fornon-cash items of $(6,928,092) and $(5,050,737) for the twelve months ended March 31,2010 and 2009, respectively, and changes in assets and liabilities of$1,726,200 and $4,108,905 for the twelve months ended March 31, 2010 and2009, respectively.

 

Net cash used in investingactivities for the twelve months ended March 31, 2010 was $134,319,compared to net cash provided by investing activities in the prior period of$718.  Net cash provided by financingactivities for the twelve months ended March 31, 2010 was $5,490,264,compared to net cash provided by financing activities in the prior period of$831,192.

 

The Company has financed itsoperations to date principally through the sale of securities in privateplacement transactions and through the issuance of short term debt.  As of March 31, 2010, the Company hastotal current notes payable of $8,158,900 outstanding, including $7,133,847 ofits 12% Senior Convertible Debentures and $1,025,053 of other short-termdebt.  Of the short-term debt, $120,000has subsequently been paid off as of the date of this filing, $50,000 wasconverted into a 12% Senior Convertible Debenture, and the balance of $729,000is currently in default.  The 12% SeniorConvertible Debentures mature on various dates in 2010 and 2011, with the firstmaturity scheduled for October 1, 2010.

 

The Company must raiseadditional funds on an immediate basis in order to fund our continuedoperations.  

 

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We may not be successful inour efforts to raise additional funds. Even if we are able to raise additional funds through the sale of oursecurities or through the issuance of debt securities, our cash needs could begreater than anticipated in which case we could be forced to raise additionalcapital.  At the present time, we have nocommitments for any additional financing, and there can be no assurance that,if needed, additional capital will be available to us on commerciallyacceptable terms or at all.  Theseconditions raise substantial doubts as to our ability to continue as a goingconcern, which may make it more difficult for us to raise additional capitalwhen needed.

 

Our significant financingand investing activities for the periods consisted of the following:

 

On November 7, 2007,the Company purchased 95% of EWI for an aggregate purchase price of $5,000,000.The purchase price was comprised of $2,750,000 of cash and $2,250,000 in theform of a promissory note.  EWI owns a50% interest in EWE.  On June 25,2008, the Company acquired the remaining 50% of EWE in exchange for 6,000,000shares of common stock and a note payable in the amount of $324,068.

 

In June 2008, theCompany completed a private placement whereby 12,002,040 shares of Common Stockwere issued for aggregate gross proceeds of $6,000,000 (net proceeds of $5,039,594).

 

During the period from September 2008through December 2008, the Company issued an aggregate of $375,000 ofnotes payable for which the proceeds were used to fund operations and workingcapital.

 

In January 2009, inconnection with a private placement, the Company issued $500,000 of promissorynotes and 100,000 shares of Common Stock for aggregate gross proceeds of$500,000.

 

In connection with the May PrivatePlacement in conjunction with the reverse merger, the Company sold toaccredited investors 600,250 Units at $2.00 per Unit, each Unit consisting ofthree shares of Common Stock and a three-year warrant to purchase threeadditional shares of Common Stock at an exercise price of $1.25 pershare.  The Company received gross proceeds of approximately $1.2million from the sale of the Units.  Abroker-dealer acted as the exclusive placement agent for the PrivatePlacement.  We received net proceeds ofapproximately $869,000 after deducting commissions and expenses of the PrivatePlacement.  In September 2009, thePrivate Placement offering was terminated.

 

In March 2009, theCompany issued a convertible note in the amount of $100,000.  Thenote bore interest at a rate of 10% per annum and the proceeds were used tofund operations and for working capital.

 

In April 2009, theCompany entered into a promissory note for $265,000 with a vendor forpreviously provided services that had been included in accounts payable andaccrued expenses.  Also, in July 2009,the Company entered into a second promissory note with the same vendor for$119,384 for previously provided services.

 

In April 2009, theCompany issued convertible notes in the amount of $300,000.  Thenotes bears interest at a rate of 10% per annum and the proceeds were used tofund operations and for working capital.

 

In June 2009, theCompany issued notes in the aggregate amount of $804,000.  The notesbore interest at a rate of 10% per annum and the proceeds were used to fundoperations and for working capital.

 

In July 2009, theCompany issued a note payable in the aggregate amount of$125,000.  The notes bears interest at a rate of 10% per annum andthe proceeds were used to fund operations and for working capital.

 

In August 2009, theCompany issued notes in the aggregate amount of $1,571,000.  The notes bear interest at a rate of 10% perannum and the proceeds were used to fund operations and for working capital.

 

Duringthe year ended March 31, 2010, the Company issued 12% Senior ConvertibleDebentures in the aggregate amount of $7,133,847 in a private placement.  The notes bear interest at a rate of 12% perannum and are due one year from date of issue. Approximately $856,000 was placed into an escrow account at closingwhich represents the 12% interest to be paid on the notes.  During the year ended March 31, 2010, aninvestor agreed to

 

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release$240,000 of interest from escrow relating to that investor’s note payable; suchfunds were utilized by the Company for general operating purposes.

 

*StockDe-Listing*

 

OnJanuary 22, 2010, the Company received notice from FINRA that shares ofthe Company’s common stock were no longer eligible for trading on the OTCBulletin Board (“OTCBB”), as a result of the Company’s delayed filing of its’Form 10-Q for the quarter ended June 30, 2009.  The Company’scommon stock is currently traded on the OTC “Pink Sheets”.  The removal ofthe Company’s common stock from the OTCBB resulted in the Company being inDefault on its 12% Senior Convertible Debentures, as the Company’s common stockis not currently eligible for quotation on a Trading Market (as defined in theDebenture Agreement).

 

Managementbelieves that its ability to raise additional capital could be negativelyimpacted as a result of its securities not being available to trade on anactive trading market.

 

ByAction by Written Consent dated February 8, 2010,  the Company’sBoard of Directors resolved that the Company would seek waivers of the Event ofDefault on the 12% Senior Convertible Debentures, in exchange for offering theDebenture Holders the following: (1) The Conversion Price of theDebentures to be reduced to $0.50 (from $1.00); (2) The Exercise Price ofthe Warrants to be reduced to $1.00 per share (from $2.00); and (3) Thereferences in Section 1(d), Call Provision, of the Warrants, to $2.50 tobe revised to $1.25.  All of the then Debenture Holders, representingoutstanding 12% Senior Convertible Debentures in the aggregate amount of$6,348,547, agreed to these terms, and waived the Event of Default, byexecution of a waiver letter dated February 8, 2010.  In addition, on February 8, 2010 theCompany’s Board of Directors approved revised agreements, reflecting theserevised terms, to be used for 12% Senior Convertible Debentures issuedsubsequent to February 8, 2010, of which an aggregate of $785,300 wereissued during March 2010.

 

Asa result of the waiver of the Event of Default by the note holders, theconversion price on the aggregate of $6,348,547 of notes was reduced from $1.00to $0.50 and the warrant exercise price on the aggregate related 6,348,547warrants was reduced from $2.00 to $1.00.

 

Amarket maker has filed a Form 15C2-11 with FINRA in order to enable theCompany’s common stock to again be quoted on the OTCBB, although there can beno assurance that this will occur.

 

Management anticipates neworder intake in the second and third quarters of fiscal year 2010, which willstart to provide funding for operational expenses on an on-going basis.

 

Management expects that itmay also obtain cash related to certain strategic partnership/supplieragreements and licensing agreements with distributors.

 

However, depending on ourfuture needs and changes and trends in the capital markets affecting our sharesand us, we may determine to seek additional equity or debt financing in theprivate or public markets. Additional financing, whether through public orprivate equity or debt financing, arrangements with stockholders or othersources to fund operations, may not be available, or if available, may be onterms unacceptable to us.

 

Our material capitalexpenditure requirements for the remaining period of the year ending March 31,2011 will be approximately $200,000 to procure office equipment, furniture andIT equipment.

 

We anticipate that ourlong-term operational expenses will be approximately $400,000 to $600,000 permonth, consisting primarily of SG&A expenses.

 

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**RecentAccounting Pronouncements**

 

Recent accountingpronouncements are described in Note 3 to the Consolidated Financial Statements.

 

**Off-BalanceSheet Arrangements**

 

We have no significantoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that is material to stockholders.

 

**Item 7A: QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

Not Applicable.

 

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**Item8:   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**WASTE2ENERGY HOLDINGS, INC. AND SUBSIDIARIES**

**FINANCIAL STATEMENTS**

**MARCH 31, 2010**

 
| ** **                                                                                                                                                          | ** ** | **Page Number** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
|                                                                                                                                                                |       |                 |
| Report  of Independent Registered Public Accounting Firm                                                                                                            |       | 36                   |
|                                                                                                                                                                |       |                 |
| Consolidated  Balance Sheets·      As of March 31, 2010 and  March 31, 2009                                                 |       | 37                   |
|                                                                                                                                                                |       |                 |
| Consolidated  Statements of Operations and Comprehensive Loss·      For the Years Ended March 31, 2010 and  March 31, 2009  |       | 38                   |
|                                                                                                                                                                |       |                 |
| Consolidated  Statement of Stockholders’ (Deficit) Equity·      For the Years Ended March 31, 2010 and  March 31, 2009 |       | 39                   |
|                                                                                                                                                                |       |                 |
| Consolidated  Statements of Cash Flows·      For the Years Ended March 31, 2010  and March 31, 2009                         |       | 40                   |
|                                                                                                                                                                |       |                 |
| Notes to Consolidated Financial Statements                                                                                                                          |       | 41                   |

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To Board of Directors andShareholders of

Waste2Energy Holdings, Inc

 

Wehave audited the accompanying consolidated balance sheets of Waste2EnergyHoldings, Inc. and Subsidiaries (the “Company”) as of March 31, 2010and 2009 and the related consolidated statements of operations andcomprehensive loss, changes in stockholders’ (deficit) equity and cash flowsfor the years then ended.  Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Waste2Energy Holdings, Incand its Subsidiaries as of March 31, 2010, and 2009, and the results oftheir operations and their cash flows for the years then ended in conformitywith accounting principles generally accepted in the United States of America.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, theCompany has incurred a significant operating loss of $11,720,669 and used cashof $5,201,892 for continuing operations which resulted in an accumulateddeficit of $30,428,744 and a working capital deficiency of $6,634,820 as of March 31,2010.  These conditions raise substantialdoubt about the Company’s ability to continue as a going concern.  Management’s plans regarding these mattersare also described in Note 2.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

 

/s/Marcum LLP

NewYork, New York July 12, 2010

 

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**WASTE2ENERGYHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                              | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| ASSETS                                                                                                                                                                                  |       |               |       |               |       |
| CURRENT  ASSETS:                                                                                                                                                                        |       |               |       |               |       |
| Cash                                                                                                                                                                                    |       | $                  | 138,945    |               | $          | 27,360 |   |
| Contracts  Receivable                                                                                                                                                                   |       | —             |       | 53,250             |       |
| Unbilled  amounts due on uncompleted contracts                                                                                                                                          |       | —             |       | 118,123            |       |
| Deferred  job costs                                                                                                                                                                     |       | 396,692            |       | —             |       |
| Deferred  financing costs                                                                                                                                                               |       | 2,486,382          |       | 107,300            |       |
| VAT  recoverable                                                                                                                                                                        |       | 109,818            |       | —             |       |
| Other  current assets                                                                                                                                                                   |       | 136,396            |       | 60,135             |       |
| Current  assets from discontinued operations                                                                                                                                            |       | 22                 |       | 1,413              |       |
| Total  current assets                                                                                                                                                                   |       | 3,268,255          |       | 367,581            |       |
| Property  and equipment, net                                                                                                                                                            |       | 30,478             |       | —             |       |
| Intangibles,  net                                                                                                                                                                       |       | 91,459             |       | —             |       |
| Cash-restricted  in escrow                                                                                                                                                              |       | 285,946            |       | —             |       |
| Security  deposits                                                                                                                                                                      |       | 3,489              |       | 2,971              |       |
| **TOTAL ASSETS**                                                                                                                                                                        |       | $                  | 3,679,627  |               | $          | 370,552 |   |
|                                                                                                                                                                                    |       |               |       |               |       |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                                                                             |       |               |       |               |       |
| CURRENT  LIABILITIES:                                                                                                                                                                   |       |               |       |               |       |
| Notes  payable, net                                                                                                                                                                     |       | $                  | 2,770,448  |               | $          | 2,279,828 |   |
| Accounts  payable                                                                                                                                                                       |       | 1,332,040          |       | 659,156            |       |
| Accrued  expenses                                                                                                                                                                       |       | 1,030,559          |       | 2,948,931          |       |
| Deferred  revenue                                                                                                                                                                       |       | 511,250            |       | 41,250             |       |
| VAT  payable                                                                                                                                                                            |       | —             |       | 8,354              |       |
| Due  to related parties                                                                                                                                                                 |       | 808,808            |       | 388,368            |       |
| Other  current liabilities                                                                                                                                                              |       | 115,000            |       | 53,005             |       |
| Derivative  liabilities                                                                                                                                                                 |       | 3,084,077          |       | —             |       |
| Current  liabilities from discontinued operations                                                                                                                                       |       | 250,893            |       | 297,271            |       |
| Total  current liabilities                                                                                                                                                              |       | 9,903,075          |       | 6,676,163          |       |
| **TOTAL LIABILITIES**                                                                                                                                                                   |       | 9,903,075          |       | 6,676,163          |       |
|                                                                                                                                                                                    |       |               |       |               |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                          |       |               |       |               |       |
|                                                                                                                                                                                    |       |               |       |               |       |
| STOCKHOLDERS’  DEFICIT:                                                                                                                                                            |       |               |       |               |       |
| Common  stock, $0.0001 par value, 200,000,000 shares authorized, 50,544,893 and  41,152,100 shares issued and outstanding at March 31, 2010 and  March 31, 2009, respectively |       | 5,055              |       | 4,115              |       |
| Additional  paid in capital                                                                                                                                                             |       | 24,145,924         |       | 12,514,724         |       |
| Foreign  currency translation adjustment                                                                                                                                                |       | 54,317             |       | (92,101            | )          |
| Accumulated  deficit                                                                                                                                                                    |       | (30,428,744        | )          | (18,732,349        | )          |
| **TOTAL STOCKHOLDERS’ DEFICIT**                                                                                                                                                    |       | (6,223,448         | )          | (6,305,611         | )          |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                    |       | $                  | 3,679,627  |               | $          | 370,552 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**WASTE2ENERGYHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**

 
| ** **                                                                     | ** ** | **For the Year Ended** | ** **  |
|--------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                     | ** ** | **March 31,**                    | ** **  |
| ** **                                                                     | ** ** | **2010**                              | ** **  | **2009** | ** ** |
|                                                                           |       |                                  |        |   |   |
| Contract  Revenues                                                             |       | $                                     | 1,250,168   |   | $ | 3,956,300 |   |
| Cost  of Revenues                                                              |       |                                  |        |   |   |
| Contract  costs                                                                |       | 1,848,964                             |        | 5,938,423 |   |
| Loss  on cancellation of contract                                              |       | —                                |        | 835,079 |   |
| Provision  for loss on contract in progress                                    |       | 61,763                                |        | 116,722 |   |
| TOTAL  COST OF REVENUES                                                        |       | 1,910,727                             |        | 6,890,224 |   |
| **GROSS LOSS**                                                                 |       | (660,559                              | )           | (2,933,924 | ) |
| OPERATING  EXPENSES                                                            |       |                                  |        |   |   |
| Selling,  general and administrative                                           |       | 7,277,703                             |        | 8,010,730 |   |
| Impairment  of technology                                                      |       | —                                |        | 10,538,029 |   |
| Impairment  of goodwill                                                        |       | —                                |        | 496,594 |   |
| TOTAL  OPERATING EXPENSES                                                      |       | 7,277,703                             |        | 19,045,353 |   |
| **OPERATING LOSS**                                                             |       | (7,938,262                            | )           | (21,979,277 | ) |
| **OTHER INCOME (EXPENSE):**                                                    |       |                                  |        |   |   |
| Interest  expense                                                              |       | (7,872,010                            | )           | (1,183,589 | ) |
| Loss  on deemed extinguishment of debt                                         |       | (701,164                              | )           | (50,918 | ) |
| Loss  on settlement of debt                                                    |       | (187,654                              | )           | — |   |
| Gain  on change in fair value of derivative liability                          |       | 3,469,225                             |        | — |   |
| Foreign  currency exchange loss                                                |       | (1,799                                | )           | (586,156 | ) |
| Loss  on equity method investment                                              |       | —                                |        | (506,757 | ) |
| Gain  on net liabilities included in bankruptcy of EnerWaste Europe, Ltd. |       | —                                |        | 2,986,840 |   |
| Gain  on legal settlement                                                      |       | 1,510,995                             |        | — |   |
| Other  income (expense)                                                        |       | —                                |        | 11,100 |   |
| **TOTAL OTHER INCOME (EXPENSE), NET**                                          |       | (3,782,407                            | )           | 670,520 |   |
| Loss  from continuing operations before income tax benefit                     |       | (11,720,669                           | )           | (21,308,757 | ) |
| Income  tax benefit                                                            |       | —                                |        | 3,868,222 |   |
| **LOSS FROM CONTINUING OPERATIONS**                                            |       | (11,720,669                           | )           | (17,440,535 | ) |
| **INCOME (LOSS) FROM DISCONTINUED OPERATIONS**                                 |       | 24,274                                |        | (233,613 | ) |
| **NET LOSS**                                                                   |       | (11,696,395                           | )           | (17,674,148 | ) |
| Foreign  currency translation adjustment                                       |       | 146,418                               |        | (92,101 | ) |
| **COMPREHENSIVE LOSS**                                                         |       | $                                     | (11,549,977 | ) | $ | (17,766,249 | ) |
|                                                                           |       |                                  |        |   |   |
| Weighted  Average Common Shares Outstanding:                                   |       |                                  |        |   |   |
| Basic                                                                          |       | 49,901,527                            |        | 38,322,993 |   |
| Diluted                                                                        |       | 49,901,527                            |        | 38,322,993 |   |
| **LOSS PER COMMON SHARE (Basic and Diluted):**                                 |       |                                  |        |   |   |
| Continuing  operations                                                         |       | $                                     | (0.23       | ) | $ | (0.46 | ) |
| Discontinued  operations                                                       |       | —                                |        | — |   |
| **NET LOSS PER COMMON SHARE**                                                  |       | $                                     | (0.23       | ) | $ | (0.46 | ) |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**WASTE2ENERGYHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ (DEFICIT) EQUITY**

 
| ** **                                                                                                            | ** ** | ** **            | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **             | ** ** | ** **    | ** ** | **Total**              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------------------------|------------|------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                                                                            | ** ** | ** **            | ** ** | ** **     | ** ** | ** **                    | ** ** | **Accumulated**        | ** ** | ** **    | ** ** | **Stockholders’** | ** ** |
| ** **                                                                                                            | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Other Comprehensive**  | ** ** | **Accumulated**        | ** ** | **(Deficit)** | ** ** |
| ** **                                                                                                            | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **Paid in Capital** | ** ** | **Income (Loss)** | ** ** | **Deficit**   | ** ** | **Equity**             | ** ** |
| **Balance at April 1, 2008**                                                                                     |       | $                     | 32,977,020 |           | 3,299      |                          | 5,523,857  |                   | $          | (1,595        | )          | $                      | (1,058,201 | ) | $ | 4,467,360 |   |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with private placement, net of offering costs  of $10,146, at $0.50 per share |       | 135,020               |       | 14             |       | 56,350                        |       | —                 |       | —        |       | 56,364                 |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with acquisition of EnerWaste Europe, Ltd.                               |       | 6,000,000             |       | 600            |       | 2,999,400                     |       | —                 |       | —        |       | 3,000,000              |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with consulting agreements                                                    |       | 752,560               |       | 75             |       | 373,675                       |       | —                 |       | —        |       | 373,750                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with notes payable                                                            |       | 250,000               |       | 25             |       | 62,475                        |       | —                 |       | —        |       | 62,500                 |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with satisfaction of note payable                                             |       | 200,000               |       | 20             |       | 99,980                        |       | —                 |       | —        |       | 100,000                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with modifications of notes payable                                           |       | 175,000               |       | 17             |       | 78,733                        |       | —                 |       | —        |       | 78,750                 |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with December 2008 private placement                                     |       | 662,500               |       | 65             |       | 294,344                       |       | —                 |       | —        |       | 294,409                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Value  of warrants issued in connection with notes payable                                                            |       | —                |       | —         |       | 84,420                        |       | —                 |       | —        |       | 84,420                 |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Consulting  expense recorded in connection with warrants issued                                                       |       | —                |       | —         |       | 997,038                       |       | —                 |       | —        |       | 997,038                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Warrants  issued in connection with compensation expense                                                              |       | —                |       | —         |       | 1,301,720                     |       | —                 |       | —        |       | 1,301,720              |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Forgiveness  of promissory note payable, related party                                                                |       | —                |       | —         |       | 642,732                       |       | —                 |       | —        |       | 642,732                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Foreign  currency translation adjustment                                                                              |       | —                |       | —         |       | —                        |       | (90,506                | )          | —        |       | (90,506                | )          |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Net  loss                                                                                                             |       | —                |       | —         |       | —                        |       | —                 |       | (17,674,148   | )          | (17,674,148            | )          |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| **Balance at March 31, 2009**                                                                                         |       | $                     | 41,152,100 |           | $          | 4,115                         |       | $                      | 12,514,724 |          | $          | (92,101                | )          | $ | (18,732,349 | ) | $ | (6,305,611 | ) |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with notes payable                                                            |       | 3,150,000             |       | 315            |       | 1,412,721                     |       | —                 |       | —        |       | 1,413,036              |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with consulting agreements                                                    |       | 1,500,000             |       | 150            |       | 744,850                       |       | —                 |       | —        |       | 745,000                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with modifications of notes payable                                           |       | 1,425,000             |       | 143            |       | 641,107                       |       | —                 |       | —        |       | 641,250                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock and warrants in connection with May 2009 private  placement, net of fees of $301,254   |       | 1,800,750             |       | 180            |       | 899,030                       |       | —                 |       | —        |       | 899,210                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Cancellation  and return of common stock                                                                              |       | (2,450,000            | )          | (245           | )          | (22,758                       | )          | —                 |       | —        |       | (23,003                | )          |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Common  stock outstanding from share exchange transaction transaction in connection  with acquisition of public shell |       | 1,000,000             |       | 100            |       | (100                          | )          |                   |       |          |       | —                 |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Common  stock issued in connection with acquisition of public shell, including costs  of $210,000                     |       | 500,000               |       | 50             |       | (210,050                      | )          | —                 |       | —        |       | (210,000               | )          |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with settlement of accounts payable                                           |       | 42,000                |       | 4              |       | 44,516                        |       | —                 |       | —        |       | 44,520                 |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Warrants  issued in connection with consulting expense                                                                |       | —                |       | —         |       | 787,569                       |       | —                 |       | —        |       | 787,569                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Warrants  issued in connection with compensation expense                                                              |       | —                |       | —         |       | 1,741,059                     |       | —                 |       | —        |       | 1,741,059              |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Warrants  issued in connection with notes payable                                                                     |       | —                |       | —         |       | 2,690,431                     |       | —                 |       | —        |       | 2,690,431              |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Warrants  issued in connection with modification of notes payable                                                     |       | —                |       | —         |       | 109,606                       |       | —                 |       | —        |       | 109,606                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Issuance  of common stock in connection with exercise of cashless option on warrants  issued                          |       | 2,164,726             |       | 217            |       | (217                          | )          | —                 |       | —        |       | —                 |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Common  stock and warrants issued with debt settlement                                                                |       | 260,317               |       | 26             |       | 317,787                       |       | —                 |       | —        |       | 317,813                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Modification  of warrant exercise price due to waiver issued by lenders on 12 % debentures                            |       | —                |       | —         |       | 825,311                       |       | —                 |       | —        |       | 825,311                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Warrants  due to placement agent in connection with 12% debenture raise                                               |       | —                |       | —         |       | 1,650,338                     |       | —                 |       | —        |       | 1,650,338              |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Foreign  currency translation adjustment                                                                              |       | —                |       | —         |       | —                        |       | 146,418                |       | —        |       | 146,418                |       |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| Net  loss                                                                                                             |       | —                |       | —         |       | —                        |       | —                 |       | (11,696,395   | )          | (11,696,395            | )          |
|                                                                                                                  |       |                  |       |           |       |                          |       |                   |       |          |       |                   |       |
| **Balance at March 31, 2010**                                                                                    |       | $                     | 50,544,893 |           | $          | 5,055                         |       | $                      | 24,145,924 |          | $          | 54,317                 |       | $ | (30,428,744 | ) | $ | (6,223,448 | ) |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**WASTE2ENERGYHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                           | ** ** | **March 31, 2010** | ** **  | **March 31, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|------------------------------|------------|
| **Operating activities:**                                                                            |       |                         |        |                         |       |
| **Loss from continuing operations**                                                                  |       | $                            | (11,720,669 | )                            | $          | (17,440,535 | ) |
| Adjustments  to reconcile loss from continuing operations to net cash used in operating  activities: |       |                         |        |                         |       |
| Foreign  currency exchange losses                                                                    |       | 1,799                        |        | 586,156                      |       |
| Equity  in loss on investment in EnerWaste Europe, Ltd                                               |       | —                       |        | 506,757                      |       |
| Gain  on net liabilties included in bankruptcy of Enerwaste Europe, Ltd                              |       | —                       |        | (2,986,840                   | )          |
| Depreciation  and amortization                                                                       |       | 6,039                        |        | 500,234                      |       |
| Loss  on cancellation of contract                                                                    |       | —                       |        | 835,079                      |       |
| Provision  for loss on contract in progress                                                          |       | 77,540                       |        | 116,722                      |       |
| Impairment  of technology                                                                            |       | —                       |        | 10,538,029                   |       |
| Impairment  of goodwill                                                                              |       | —                       |        | 496,594                      |       |
| Provision  for doubtful collections on unbilled contracts                                            |       | 543,884                      |        | —                       |       |
| Amortization  of discount on notes payable                                                           |       | 4,716,809                    |        | 186,934                      |       |
| Amortization  of deferred financing costs                                                            |       | 1,983,726                    |        | 259,337                      |       |
| Loss  on deemed extinguishment of debt                                                               |       | 701,164                      |        | 50,918                       |       |
| Loss  on settlement of debt                                                                          |       | 187,654                      |        | —                       |       |
| Additional  interest expense in connection with excess value of derivative over notes  payable       |       | 552,781                      |        | —                       |       |
| Change  in fair value of derivative liability                                                        |       | (3,469,191                   | )           | —                       |       |
| Warrants  issued for consulting services                                                             |       | 86,028                       |        | 1,698,580                    |       |
| Warrants  issued for compensation                                                                    |       | 329,640                      |        | 2,713,048                    |       |
| Common  stock issued for consulting services                                                         |       | 745,000                      |        | 373,750                      |       |
| Deferred  taxes                                                                                      |       | —                       |        | (3,876,530                   | )          |
| Accrued  and unpaid interest expense                                                                 |       | (159,301                     | )           | 391,030                      |       |
| Gain  on legal settlement                                                                            |       | (1,510,995                   | )           | —                       |       |
| **Changes in assets and liabilities:**                                                               |       |                         |        |                         |       |
| Due  from escrow agent                                                                               |       | —                       |        | 373,582                      |       |
| Contracts  Receivable                                                                                |       | 53,250                       |        | (53,250                      | )          |
| Costs  and estimated earnings in excess of billings on uncompleted contracts                         |       | (412,566                     | )           | 640,765                      |       |
| Deferred  job costs                                                                                  |       | (397,020                     | )           | —                       |       |
| Other  assets                                                                                        |       | (81,303                      | )           | (33,916                      | )          |
| Accounts  payable                                                                                    |       | 1,299,803                    |        | 1,607,192                    |       |
| Accrued  expenses                                                                                    |       | 423,312                      |        | 1,590,097                    |       |
| Deferred  revenue                                                                                    |       | 471,763                      |        | 41,250                       |       |
| VAT  payable/recoverable                                                                             |       | (125,705                     | )           | 87,311                       |       |
| Due  to related parties                                                                              |       | 379,666                      |        | 192,374                      |       |
| Other  current liabilities                                                                           |       | 115,000                      |        | (336,500                     | )          |
| **Net cash used in operating activities**                                                            |       | (5,201,892                   | )           | (941,832                     | )          |
| Investing  activities:                                                                               |       |                         |        |                         |       |
| Purchase  of equipment                                                                               |       | (37,451                      | )           | —                       |       |
| Cost  of applying for patents                                                                        |       | (96,868                      | )           | —                       |       |
| Cash  acquired in acquisition                                                                        |       | —                       |        | 718                          |       |
| **Net cash (used in) provided by investing activities**                                              |       | (134,319                     | )           | 718                          |       |
| Financing  activities:                                                                               |       |                         |        |                         |       |
| Proceeds  from notes payable, net of financing costs                                                 |       | 8,135,380                    |        | 889,320                      |       |
| Principal  payments on notes payable                                                                 |       | (3,028,330                   | )           | (114,492                     | )          |
| Consideration  for cancellation and return of common stock                                           |       | (20,000                      | )           | —                       |       |
| Issuance  of common stock in private placement                                                       |       | 899,210                      |        | 56,364                       |       |
| Increase  in restricted cash held for note payable interest payments                                 |       | (285,946                     | )           | —                       |       |
| Other  financing costs                                                                               |       | (210,050                     | )           | —                       |       |
| **Net cash provided by financing activities**                                                        |       | 5,490,264                    |        | 831,192                      |       |
| Discontinued  operations:                                                                            |       |                         |        |                         |       |
| Operating  cash flows                                                                                |       | (20,726                      | )           | (169,606                     | )          |
| **Net cash (used in) discontinued operations**                                                       |       | (20,726                      | )           | (169,606                     | )          |
| Effect  of exchange rate changes on cash                                                             |       | (21,742                      | )           | (416,767                     | )          |
| **Net increase (decrease) in cash**                                                                  |       | 111,585                      |        | (696,295                     | )          |
| Cash  — beginning                                                                               |       | 27,360                       |        | 723,655                      |       |
| **CASH — Ending**                                                                               |       | $                            | 138,945     |                         | $          | 27,360 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 1.                THE COMPANY**

 

The terms “we,” “ours,” “us,”and “Company” refer to Waste2Energy Holdings, Inc. and its subsidiaries.

 

***Organization***

 

We are a “cleantech”technology company. We target waste to energy technologies that generate “greenpower” converting waste streams, traditionally destined for landfill, into clean,renewable energy.  The Company seeks small footprint, simple, costeffective technologies that are scalable, modular, environmentally friendly androbust enough to operate in harsh and remote environments.  TheCompany is forging strategic alliances for the regional fabrication andmanufacturing of its BOSTM systems, specialized heat recovery steamgeneration, control housing panels, green power electricity production and thedevelopment of sales and distribution channels.

 

Waste2Energy, Inc. (“W2E”)was incorporated in the State of Delaware on April 10, 2007.  On July 10, 2007, W2E entered into apurchase agreement with EnerWaste International Corp. (“EWI”) to acquire 95% ofthe issued and outstanding common stock of EWI. On the effective date of theacquisition (November 7, 2007), the Company discontinued the operations ofEWI (see Note 5).  EWI owned a 50% interest in EnerWaste Europe Ltd.(“EWE”) and W2E purchased the remaining 50% interest on June 25, 2008,through a newly formed, wholly-owned subsidiary, EnerWaste, Inc. (“EW”),which was incorporated in the State of Delaware on April 11, 2008. EWE waslocated in Iceland.  In October 2008, due to the economic crisisthat occurred in Iceland, in particular the banking sector, EWE ceasedoperations in Iceland.  Further, in February 2009, (and as morefully described in Note 6) a creditor of EWE commenced bankruptcy proceedingsagainst EWE and EWE was declared bankrupt and an Administrator was appointedfor the estate of EWE.  As of February 23,2010, the bankruptcy proceedings were completed.  This subsidiary no longer is in existence andthe Company has no further rights or obligations to the assets and liabilitiesof EWE.

 

W2E formed a wholly-ownedsubsidiary, Waste2Energy Group Holdings PLC (“W2E Group Holdings”), which wasincorporated in the Isle of Man on April 17, 2009. W2E Group Holdings hasthree primary wholly-owned subsidiaries: (i) Waste2Energy TechnologiesInternational Limited (“W2E Technologies”), which was incorporated in the Isleof Man on February 13, 2009, and is intended to be an intellectualproperty holding company; (ii) W2E (IOM) Limited, which was incorporatedin the Isle of Man on October 27, 2008 and is the holder of a majorcontract for the Company; and (iii) Waste2Energy Engineering Limited,which was incorporated in Scotland on May 27, 2009.

 

Waste2Energy International, Ltd.(“W2EL”),  a wholly-owned subsidiary ofW2E, was incorporated in England on March 5, 2007 under the name LM GlobalLimited.  The name was changed to Waste2EnergyInternational, Ltd. Effective October 18, 2007.

 

In addition, W2E formed twoadditional wholly-owned subsidiaries, Waste2Energy Holdings PLC andWaste2Energy Europe Limited, which were incorporated in England on July 2,2008, both of which are inactive.

 

On May 6, 2009, theCompany entered into an Agreement and Plan of Merger (the “Merger Agreement”)with Waste2Energy Acquisition Co., a Delaware corporation and wholly ownedsubsidiary of the Company (the “Subsidiary”) and W2E.  On May 28 2009, the Company, Subsidiaryand W2E entered into Amendment No. 1 to the Merger Agreement (“Amendment No. 1.”).  Pursuantto Amendment No. 1, the definition of Acquisition Shares was revisedto mean 45,981,770 shares of W2E and Section 5.19(e) of the MergerAgreement was revised to note that the issued and outstanding share capital ofW2E consists of 45,981,770 issued and outstanding shares.  TheMerger Agreement as amended by Amendment No. 1 is hereinafter referred toas the “Merger Agreement”. Pursuant to the Merger Agreement, on May 28,2009 (the “Closing”), the Subsidiary merged with and into W2E resulting in W2Ebecoming a wholly-owned subsidiary of the Company (the “Merger”). TheMerger was accounted for as a reverse merger and recapitalization.Pursuant to the Merger Agreement, the Company issued 45,981,770 shares ofcommon stock (the “Common Stock”) of the Company (the “Acquisition Shares”) tothe shareholders of W2E, representing approximately 96% of the issued andoutstanding Common Stock following the closing of the Merger and the saleof Units (as defined below) concurrently with the Closing, and warrants topurchase 18,760,000 shares

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

 

**NOTE 1.                THE COMPANY (CONTINUED)**

 

of Common Stock (the “AcquisitionWarrants”) to the warrant holders of W2E at exercise prices ranging from $0.10to $0.75. Pursuant to the Merger Agreement, the outstanding shares of commonstock and warrants to purchase shares of common stock of W2E werecancelled.  The par value of the Waste2Energy Inc. common stock was$0.001.  Upon completion of the mergerthe par value of the shares of the merged company were $0.0001.  Subsequent to the closing of the Merger, theCompany continued W2E’s operations. In July 2009, the name of the Companywas changed to Waste2Energy Holdings, Inc.  The Company, which was incorporated on March 11,2008, is headquartered in Greenville, South Carolina.  On the Closing, the Company sold in a privateplacement 254,500 units (the “Units”) to investors (the “Investors”), each Unitconsisting of (i) three (3) shares of Common Stock and (ii) athree-year warrant (the “Warrants”) to purchase three (3) additionalshares of Common Stock at an exercise price of $1.25 per share, at a purchaseprice of $2.00 per Unit and, as a result, the Company received gross proceedsof approximately $509,000 and issued the Investors an aggregate of 763,500shares of Common Stock and Warrants to purchase 763,500 shares of Common Stock(the “Warrant Shares”). The Warrants may not be exercised to the extent suchexercise would cause the holder of the Warrant, together with its affiliates,to beneficially own a number of shares of Common Stock which would exceed 4.99%of the Company’s then outstanding shares of Common Stock following suchexercise.

 

The private placement wasterminated in September 2009 and the Company raised $1,200,464 from theoffering. In April 2009, the Company issued $250,000 of convertible debtwhich was due 180 days from date of issuance and $50,000 of convertible debtfrom a related party which was due 120 days from date of issuance.  In July and August 2009, theCompany issued $2,500,000 of Debentures due 90 days from the date of issuance.This debt bears interest at 10% and was used to refinance existing debt and tofund operating expenses. In September 2009, the Company borrowed $39,000from a related party that was due on demand. From October 2009 to March 2010, the Company issued $7,133,847of Senior Convertible Debentures bearing interest at 12% and due one year fromdate of issue.  This debt was used torefinance existing debt and to fund operating expenses.

 

On January 22, 2010,the Company received notice from the Financial Industry Regulatory Authority(FINRA) that shares of the Company’s common stock were no longer eligible fortrading on the OTC Bulletin Board (“OTCBB”), as a result of the Company’sdelayed filing of its quarterly report on Form 10-Q for the quarter ended June 30,2009.  The Company’s common stock iscurrently traded on the OTC “Pink Sheets” under the symbol “WTEZ.PK”.  The removal of the Company’s stock from theOTCBB resulted in the Company being in Default on its 12% Senior ConvertibleDebentures, as the Company’s common stock is not currently eligble forquotation on a Trading Market (as defined in the Debenture Agreement).  The Company obtained waivers from theDebenture holders in February 2010 which cured the Default.  A market maker has submitted an applicationfor the Company to become eligible to resume trading on the OTCBB, howeverthere can be no assurance that the request will be granted.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 2.                LIQUIDITY, FINANCIAL CONDITION AND MANAGEMENT’S PLANS**

 

The Company’s consolidatedfinancial statements for the year ended March 31, 2010 have been preparedassuming that it will continue as a going concern.  To date the Company has generated limitedrevenues, has substantial operating losses and an accumulated deficit since itsinception in April 2007.  TheCompany incurred a net loss from continuing operations of $11,720,669 and used$5,201,892 of cash in continuing operations for the year ended March 31,2010.  At March 31, 2010, the Company had a working capitaldeficit of $6,634,820, limited financial resources available to pay ongoingfinancial obligations as they become due and a $30,428,744 accumulated deficit.These conditions raise substantial doubt about the Company’s ability tocontinue as a going concern. These consolidated financial statements do notinclude any adjustments relating to the recovery of assets or theclassification of liabilities should the Company be unable to continue as agoing concern.

 

The Company has principallyfinanced its operations for the year ended March 31, 2010, using proceedsfrom short term borrowings primarily from the sale of its 12% SeniorConvertible Debentures in a series of private placement transactions (see Note8).  The first tranche of Debenturesmature starting October 1, 2010.  Ifthe Company is unable to repay this debt when due, the Company will be indefault under the debt and the holders may seek to enforce any and all of theirrights under applicable laws, which may have a material adverse effect on ourbusiness and ability to continue operations.

 

Management believes theCompany’s ability to continue operations is dependent on its ability tocontinue to raise capital.  At thepresent time, we have no commitments for any additional financing.  If the Company is unable to raise additionalcapital or encounters unforeseen circumstances, it may be required to takeadditional measures to conserve liquidity, which could include, but notnecessarily be limited to, curtailing its operations, suspending the pursuit ofits business plan, and controlling overhead expenses.  The Companycannot provide any assurance that it will raise additional capital as necessarynor can it provide any assurance that new financing will be available to it oncommercially acceptable terms, if at all. Management believes that theability to raise additional capital could be negatively impacted as a result ofits securities not being traded on an active trading market.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The following is a summaryof the significant accounting policies followed in the preparation of theaccompanying consolidated financial statements. On July 1, 2009, the Financial Accounting Standards Board (“FASB”)issued the FASB Accounting Standards Codification (“ASC” or “the Codification”),the single source of authoritative, nongovernmental Generally AcceptedAccounting Principles (“GAAP”), except for rules and interpretive releasesof the Securities and Exchange Commission (“SEC”), which are sources ofauthoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not includedin the Codification is non-authoritative. The new guidelines and numbering system prescribed by the Codificationare used when referring to GAAP.  As theCodification was not intended to change or alter existing GAAP, it will nothave any impact on the Company’s consolidated financial statements.

 

***Principles of Consolidation***

 

The consolidated financialstatements include the accounts of Waste2Energy Holdings, Inc. and itssubsidiaries.  Additionally, the accountsof W2E include the accounts of EWI, and EWI’s investment in EWE, which wasaccounted for under the equity method during the period from November 7,2007 through June 25, 2008. Further, as a result of the Company’s purchaseof the remaining 50% of EWE, the Company used the consolidation method ofaccounting for its investment in EWE for the period from June 25, 2008,the effective date of the acquisition, to February 19, 2009, the date ofbankruptcy (see Note 6). All significant intercompany balances and transactionshave been eliminated in consolidation.

 

Through June 25, 2008,the Company had an investment in EWE over which it had the ability to influencebut not control the operating and financial policies either through votingrights or financial and management participation. The Company used the equitymethod of accounting as prescribed under ASC 323 “Investments-Equity Method andJoint Ventures” to account for its investment in EWE. Accordingly, the Companyrecorded its investment in EWE as a separate component in the consolidatedbalance sheet and recorded its proportionate share of loss as a component ofresults of operations. The difference between the cost of an investment and theamount of the underlying equity in net assets of an investee is accounted foras if the investee were a consolidated subsidiary. A Company is also requiredto amortize, if appropriate, the difference between the investor cost and theunderlying equity in net assets of the investee at the date of investment.Accordingly, the Company’s investment in EWE was allocated to the underlyingassets of EWE for presentation purposes.

 

The investment in EWE as of March 31,2010 and 2009 has been reduced to zero due to the bankruptcy of EWE in February 2009(see Note 6).  The Company’sproportionate share of losses under the equity method for the period from April 1,2008 to June 25, 2008 amounted to $506,757.  Included in the losses is $126,121 for theperiod from April 1, 2008 to June 25, 2008 related to itsproportionate share of the amortization of intangibles acquired in connectionwith the acquisition of EWI (see Note 5). Gain (loss) on discontinuedoperations of EWI, included in the statement of operations for the years ended March 31,2010 and 2009, amounted to $24,274 and ($233,613), respectively.

 

***Use of Estimates***

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of income andexpenses during the reported period.  The Company evaluates all ofits estimates on an on-going basis. Significant estimates and assumptionsinclude the valuation of acquired assets including the establishment of adeferred tax liability, the useful lives of acquired intangible assets and thevaluation of equity instruments.  In addition, the Company’s businessinvolves making significant estimates and assumptions in the normal course ofbusiness relating to its contracts and the long-term duration of a contractcycle. The most significant estimates with regard to its contracts relate tothe estimating of total forecasted construction contract revenues, costs andprofits in accordance with accounting for long-term

 

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**MARCH 31,2010**

 

**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

contracts, as well asestimating the allowance for doubtful accounts with respect to contractsreceivable.

 

Making estimates requiresmanagement to exercise significant judgment. It is at least reasonably possiblethat the estimate of the effect on the financial statements of a condition,situation or set of circumstances that existed at the date of the consolidatedfinancial statements, which management considered in formulating its estimatecould change in the near term due to one or more future confirming events.Accordingly, actual results could differ in the near term from these estimates,and such differences could be material.

 

***Revenue Recognition***

 

The Company generallyapplies revenue recognition principles in accordance with ASC Topic 605 “RevenueRecognition” (“ASC 605”).  Accordinglyrevenue is generally recognized when persuasive evidence of an arrangementexists, services have been rendered or product delivery has occurred, theselling price to the customer is fixed or determinable, and collectability isreasonably assured. For multiple element arrangements, where Vendor SpecificObjective Evidence (“VSOE”) of fair value is available for all elements, thecontract value is allocated to each element proportionately based upon relativeVSOE fair value and revenue is recognized separately for each element. WhereVSOE of fair value is available for undelivered elements, the residual methodis used to value the delivered elements. Where VSOE of fair value is notavailable for undelivered elements, all revenue for the arrangement is deferreduntil the earlier of the point at which VSOE does exist or all elements of thearrangement have been delivered.

 

The Company requires all ofits sales to be supported by evidence of a sale transaction that clearlyindicates the selling price to the customer, shipping terms and payment terms.Evidence of an arrangement generally consists of a contract, purchase order ororder confirmation approved by the customer. The Company’s specific revenue recognition policies with respect to itsproducts and services are as follows:

 

Revenue generated frominstallation services and engineering studies is generally recognized as theservices are performed.

 

Percentage of completion method

 

We enter into certaincontracts that are accounted for using the percentage of completion method, asprescribed by ASC 605-35 “Construction-Type and Production-Type Contracts.”  Revenue recognized on contracts in processare based upon estimated contract revenue and related total cost of the projectat completion. The extent of progress toward completion is generally measuredbased on the ratio of actual cost incurred to total estimated cost atcompletion. Revisions to cost estimates as contracts progress have the effectof increasing or decreasing profits each period. Provisions for anticipatedlosses are made in the period in which they become determinable.

 

Completed-contract method

 

The Company under certaincircumstances recognizes revenues utilizing the completed-contract method. Thatmethod is used on smaller contracts because the financial position and resultsof operations do not vary significantly from those that would result using thepercentage of completion method. A contract is considered complete when thecustomer accepts the work.

 

Contract costs include alldirect material and labor costs and those indirect costs related to contractperformance, such as indirect labor, supplies, tools, repairs, and depreciationcosts. General and administrative costs are charged to expense as incurred.Provisions for estimated losses on uncompleted contracts are made in the periodin which such losses are determined.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

***Contracts Receivable***

 

Contracts receivable arestated at the amount the Company expects to collect. The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. Management considers thefollowing factors when determining the collectability of specific customeraccounts: customer credit-worthiness, past transaction history with thecustomer, current economic industry trends, and changes in customer paymentterms. If the financial condition of the Company’s customers was todeteriorate, adversely affecting their ability to make payments, additionalallowances would be required. Based on management’s assessment, the Companyprovides for estimated uncollectible amounts through a charge to earnings and acredit to a valuation allowance. Balances that remain outstanding after theCompany has made reasonable collections efforts are written off through acharge to the valuation allowance and a credit to accounts receivable.  As of March 31, 2010, the Company had nocontracts receivable.

 

***Value Added Tax***

 

Certain of our foreignsubsidiaries are subject to Value Added Tax, or VAT, which is usually appliedto goods and services purchased in the respective countries. In accordance withASC 605-45 “Principal Agent Considerations”, we account for VAT imposed on our goods and services on a net basis inthe consolidated statements of operations. We are required to remit the VAT wecollect to the tax authorities, but may deduct the VAT we have paid on eligiblepurchases. The VAT returns are filed offsetting the payables against thereceivables. At March 31, 2010 and March 31, 2009, the Companyrecorded a net VAT recoverable of $109,818 and a net VAT payable of $8,354,respectively.

 

***Concentrations of Credit Risk***

 

Financial instruments thatpotentially expose the Company to credit risk include cash. At times, our cashmay be in uninsured or in deposit accounts that exceed the Federal DepositInsurance Corporation (“FDIC”) insurance limit. At March 31, 2010, theCompany did not have any cash with any financial institutions that exceeded theFDIC insurance limits.  The Company places its cash with variousfinancial institutions and has not experienced any losses on these accountsother than its accounts in Iceland (see Note 6).

 

As of March 31, 2010,the Company did not have any contracts receivable balance related to itsuncompleted contracts.  As of March 31,2009, one contract made up substantially all the Company’s contracts receivableand cost and estimated earnings in excess of billings on uncompleted contracts.

 

For the years ended March 31,2010 and 2009, substantially all of the Company’s revenues were derived fromone contract.

 

***Property and Equipment***

 

Property and equipment arecarried at cost. Expenditures for maintenance and repairs are expensedcurrently, while renewals and betterments that materially extend the life of anasset are capitalized. The cost of assets sold, retired, or otherwise disposedof, and the related allowance for depreciation, are eliminated from theaccounts, and any resulting gain or loss is recognized.

 

Depreciation is providedusing the straight-line method over the estimated useful lives of the assets,which are as follows:

 
| Building and improvements          |   | 33  years  |
|------------------------------------|--------|------------|
| Furniture, fixtures and  equipment |   | 3-7  years |

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

***Goodwill and Intangible Assets***

 

The Company accounts forgoodwill and intangible assets in accordance with ASC 350 “Intangibles-Goodwilland Other” (“ASC 350”).  ASC 350 requiresthat goodwill and other intangibles with indefinite lives be tested forimpairment annually or on an interim basis if events or circumstances indicatethat the fair value of an asset has decreased below its carrying value.

 

Goodwill represents theexcess of the purchase price over the fair value of net assets acquired in theCompany’s EWE business combination which occurred on June 25, 2008.  ASC 350 requires that goodwill be tested forimpairment at the reporting unit level (operating segment or one level below anoperating segment) on an annual basis and between annual tests whencircumstances indicate that the recoverability of the carrying amount ofgoodwill may be in doubt. Application of the goodwill impairment test requiresjudgment, including the identification of reporting units; assigning assets andliabilities to reporting units, assigning goodwill to reporting units, anddetermining the fair value (see Notes 6 and 7).

 

Significant judgmentsrequired to estimate the fair value of reporting units include estimatingfuture cash flows, determining appropriate discount rates and otherassumptions. Changes in these estimates and assumptions or the occurrence ofone or more confirming events in future periods could cause the actual resultsor outcomes to materially differ from such estimates and could also affect thedetermination of fair value and/or goodwill impairment at future reportingdates.

 

The Company’s policy is toamortize intangible assets including technology and patents using astraight-line method over their estimated useful life, generally fifteenyears.  Patents that have been appliedfor are not amortized until the patent has been approved.

 

***Long Lived Assets***

 

In accordance with ASC 360 “PropertyPlant and Equipment”,  the Companyreviews the carrying value of intangibles subject to amortization andlong-lived assets for impairment at least annually or whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.

 

Recoverability of long-livedassets is measured by comparison of its carrying amount to the undiscountedcash flows that the asset or asset group is expected to generate. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amount of the property, if any,exceeds its fair market value (see Note 7).

 

***Deferred Financing Costs***

 

Costs relating to the debtportion of the private placement offerings and notes are capitalized andamortized over the term of the related debt using the straight-line methodwhich approximates the interest method.  Whena loan is paid in full, any unamortized financing costs are removed from therelated accounts and charged to operations.  During the year endedMarch 31, 2010, the Company incurred $189,384 of professional fees and$4,173,424 in placement fees (total of $4,362,808) in connection with theprivate placement of debt. During the year ended March 31, 2009, the Companyincurred $353,637 of professional fees and $13,000 in placement fees (total of$366,637) in connection with a private placement offering and the issuance ofnotes payable.  Amortization of deferredfinancing costs is a component of interest expense in the consolidatedstatement of operations (See Note 8).

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

***Debt ModificationAccounting***

 

The Company accounted foramendments to certain debt instruments to extend the maturity dates andmodifications to warrants issued in association with 12% Debentures (see Note8) in accordance with guidelines enumerated in ASC 470 Debt, (“ASC 470.”) ASC 470 provides that a substantial modification of termsin an existing debt instrument should be accounted for like, and reported inthe same manner as, an extinguishment of debt. ASC 470 further provides that the modification of a debt instrument by adebtor and a creditor in a non-troubled debt situation is deemed to have beenaccomplished with debt instruments that are substantially different if thepresent value of the cash flows under the terms of the new debt instrument isat least ten percent different from the present value of the remaining cashflows under the terms of the original instrument at the date of themodification.

 

TheCompany evaluated its change due to the reduction in the warrant exercise priceas it relates to the cash flows before and after modification to determinewhether the modification resulted in the issuance of a substantially differentinstrument.  The Company determined aftergiving effect to the change in the exercise price the terms were notsubstantially different.  Accordingly,the Company recorded the change in the fair value of warrants issuedbefore and after the modification totaling $825,311, as deferred financingcharges which are being amortized over the contractual term of the relateddebt.  Accumulated amortization as of March 31,2010 totaled $163,020 and amortization expense for the year ended March 31,2010 totaled $163,020.

 

The Company evaluated itsissuance of the note extensions to determine whether the modification for thechange in the maturity date resulted in the issuance of a substantiallydifferent debt instrument. The Company determined after giving effect to thechanges in the extended due dates and the consideration paid to the debt holdersthat the Company had issued substantially different debt instruments on certainextensions, which resulted in a constructive extinguishment of the originaldebt instrument. Accordingly, the Company recorded a loss on the extinguishmentof debt in the amount of $701,164 and $50,918 which represented the value ofadditional equity instruments given to debt holders to extend the maturity forthe years ended March 31, 2010 and 2009, respectively.  Inaddition, on other extensions the Company considered the amendments to bemodifications and deferred the cost of additional consideration paid atextension totaling 49,692 for the year ended March 31, 2010, and hasamortized said costs to interest expense during the year over the extensionperiod.  The debt instrument charges areincluded in the accompanying statement of operations for the years ended March 31,2010 and 2009, respectively.

 

***Stock-Based Compensation***

 

The Company accounts forstock-based compensation in accordance with ASC 718 Compensation — Stock Compensation (“ASC 718”). ASC 718 addressesall forms of share-based payment (“SBP”) awards including shares issued underemployee stock purchase plans, stock options, restricted stock and stockappreciation rights. Under ASC 718 awards result in a cost that is measured atfair value on the awards’ grant date, based on the estimated number of awardsthat are expected to vest and will result in a charge to operations.

 

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**MARCH 31,2010**

 

**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

***Non-Employee Stock-Based Compensation***

 

The Company accounts forequity instruments issued to non-employees in accordance with the provisions ofASC 505, Share Based Payments toNon-Employees, and ASC 718 which requires that such equity instrumentsare recorded at their fair value on the measurement date.  Themeasurement of stock-based compensation is subject to periodic adjustment asthe underlying equity instruments vest.  Non-employee stock-basedcompensation charges are being amortized over their respective contractualvesting periods.

 

***Income Taxes***

 

The Company accounts forincome taxes under ASC 740 Income taxes (“ASC 740”).  ASC 740 requires the recognition of deferredtax assets and liabilities for both the expected impact of differences betweenthe financial statements and tax basis of assets and liabilities and for theexpected future tax benefit to be derived from tax loss and tax credit carryforwards. ASC 740 additionally requires a valuation allowance to be establishedwhen it is more likely than not that all or a portion of deferred tax assetswill not be realized. Furthermore, ASC 740 provides that it is difficult toconclude that a valuation allowance is not needed when there is negativeevidence such as cumulative losses in recent years. Therefore, cumulativelosses weigh heavily in the overall assessment.

 

ASC740 also addresses the determination of whether tax benefits claimed orexpected to be claimed on a tax return should be recorded in the financialstatements. Under ASC 740, the Company may recognize the tax benefit from anuncertain tax position only if it is more likely than not that the tax positionwill be sustained on examination by the taxing authorities, based on thetechnical merits of the position. The tax benefits recognized in the financialstatements from such a position should be measured based on the largest benefitthat has a greater than 50% likelihood of being realized upon ultimatesettlement. ASC 740 also provides guidance on derecognition, classification,interest and penalties on income taxes, accounting in interim periods andrequires increased disclosures. The Company reflects any interest and penaltiesrecorded in connection with its uncertain tax positions as a component ofincome tax expense.  As of March 31, 2010 and 2009, the Companydoes not have a liability for unrecognized tax liabilities.

 

The Company is required tofile income tax returns in the United States (federal) and in various state andlocal jurisdictions. In addition, the Company operates in different countriessuch as the Isle of Man, United Kingdom, Iceland and Scotland and issubject to taxation in these jurisdictions. Further, with few exceptions, the Company is subject to U.S. federal,state, local and foreign tax examinations by tax authorities for 2007, 2008,2009 and 2010.

 

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**MARCH 31,2010**

 

**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

***Net Loss Per Share***

 

The Company computes netloss per share in accordance with ASC 260 Earnings per Share (“ASC 260”).  Under ASC 260, basic net loss per share iscomputed by dividing net loss per share available to common stockholders by theweighted average number of shares outstanding for the period and excludes theeffects of any potentially dilutive securities. Diluted earnings per share, ifpresented, would include the dilution that would occur upon the exercise orconversion of all potentially dilutive securities into common stock using the “treasurystock” and/or “if converted” methods as applicable. The computation of basicloss per share for the year ended March 31, 2010 and March 31, 2009 excludespotentially dilutive securities because their inclusion would beanti-dilutive.  Of the total outstandingwarrants to purchase 30,242,770 shares of common stock at March 31, 2010,28,500,917 were excluded from the computation of basic and diluted net loss pershare; however the remaining 1,741,853 warrants exercisable at $0.01 per shareand issuable to the placement agent as additional consideration for each 12%Convertible Debenture closing (see Note 8), are included in the weightedaverage shares outstanding (basic and diluted), as they are deemed to beoutstanding stock for purposes of this calculation due to the $0.01 exerciseprice.  Warrants to purchase 11,410,000shares of common stock at March 31, 2009 were excluded from thecomputation of basic and diluted net loss per share.

 

TheCompany retrospectively adopted certain provisions of ASC 260  on April 1, 2009. This provision of ASC260 addresses whether instruments granted in share based payment transactionsare participating securities prior to vesting and, therefore, need to beincluded in the earnings allocation in computing earnings per share (EPS) underthe two class method described. This provision of ASC 260 is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and interim periods within those years. The adoption of this provision ofASC 260 did not have a material impact on the Company’s consolidated financialposition, results of operations or cash flows.

 

***Non-Controlling Interest***

 

TheCompany prospectively adopted certain provisions of ASC 810 Consolidation (“ASC810”). ASC 810 establishes accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. This provision of ASC 810 is effective for fiscal years and interimperiods within those fiscal years beginning on or after December 15, 2008.Earlier adoption is prohibited. The adoption of this provision of ASC 810 didnot have a material effect on the Company’s consolidated financial position,results of operations or cash flows.

 

***Financial Instruments***

 

TheCompany adopted the provisions of ASC 815-40 Contracts in Entity’s Own Equity (“ASC815-40”). ASC 815-40 provides that an entity should use a two step approach toevaluate whether an equity-linked financial instrument, or embedded feature, isindexed to its own stock, including evaluating the instrument’s contingentexercise and settlement provisions. It also clarifies on the impact of foreigncurrency denominated strike prices and market-based employee stock optionvaluations. This provision of ASC 815-40 is effective for fiscal yearsbeginning after December 15, 2008 and interim periods within those fiscalyears. The adoption of the provisions of ASC 815-40 did not have a materialeffect on the Company’s consolidated financial position, results of operationsor cash flows.

 

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**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

***Derivative Instruments***

 

TheCompany adopted the provisions of ASC 815-15 “Embedded Derivatives” (“ASC815-15”). Under ASC 815-15, the Company is required to bifurcate conversionoptions from their host instruments and account for them as free standingderivative financial instruments according to certain criteria. The criteriaincludes circumstances in which (a) the economic characteristics and risksof the embedded derivative instrument are not clearly and closely related tothe economic characteristics and risks of the host contract, (b) thehybrid instrument that embodies both the embedded derivative instrument and thehost contract is not re-measured at fair value under otherwise applicablegenerally accepted accounting principles with changes in fair value reported inearnings as they occur and (c) a separate instrument with the same termsas the embedded derivative instrument would be considered a derivativeinstrument.

 

TheCompany does not enter into derivative contracts for purposes of riskmanagement or speculation. However, from time to time, the Company enters intocontracts that are not considered derivative financial instruments in theirentirety but that include embedded derivative features.

 

TheCompany accounts for its embedded conversion features and freestanding warrantsthat are settled in a company’s own stock to be designated as an equityinstrument, asset, or a liability. A contract designated as an asset or aliability is carried at fair value on a Company’s balance sheet, with anychanges in fair value recorded in the results of operations.

 

TheCompany accounts for it’s embedded conversion options as a derivative liabilityat fair value and the unrealized changes in the values of these derivatives arerecorded in the statement of operations as gain or loss on derivatives.Contingent conversion features that reduce the conversion price of warrants andconversion features are included in the valuation of the warrants and theconversion features. The recognition of the fair value of derivativeliabilities (i.e. warrants and embedded conversion options) at the date ofissuance is applied first to the debt proceeds. The excess fair value, if any,over the proceeds from a debt instrument, is recognized immediately in thestatement of operations as interest expense. The value of warrants orderivatives associated with a debt instrument is recognized at inception as adiscount to the debt instrument. This discount is amortized over the life ofthe debt instrument. A determination is made upon settlement, exchange, ormodification of the debt instruments to determine if a gain or loss on the extinguishmenthas been incurred based on the terms of the settlement, exchange, ormodification and on the value allocated to the debt instrument at such date.

 

TheCompany uses the Black-Scholes pricing model to determine fair values of itsderivatives. The model uses market-sourced inputs such as interest rates,exchange rates, and stock volatilities. Selection of these inputs involvesmanagement’s judgment and may impact net loss. The fair value of the derivativeliabilities are subject to the changes in the trading value of common stock. Asa result, the Company’s financial statements may fluctuate fromquarter-to-quarter based on factors, such as the bid price of the stock at thebalance sheet date, the amount of shares converted by note holders and/or exercisedby warrant holders, and changes in the determination of market-sourced inputs.Consequently, the Company’s financial position and results of operations mayvary materially from quarter-to-quarter based on conditions other than itsoperating revenues and expenses.

 

***Registration Rights Agreements***

 

The Company accounts forregistration rights agreements in accordance with ASC 825-20 RegistrationPayment Arrangements (“ASC 825-20”). ASC 825-20 specifies that the contingentobligation to make future payments or otherwise transfer consideration under aregistration payment arrangement, whether issued as a separate agreement orincluded as a provision of a financial instrument, should be separatelyrecognized and accounted for as a contingency in accordance with ASC 450Contingencies.

 

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**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**

 

***Foreign Currency Translation and Remeasurement***

 

The financial statements ofour foreign operations are stated in foreign currencies, referred to as thefunctional currency. Under ASC 830 Foreign Currency Matters, functionalcurrency assets and liabilities are translated into the reporting currency, USDollars, using period end rates of exchange and the related translationadjustments are recorded as a separate component of accumulated othercomprehensive income. Functional statements of operations amounts expressed infunctional currencies are translated using average exchange rates for therespective periods. Remeasurement adjustments and gains or losses resultingfrom foreign currency transactions are recorded as foreign exchange gains orlosses in the consolidated statement of operations.

 

***Fair value measurements***

 

The Company carries variousassets and liabilities at fair value in the accompanying consolidated balancesheets. Fair value is defined as the amount that would be received for an assetor paid to transfer a liability (i.e., an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. The Company maximizes theuse of observable inputs and minimizes the use of unobservable inputs whenmeasuring fair value. Three levels of inputs that may be used to measure fairvalue are as follows:

 
| Level 1: |   | Quoted prices (unadjusted)  in active markets that are accessible at the measurement date for identical  assets and liabilities. The fair value hierarchy gives the highest priority  to Level 1 inputs.   |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Level 2: |   | Observable prices that are  based on inputs not quoted on active markets but corroborated by market data.                                                                                                       |
| Level 3: |   | Unobservable inputs when  there is little or no market data available, thereby requiring an entity to  develop its own assumptions. The fair value hierarchy gives the lowest  priority to Level 3 inputs. |

 

The table below summarizesthe fair values of our financial liabilities as of March 31, 2010:

 
| ** **              | ** ** | **Fair Value at**       | ** ** | **Fair Value Measurement Using** | ** ** |
|-------------------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 31, 2010** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                    |       |                    |       |                             |       |   |   |   |   |
| Derivative  liabilities |       | $                       | 3,084,077  |                             | —     |   | — |   | $ | 3,084,077 |   |
|                         |            |                         |            |                                  |            |  |  |  |  |  |  |

 

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**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

The following is a descriptionof the valuation methodologies used for these items, as well as the generalclassification of such items:

 

*Derivativeliabilities* — these instruments are embedded within theCompany’s 12% Senior Convertible Debentures. These instruments were valuedusing pricing models which incorporate the Company’s stock price, credit risk,volatility, U.S. risk free rate, transaction details such as contractualterms, maturity and amount of future cash inflows, as well as assumptions aboutprobability and the timing of certain events taking place in the future. Theseembedded derivatives are included in derivative liabilities in the accompanyingconsolidated balance sheet at March 31, 2010.  For a summary of the changes in the fairvalue of these embedded derivatives, see Note 8.

 

***Reclassification***

 

Certain amounts in the prioryear consolidated financial statements have been reclassified to conform tocurrent year presentation.  Thosereclassification adjustments had no effect on the Company’s previously reportedconsolidated net loss.

 

***Recent Accounting Pronouncements***

 

InFebruary 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855)- Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09requires an entity that is an SEC filer to evaluate subsequent events throughthe date that the financial statements are issued and removes the requirementthat an SEC filer disclose the date through which subsequent events have beenevaluated. ASC 2010-09 was effective upon issuance.

 

InJune 2009 the FASB issued ASC 860, formerly SFAS 166, “Accounting forTransfers of financial Assets — an amendment of FASB Statement No. 140”(ASC 860). ASC 860 eliminates the concept of a qualifying special-purposeentity, creates more stringent conditions for reporting a transfer of a portionof a financial asset as a sale, clarifies other sale-accounting criteria, andchanges the initial measurement of a transferor’s interest in transferredfinancial assets. ASC 860 will be effective April 1, 2010. The Company isin the process of evaluating the impact of this pronouncement on itsconsolidated financial position and results of operations. The adoption of thispronouncement is not expected to have a material impact on the Company’sconsolidated financial position and results of operations.

 

InJune 2009 the FASB issued ASC 810, formerly SFAS 167, “Amendments to FASBInterpretation No. 46(R)” (ASC 810). ASC 810 eliminates Interpretation46(R)’s exceptions to consolidating qualifying special-purpose entities,contains new criteria for determining the primary beneficiary, and increasesthe frequency of required reassessments to determine whether a company is theprimary beneficiary of a variable interest entity. ASC 810 also contains a newrequirement that any term, transaction, or arrangement that does not have asubstantive effect on an entity’s status as a variable interest entity, acompany’s power over a variable interest entity, or a company’s obligation toabsorb losses or its right to receive benefits of an entity must be disregardedin applying Interpretation 46(R)’s provisions. The elimination of thequalifying special-purpose entity concept and its consolidation exceptionsmeans more entities will be subject to consolidation assessments andreassessments.  ASC 810 will be effectiveApril 1, 2010. The adoption of this pronouncement is not expected to havea material impact on the Company’s consolidated financial position and resultsof operations.

 

InAugust 2009, FASB issued Accounting Standards Update 2009-05 whichincludes amendments to Subtopic 820-10, Fair Value Measurements andDisclosures—Overall. The update provides clarification that in circumstances,in which a quoted price in an active market for the identical liability is notavailable, a reporting entity is required to measure fair value using one ormore of the techniques provided for in this update. The amendments in thisUpdate clarify that a reporting entity is not required to include a separateinput or adjustment to other inputs relating to the existence of a restrictionthat prevents the transfer of the liability and also clarifies that both aquoted price in an active market for the identical liability at the measurementdate and the quoted price for the

 

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**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

identicalliability when traded as an asset in an active market when no adjustments tothe quoted price of the asset are required are Level 1 fair value measurements.The adoption of this standard did not have a material impact on the Company’sconsolidated financial position and results of operations.

 

TheFASB has published FASB Accounting Standards Update 2009-13, RevenueRecognition (Topic 605)-Multiple Deliverable Revenue Arrangements whichaddresses the accounting for multiple-deliverable arrangements to enablevendors to account for products or services (deliverables) separately ratherthan as a combined unit. Specifically, this guidance amends the criteria inSubtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separatingconsideration in multiple-deliverable arrangements. This guidance establishes aselling price hierarchy for determining the selling price of a deliverable,which is based on: (a) vendor-specific objective evidence; (b) third-partyevidence; or (c) estimates. This guidance also eliminates the residualmethod of allocation and requires that arrangement consideration be allocatedat the inception of the arrangement to all deliverables using the relativeselling price method and also requires expanded disclosures. FASB AccountingStandards Update 2009-13 is effective prospectively for revenue arrangementsentered into or materially modified in fiscal years beginning on or after June 15,2010. Early adoption is permitted. The adoption of this standard is notexpected to have a material impact on the Company’s consolidated financialposition and results of operations.

 

InSeptember 2009, the FASB issued ASU No. 2009-14, “Software (Topic985) — Certain Revenue Arrangements That Include Software Elements” (“ASU No. 2009-14”).ASU No. 2009-14 changes the accounting model for revenue arrangements thatinclude both tangible products and software elements to allow for alternativeswhen vendor-specific objective evidence does not exist. Under this guidance,tangible products containing software components and non-software componentsthat function together to deliver the tangible product’s essentialfunctionality and hardware components of a tangible product containing softwarecomponents are excluded from the software revenue guidance in Subtopic 985-605,“Software-Revenue Recognition;” thus, these arrangements are excluded from thisupdate. ASU No. 2009-14 is effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010 with early adoption permitted. The adoption of thispronouncement is not expected to have a material impact on our consolidatedfinancial position or results of operations.

 

TheFASB has issued Accounting Standards Update (ASU) No. 2010-06, Fair ValueMeasurements and Disclosures (Topic 820): Improving Disclosures about FairValue Measurements. This ASU requires some new disclosures and clarifies someexisting disclosure requirements about fair value measurement as set forth in CodificationSubtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 and nowrequires a reporting entity to use judgment in determining the appropriateclasses of assets and liabilities and to provide disclosures about thevaluation techniques and inputs used to measure fair value for both recurringand nonrecurring fair value measurements. ASU 2010-06 is effective for interimand annual reporting periods beginning after December 15, 2009, as thisstandard relates specifically to disclosures, the adoption will not have animpact on the Company’s consolidated financial position and results ofoperations.

 

InMarch 2010, the FASB issued ASU No. 2010-17, Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition. This standardprovides that the milestone method is a valid application of the proportionalperformance model for revenue recognition if the milestones are substantive andthere is substantive uncertainty about whether the milestones will be achieved.Determining whether a milestone is substantive requires judgment that should bemade at the inception of the arrangement. To meet the definition of asubstantive milestone, the consideration earned by achieving the milestone(1) would have to be commensurate with either the level of effort requiredto achieve the milestone or the enhancement in the value of the item delivered,(2) would have to relate solely to past performance, and (3) shouldbe reasonable relative to all deliverables and payment terms in the arrangement.No bifurcation of an individual milestone is allowed and there can be more thanone milestone in an arrangement. The new standard is effective for interim andannual periods beginning on or after June 15, 2010. The adoption of thisstandard is not expected to have a material impact on the Company’sconsolidated financial position and results of operations.

 

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**NOTE 3:                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)**

 

Other accounting standardsthat have been issued or proposed by the FASB or other standards-setting bodiesthat do not require adoption until a future date are not expected to have amaterial impact on our consolidated financial statements upon adoption.

 

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**NOTE 4:                CONTRACT IN PROGRESS**

 

The following is a summaryof the one contract in progress accounted for under thepercentage-of-completion method at March 31, 2010 and 2009:

 
| ** **                                    | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| Costs  incurred on uncompleted contract       |       | $                  | 5,195,800  |               | $          | 3,466,907 |   |
| Estimated  loss on contract                   |       | (863,592           | )          | (328,706           | )          |
|                                          |       | 4,332,208          |       | 3,138,201          |       |
| Less:  billings to date                       |       | (3,788,323         | )          | (3,020,078         | )          |
|                                          |       | 543,885            |       | 118,123            |       |
| Provision  for uncollectible unbilled amounts |       | (543,885           | )          | —             |       |
|                                          |       | $                  | —     |               | $          | 118,123 |   |

 

The contract included in thetable above is serviced by the Company’s foreign subsidiaries who’s functionalcurrency is not the US Dollar.  Accordingly, costs, billings, andreceivables are subject to change as a result of changes in foreign currencyexchange rates.

 

All other contracts havebeen accounted for under the completed contract method.  Total deferred job costs accounted for underthe completed contract method at March 31, 2010 and 2009, wasapproximately $396,000 and $0, respectively.

 

Estimated future losses onall contracts in progress which are included in accrued expenses in theaccompanying consolidated balance sheet amounted to approximately, $178,000 and$117,000 at March 31, 2010 and 2009, respectively.  The onecontract in progress under the percentage of completion method had incurredcost overruns and other costs that the customer asserted should be part of thecontract.  The Company and its customer reached a settlementagreement in April 2010 resulting in the Company having no further paymentobligations related to the cost overruns assuming that the final commissioningoccurs and results in the plant being delivered and operating according to therequirements in the original contract. Additionally, the customer has no further payment obligations to theCompany under the agreement.  As such,the Company has recorded a provision for uncollectible unbilled amounts dueunder this contract as of March 31, 2010, in the amount of $543,885.

 

**NOTE 5:  DISCONTINUED OPERATIONS**

 

On July 10, 2007, theCompany entered into a stock purchase agreement (the “Agreement”) pursuant towhich the Company agreed to acquire 95 shares of common stock of EWI for anaggregate purchase price of $5,000,000, representing 95% of the issued andoutstanding shares of common stock of EWI.

 

EWI is incorporated in thestate of Washington and manufactured a proprietary system that converted almostany type of waste, including municipal, hazardous, industrial, and commercialwaste into energy and inert disposable and/or useable ash amounting toapproximately 5% of the original mass with minimal environmental impact.

 

Effective November 7,2007, the Company entered into an amendment to the stock purchase agreement atwhich time the Company consummated the acquisition of EWI. Pursuant to theterms of the amendment, the $5,000,000 purchase price consideration includes (i) $2,750,000paid in cash and (ii) $2,250,000 paid in the form of a promissory note(see Note 8). The amendment was further changed in April 2009, seeNote 8 for further discussions.

 

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**MARCH 31,2010**

 

**NOTE 5:  DISCONTINUED OPERATIONS (CONTINUED)**

 

The value of the excess ofthe purchase price of net liabilities assumed over their carrying value as of November 7,2007 of $8,109,425 has been allocated entirely to EWI’s 50% investment inEWE.  All other assets and liabilities acquired are stated at theirfair values, which approximates their recorded historical cost. Deferred incometaxes have been provided for the difference between the income tax basis of theassets and the fair value allocated pursuant to ASC 805. The Company will haveno income tax deduction for the amortization provided on the difference betweenthe amount allocated to the intangible asset and its carryover basis from EWE.

 

In accordance with ASC 323the difference between the cost of an investment and the amount of theunderlying equity in net assets of an investee should be accounted for as ifthe investee were a consolidated subsidiary. A Company is also required toamortize, if appropriate, the difference between the investor cost and theunderlying equity in net assets of the investee at the date of investment. A valuationwas performed in order to determine the fair value of EWE prior to theaccounting for the deferred tax liability under ASC 323. Accordingly, theCompany’s investment in EWE was allocated to the assets of EWE as follows:

 
| Investment  in EnerWaste Europe, Ltd. |   | $         | 8,109,425 |   |
|--------------------------------------------|--------|-----------|-----------|--------|
| Allocated  to:                             |   |      |      |
| Property,  Plant and Equipment             |   | 208,661   |      |
| Goodwill                                   |   | 333,500   |      |
| Technology                                 |   | 7,567,264 |      |
|                                       |   | $         | 8,109,425 |   |

 

The Company was amortizingthe acquired intangibles on a straight-line basis over their respective usefullives. The useful life of the technology was 15 years (see Note 6).  A corresponding related deferred taxliability was recorded with the acquisition of the intangibles. This liabilitywas being reduced in conjunction with the amortization ofintangibles.  As more fully described in Note 6, the Companypurchased the remaining 50% interest in EWE on June 25, 2008 and on thatdate began to consolidate the operations of EWE.

 

Effective on the date ofacquisition, the Company decided to discontinue the operational segment of EWIand ceased all operations of EWI. The Company has utilized outsourcedmanufacturing and services to complete any contracts secured prior to the dateof acquisition.  In addition, the Company has discontinued all of EWI’sproduct lines and terminated all vendor relationships. Accordingly, the resultsof activities for EWI are classified as discontinued operations in theaccompanying consolidated financial statements.

 

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**NOTE 5:  DISCONTINUED OPERATIONS (CONTINUED)**

 

A summary of EWI’s assetsand liabilities from discontinued operations as of March 31, 2010 and2009, and its results of discontinued operations for the year ended March 31,2010 and 2009 are as follows:

 
| ** **                                       | ** ** | **For the year ended  March 31, 2010** | ** ** | **For the year ended  March 31, 2009** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Assets from discontinued operations              |       |                                        |       |                                        |       |
| Cash                                             |       | $                                           | 22         |                                        | $          | 1,413 |   |
| Current assets from discontinued operations      |       | $                                           | 22         |                                        | $          | 1,413 |   |
|                                             |       |                                        |       |                                        |       |
| Liabilities from discontinued operations         |       |                                        |       |                                        |       |
| Accounts payable and accrued expenses            |       | $                                           | 124,341    |                                        | $          | 170,719 |   |
| Income taxes payable                             |       | 126,552                                     |       | 126,552                                     |       |
| Current liabilities from discontinued operations |       | $                                           | 250,893    |                                        | $          | 297,271 |   |
|                                             |       |                                        |       |                                        |       |
| Results of discontinued operations               |       |                                        |       |                                        |       |
| Net revenue                                      |       | $                                           | —     |                                        | $          | 518,002 |   |
| Cost of revenue                                  |       | —                                      |       | (516,285                                    | )          |
| Operating expenses                               |       | (10,152                                     | )          | (197,455                                    | )          |
| Interest income (expense), net                   |       | 1                                           |       | 374                                         |       |
| Other income                                     |       | 34,425                                      |       | 984                                         |       |
| Provision for income taxes                       |       | —                                      |       | (39,233                                     | )          |
| Income (loss) from discontinued operations       |       | $                                           | 24,274     |                                        | $          | (233,613 | ) |

 

**NOTE 6.                INVESTMENT IN ENERWASTE EUROPE, LTD.**

 

***Acquisition of Remaining Interest in Enerwaste Europe, Ltd***

 

On June 16, 2008, theCompany entered into a stock purchase agreement between W2E, EWE and IcelandEnvironmental, Inc. (“IE”) to purchase the remaining 50% of EWE inexchange for 6,000,000 shares of the Company’s common stock for an aggregatepurchase price of $3,000,000 (fair value of $0.50 per share).

 

As part of the stockpurchase agreement, the Company entered into a service and employment agreementwith IE and Finni Einarsson (“Einarsson”), 100% owner of IE, whereby Einarssonbecame EWE’s Chief Executive Officer and assumed the duties as the Company’sChief Technology Officer. The service and employment agreement was retroactiveto February 1, 2008 provided that it would continue until either thesecond round of financing of $8,000,000 was completed, and/or EWE becomes cashflow positive, which is defined in the agreement as three consecutive months ofpositive cash flows (the “Milestones”).  Einarsson is to receive$15,000 per month as compensation. When one of the Milestones is achieved,Einarsson will become an employee with a salary of $18,750 per month and a termof three years effective from June 16, 2008.  In the event EWEachieves certain projected net profits, Einarsson will also receive a minimum$100,000 bonus.

 

Also, in connection with theservice and employment agreement, Einarsson was issued warrants to purchase500,000 shares of the Company’s common stock at an exercise price of $0.75 pershare. The warrants are exercisable upon issuance, expire on February 1,2013 and have the option of a cashless exercise.  The fair value ofthe warrants issued to Einarsson, amounting to $109,635, was determined usingthe Black-Scholes option pricing model at $0.22 per warrant utilizing thefollowing assumptions: expected volatility of 94.21%, risk free interest rateof 3.02%, expected term of two years and a market price of$0.50.  The Company recorded $109,635 in compensation expense duringthe year ended March 31, 2009 with respect to this award.

 

Inconnection with the service and employment agreement, IE received warrantsto purchase 1,000,000 shares of the Company’s common stock at an exercise priceof $0.75 per share. The warrants expire on February 1, 2011 and have theoption of a cashless exercise. These warrants vest evenly over three years. Thefair value of the warrants issued to IE, amounting to $149,896, was determinedusing the Black-Scholes option pricing model at

 

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**NOTE 6.                INVESTMENT IN ENERWASTE EUROPE, LTD. (CONTINUED)**

 

$0.15 per warrant utilizingthe following assumptions: expected volatility of 95.54%, risk free interestrate of 2.68%, expected term of one year and a market price of$0.50.  The value of the warrants were charged to compensationexpense over the vesting period. The Company recorded compensation expense inthe amount of $45,207 for the year ended March 31, 2009 with respect tothis award.  During the year end March 31,2009, the Company cancelled and reissued the 1,000,000 warrants and changed thevesting term from three years to immediate.  The Company treated thecancellation and reissuance as a modification and accordingly recorded thedifference on the day of the modification.  The additional compensationcharge to operations was approximately $234,000 due to the modification, andwas determined using the Black-Scholes option pricing model at $0.75 perwarrant utilizing the following assumptions: expected volatility of 110.05%,risk free interest rate of 1.15%, expected term of one year and a market priceof $0.45.

 

Also as part of the stockpurchase agreement, EWE entered into a promissory note in the amount of$642,732 with various parties related to IE, dated June 18, 2008, bearingno interest, with principal to be paid in full upon reaching one of theMilestones, but no later than December 31, 2008.  The promissorynote was issued and included $318,664 of advances and expenditures previouslyrecorded on EWE as balances due IE. The remainder of $324,068 was allocated tothe purchase price and represents additional consideration towards the purchaseof EWE.  On March 14, 2009, IE forgave the $642,732promissory note due to them and W2E was released from its guaranty of the noteand accordingly it has been recorded as an increase in additional paid incapital in the accompanying consolidated statement of stockholders’ equity (seeNote 9).

 

The allocation of thepurchase price was as follows:

 
| Consideration  paid:                           |   |      |      |
|------------------------------------------------|--------|-----------|-----------|
| Promissory  Note                               |   | $         | 324,068   |   |
| Common  Stock                                  |   | 3,000,000 |      |
| Total  consideration                           |   | 3,324,068 |      |
| Assumption  of Liabilities in Excess of Assets |   | 1,798,895 |      |
| Deferred  Tax Liability                        |   | 2,928,714 |      |
| Total  Amount to be Allocated                  |   | $         | 8,051,677 |   |
| Allocated  to:                                 |   |      |      |
| Building  and Equipment                        |   | $         | 208,662   |   |
| Goodwill                                       |   | 333,500   |      |
| Technology                                     |   | 7,509,515 |      |
|                                           |   | $         | 8,051,677 |   |

 

The Company is amortizingthe acquired Technology on a straight-line basis over their respective usefullives. The useful life of the technology is 15 years. Deferred income taxeshave been provided for the difference between the income tax basis of theassets and the fair value allocated pursuant to ASC 805. The Company will haveno income tax deduction for the amortization provided on the difference betweenthe amount allocated to the intangible asset and its carryover basis from EWE.

 

The acquisition, which waseffective on June 25, 2008, was accounted for using the purchase method ofaccounting in accordance ASC 805. Accordingly, the net assets were recorded attheir estimated fair values, and operating results were included in theconsolidated financial statements from June 25, 2008, the effective dateof acquisition.

 

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**NOTE 6.                INVESTMENT IN ENERWASTE EUROPE, LTD. (CONTINUED)**

 

The following unauditedconsolidated pro forma information gives effect to the acquisition of EWE as ifthis transaction had occurred at the beginning of each period presented. Thefollowing unaudited pro forma information is presented for illustrationpurposes only and is not necessarily indicative of the results that would havebeen attained had the acquisition of this business been completed at thebeginning of each period presented, nor are they indicative of results that mayoccur in any future periods.

 
| ** **                                                        | ** ** | **Year  ended  March 31, 2009  (unaudited)** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| Revenues                                                          |       | $                                                 | 4,971,990  |   |
| Loss  from Operations                                             |       | (22,152,155                                       | )          |
| Net  Loss from Continuing Operations                              |       | (17,917,539                                       | )          |
| Basic and  Diluted Loss from Continuing Operations per Share |       | $                                                 | (0.48      | ) |
| Weighted  Average Shares Outstanding - Basic and Diluted          |       | 37,568,083                                        |       |

 

***Bankruptcy of Enerwaste Europe, Ltd on February 19, 2009***

 

The Company’s subsidiary,EWE, had significant operations in Iceland and historically paid a largeproportion of its fixed costs in Icelandic Krona (ISK), while its sales aregenerally denominated in Euros and its reporting currency is the U.S. dollar.Beginning in the third quarter of 2008 and particularly in the first weeks ofthe fourth quarter, the effects of the global credit and financial crisis had asignificant adverse effect on the Icelandic economy. In mid-October 2008,the Icelandic parliament passed emergency legislation to minimize the impact ofthe financial crisis, resulting in the government takeover of the three largestIcelandic banks, including Glitnir Bank (“Glitnir”), with whom EWE had bankaccounts, lines of credit and a loan payable. The financial crisis has hadserious consequences for the Icelandic economy; the national currency hasfallen sharply in value, foreign currency transactions were virtually suspendedfor weeks, and the market capitalization of the Icelandic stock exchangedropped significantly.

 

The turmoil in the Icelandicfinancial sector and economy as a whole had a significant impact on the Companyand a material adverse impact on the day to day operations ofEWE.  In October 2008, the Company was made aware that GlitnirBank (“Glitnir”) was placed into receivership due to serious financialdifficulties and that transfers of funds between the United Kingdom and Icelandwere subject to significant delays and uncertainties. As a result of thesignificant delays caused by Glitnir, EWE’s Dargavel contract with AscotEnvironmental Ltd (“Ascot”) was seriously jeopardized, since EWE could notsatisfy the terms of its sub-contractual agreements with third parties. As aresult of Glitnir’s inability to transfer funds into and out of Iceland, EWEwas unable to continue work on the Dargavel contract and EWE was unable to payits manufacturing and site workers, sub-contractors or material suppliers andwas accumulating significant penalties for non-performance and delays on thecontract.

 

Due to the above events,Ascot terminated EWE’s Dargavel contract on November 10, 2008 andcancelled their letter of credit securing a line of credit forEWE.  In addition, because the contract was canceled and EWE wasunable to fulfill its duties under the contract, EWE was unable to bill Ascotfor costs they expended on the contract in excess of billings.  Theresulting loss on the cancellation of the contract for the year ended March 31,2009, totaled $835,079.

 

On November 10, 2008, anew contract was entered into between Ascot and IOM to complete the project. Asa result of the loss of this major contract, on February 19, 2009, acreditor commenced bankruptcy proceedings against EWE and it was placed ininvoluntary receivership (bankruptcy) and was appointed an Administrator underthe supervision of the local courts. EWE subsequently delivered all of itsbooks and records, money, bank accounts, bonds and any other valuable assets tothe Administrator. Further, under Icelandic law, a ruling of bankruptcy has theeffect that a new legal entity emerges that is controlled by the Administrator.  Managementdoes not believe that the Company will be materially impacted by the bankruptcyof EWE beyond the impact that has occurred to date.  Further,management does not intend to reorganize EWE and continue its operations uponcompletion of the

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 6.                INVESTMENT IN ENERWASTE EUROPE, LTD. (CONTINUED)**

 

bankruptcy proceedings.

 

In January 2009, theCompany evaluated its investment in Technology held by EWE and found it to beimpaired, as more fully described in Note 7.  As a result, animpairment charge in the amount of $10,538,029 was recorded and is included inthe accompanying consolidated statement of operations for the year ended March 31,2009.

 

Accordingly, as of February 19,2009, the Company deconsolidated EWE and began using the equity method ofaccounting for the investment. As such, under the equity method of accounting,we recognize our proportionate share of losses in the Company’s investment inEWE.  During the period from February 19, 2009 through March 31,2010, there were minimal and immaterial transactions in EWE.  As aresult of the deconsolidation and bankruptcy of EWE on February 19, 2009,the Company recorded income for the excess of liabilities over assets relievedin the amount of $2,986,840 which is included in accompanying statement ofoperations.

 

As of February 23,2010, the bankruptcy proceedings were completed.  This subsidiary no longer is in existence andthe Company has no further rights or obligations to the assets and liabilitiesof EWE.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 7.                INTANGIBLE ASSETS**

 

Intangible assets consistedof Patents applied for during the year ended March 31, 2010 and Goodwilland Technology during the year ended March 31, 2009:

 
| ** **                                                                                | ** ** | **Gross Asset  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net Value** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------------|------------|---------------|------------|
| Intangible assets, other:                                                                 |       |                   |       |                          |       |          |       |
| Technology                                                                                |       |                   |       |                          |       |          |       |
| Technology, March 31, 2008                                                           |       | $                      | —     |                          | $          | —        |       | $ | — |   |
| Acquisition                                                                               |       | 14,740,457             |       | 586,319                       |       | 14,154,138    |       |
| Foreign currency translation adjustment from  June 25, 2008 to January 31, 2009 |       | (3,714,629             | )          | (98,520                       | )          | (3,616,109    | )          |
| Technology, net, prior to impairment                                                      |       | $                      | 11,025,828 |                          | $          | 487,799       |       | $ | 10,538,029 |   |
| Impairment during the year ended March 31,  2009                                     |       | (11,025,828            | )          | (487,799                      | )          | (10,538,029   | )          |
| Technology, net, March 31, 2010 and 2009                                             |       | $                      | —     |                          | $          | —        |       | $ | — |   |
|                                                                                      |       |                   |       |                          |       |          |       |
| Patents applied for:                                                                      |       |                   |       |                          |       |          |       |
| Patents applied for, March 31, 2009                                                  |       | $                      | —     |                          | $          | —        |       | $ | — |   |
| Patents applied for, expenditures during the year  ended March 31, 2010              |       | 91,459                 |       | —                        |       | 91,459        |       |
| Patents applied for, March 31, 2010                                                  |       | $                      | 91,459     |                          | $          | —        |       | 91,459 |   |
|                                                                                      |       |                   |       |                          |       |          |       |
| Total Intangibles assets, other, March 31,  2010                                     |       |                   |       |                          |       | $             | 91,459     |   |
|                                                                                      |       |                   |       |                          |       |          |       |
| Goodwill:                                                                                 |       |                   |       |                          |       |          |       |
| Goodwill, March 31, 2008                                                             |       |                   |       |                          |       | $             | —     |   |
| Acquisition                                                                               |       |                   |       |                          |       | 667,000       |       |
| Foreign currency translation adjustment from  June 25, 2008 to January 31, 2009 |       |                   |       |                          |       | (170,406      | )          |
| Impairment during the year ended March 31,  2009                                     |       |                   |       |                          |       | (496,594      | )          |
| Goodwill, net                                                                             |       |                   |       |                          |       | $             | —     |   |

 

Amortization expense relatedto technology was $0 and $487,799 for the year ended March 31, 2010 and2009.

 

In January 2009, theCompany engaged a consultant to assist in the evaluation of the Dargavelproject due to continued delays and concerns over the design and plans for thefacility, as well as the progress and ability to complete the project inaccordance with the contract.  The initial plans, designs, andknowhow that were the foundation of the project plan also served as the basisof the Technology assets we acquired with the purchase of EnerwasteEurope.  The conclusion reached was that the Company needed tocompletely change the project plans, technology and controls that would enablethe company to deliver the project according to the contractspecifications.  As a result, management made a determination thatthe value of the assets acquired were of no value and the Company’s IP platformwould be built on a new set of plans, design specifications and technology thatwas developed starting in January through the expected conclusion of theproject in late 2009.   As a result, an impairment charge in theamount of $10,538,029 was recorded and is included in the accompanyingconsolidated statement of operations.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 7.                INTANGIBLE ASSETS (CONTINUED)**

 

Additionally, when theCompany acquired EWE, Goodwill was assigned based on the value of theworkforce.  At the time of the Iceland economic collapse andsubsequent termination of the contract between EWE and the customer, and thesigning of the new contract with another Company subsidiary, the majority ofthe workforce where the value was placed did not continue on with the Dargavelproject or any other efforts supporting the continued development of theTechnology and knowhow of the business.  As a result of the above,management determined that Goodwill was impaired and an impairment charge inthe amount of $496,594 was recorded to write-off the value of the Goodwill, forthe year ended March 31, 2009. This charge is included in the accompanyingconsolidated statement of operations.

 

**NOTE 8.                NOTES PAYABLE**

 

A summary of the notespayable as of March 31, 2010 and March 31, 2009 is as follows:

 
| ** **                                        | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                              |       |                    |       |                    |       |
| Promissory Notes                                  |       | $                       | 126,053    |                    | $          | 1,508,898 |   |
| Promissory Notes-Private Placement Offering (a)   |       | —                  |       | 500,000                 |       |
| Promissory Notes-Private Placement Offering (b)   |       | 774,000                 |       | —                  |       |
| Convertible Notes                                 |       | 100,000                 |       | 100,000                 |       |
| 12% Convertible Debentures                        |       | 7,133,847               |       | —                  |       |
| Bridge Loans                                      |       | 25,000                  |       | 200,000                 |       |
| Bridge Loans-Related Parties                      |       | —                  |       | 25,000                  |       |
| Subtotal                                          |       | 8,158,900               |       | 2,333,898               |       |
| Unamortized Discounts                             |       | (5,388,452              | )          | (54,070                 | )          |
| Total Notes Payable, net of unamortized discounts |       | $                       | 2,770,448  |                    | $          | 2,279,828 |   |

 

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(a)  Notes issued in connection with December 2008 privateplacement

(b)  Notes issued in connection with July 2009 privateplacement

 

The activity associated with the capitalization andamortization of deferred financing costs and discounts on notes payable for theyears ended March 31, 2010 and March 31, 2009 is as follows:

 
| Discount on Notes Payable    |   |       |      |
|------------------------------|--------|------------|-----------|
|                         |   |       |      |
| Balance, April 1, 2008  |   | $          | —    |   |
| Additions                    |   | 241,004    |      |
| Amortization                 |   | (186,934   | )         |
| Balance, April 1, 2009  |   | 54,070     |      |
| Additions                    |   | 10,051,291 |      |
| Amortization                 |   | (4,716,909 | )         |
| Balance, March 31, 2010 |   | $          | 5,388,452 |   |
|                         |   |       |      |
| Deferred Financing Costs     |   |       |      |
|                         |   |       |      |
| Balance, April 1, 2008  |   | $          | —    |   |
| Additions                    |   | 366,637    |      |
| Amortization                 |   | (259,337   | )         |
| Balance, April 1, 2009  |   | 107,300    |      |
| Additions                    |   | 4,362,808  |      |
| Amortization                 |   | (1,983,726 | )         |
| Balance, March 31, 2010 |   | $          | 2,486,382 |   |

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****               ****NOTESPAYABLE (CONTINUED)**

 

Promissory Note

 

On November 7, 2007,the Company issued a promissory note in connection with the acquisition of EWIin the principal amount of $2,250,000. The promissory note bore interest at 8%per annum and was due to mature on May 8, 2008. The promissory note wassecured by the Company’s 95% interest in EWI.  On April 21,2009, the Company entered into a release and Settlement Agreement (the “SettlementAgreement”) with the note holder whereby the Company agreed to pay $125,000 infull settlement of any and all amounts due under the July 10, 2007 StockPurchase Agreement, as amended, the September 7, 2007 consulting agreementand the November 7, 2007 promissory note, as amended. In addition, theCompany and the note holder released each other from any and all claims, asdefined in the Settlement Agreement.  Asa result of the Settlement Agreement the loan balance and accrued interest wasreduced by $1,383,898 and $127,097, respectively.  The note wasrepaid on July 17, 2009.

 

In April 2009, theCompany entered into a promissory note for $265,000 with a vendor forpreviously provided services that had been included in accounts payable andaccrued expenses.  The note was due in ninety days bearing interestat 10% per annum.  Also, in July 2009,the Company entered into a second promissory note with the same vendor for$119,384 for previously provided services. The second note also was due in ninety days bearing interest at 10% perannum.  In September 2009, the duedate of the notes was extended through an amendment. The due date of the noteswas amended and repayment is now expected to be repaid using proceeds fromfuture capital raises and/or operations. During the quarter ended December 31, 2009, the Company repaid$258,331 of the balance due on the promissory notes using proceeds from aprivate debt placement of 12% Convertible Debentures as further discussedbelow.

 

Promissory Notes—Private Placement Offering (December 2008)

 

In January 2009, theCompany sold ten units in a private placement offering and, accordingly, issuedpromissory notes totaling $500,000 and issued 100,000 shares of commonstock.  The notes bore interest of$150,000. The relative fair value of the commonstock, which amounted to $41,284, was recorded as a discount to the notes. Thisamount was accreted to interest expense over the contracted term of the notes. The maturitydates on the promissory notes in the aggregate amount of $500,000 scheduled tomature in April 2009 were extended to October 2009. In connectionwith the extension of the maturity dates, the Company issued 1,000,000 sharesof common stock to the debt holders, valued at $450,000, and agreed to payadditional interest totaling $150,000. In accordance with ASC 470, the Companyrecorded the additional consideration as a loss on deemed extinguishment ofdebt, which has been included in the accompanying consolidated statement ofoperations for the year ended March 31, 2010. These notes were repaid infull on July 31, 2009 (see Note 9 for further discussions on equitycomponent of offering).

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****              ****NOTESPAYABLE (CONTINUED)**

 

*P**romissory Notes — Private Placement Offering (July 2009)*

 

On June 25, 2009, theCompany issued notes in the aggregate amount of $804,000.  The notesbore interest at a rate of 10% per annum. Principal, plus all accrued and unpaidinterest thereon, were due on September 25, 2009.  The notes were automatically due and payable,including accrued interest thereon, upon the initial closing of an equityfinancing of the Company in the minimum amount of $5,000,000. The Companyissued 804,000 shares of its common stock to the payees.  The Company allocated a portion of theproceeds from the note to the common stock based on the relative fair value ofthe notes and common stock.  The relativefair value of the common stock, which amounted to $249,517, was recorded as adiscount to the notes. During the year ended March 31, 2010, the Companyrepaid in full $655,000 of the notes using proceeds from a private debtplacement of 12% Convertible Debentures as discussed below.  In April 2010, $45,000 of the notes plusaccrued interest in the aggregate amount of $48,966 was converted into anequivalent amount of the Company’s 12% Senior Convertible Debentures, with aterm of one year from date of issue and with the same terms as the 12%Debentures discussed below. During the year ended March 31, 2010, theCompany obtained extension agreements on the remaining $104,000 of notesinitially through February 18, 2010, then April 1, 2010 and furtherobtained extensions through July 1, 2010. As consideration for the February 18, 2010, extension the Companygranted 26,003 warrants to the payees. The Company estimated the fair value of the warrants issued using theBlack-Scholes option pricing model at $0.75 per warrant utilizing the followingassumptions:  expected volatility of131.66%; risk free interest rate of 1.24%; expected term of three years and amarket price of $1.00.  In accordancewith ASC 470, the Company recorded the additional consideration, valued at $19,521,as a loss on deemed extinguishment of debt. The remaining notes are expected to be repaid using proceeds from futurecapital raises and/or operations.   TheCompany did not repay the outstanding notes on July 1, 2010 and is indefault on the notes, although we have not received a formal notice of defaultfrom the noteholder.

 

On July 17, 2009, theCompany issued a note payable in the aggregate amount of$125,000.  The note bears interest at a rate of 10% per annum.Principal, plus all accrued and unpaid interest thereon, was due on October 17,2009. The notes are automatically due and payable, including accrued interestthereon, upon the initial closing of an equity financing of the Company in theminimum amount of $5,000,000. The Company issued 125,000 shares of its commonstock to the payee.  The Company allocated a portion of the proceedsfrom the note to the common stock based on the relative fair value of the notesand common stock.  The relative fair value of the common stock, whichamounted to $38,793, was recorded as a discount to the notes. This amount wasaccreted to interest expense over the contracted term of the notes.   The Company did not repay the outstandingnote on July 1, 2010 and is in default on the notes, although we have notreceived a formal notice of default from the noteholder.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****              ****NOTESPAYABLE (CONTINUED)**

 

On August 4, 2009, theCompany issued notes in the aggregate amount of $1,571,000.  The notes bear interest at a rate of 10% perannum.  Principal, plus all accrued andunpaid interest thereon, was due on November 4, 2009.  The notes are automatically due and payable,including accrued interest thereon, upon the initial closing of an equityfinancing of the Company in the minimum amount of $5,000,000. The Companyissued 1,571,000 shares of its common stock to the payees.  TheCompany allocated a portion of the proceeds from the notes to the common stockbased on the relative fair value of the notes and common stock.  Therelative fair value of the common stock, which amounted to $860,140, was recordedas a discount to the notes. The discount was accreted to interest expense overthe contracted term of the notes.  TheCompany has repaid $1,051,000 of the notes, plus interest using proceeds from aprivate debt placement as discussed below. Additionally, $20,000 of the notes plus interest of $1,146 wereexchanged for common stock and warrants in connection with an exchangeagreement entered into between the note holders and the Company.  The consideration given to the note holders onthe exchange exceeded the principle and interest owed by $10,573.  Accordingly, the Company recorded a loss onsettlement of debt for the excess consideration.  The loss on settlement has been included inthe consolidated statement of operations during the year ended March 31,2010.  The remaining $500,000 of noteshas not been repaid.  The Company hasobtained extensions on the notes until July 1, 2010.  These notes are expected to be repaid usingproceeds from future capital raises and/or operations.   As consideration for a previous extensionthrough February 20, 2010, the Company granted 63,750 warrants to thepayees.  The Company estimated the fairvalue of the warrants issued using the Black-Scholes option pricing model at$0.75 per warrant utilizing the following assumptions:  expected volatility of 131.66%; risk freeinterest rate of 1.24%; expected term of three years and a market price of$1.00.  In accordance with ASC 470, theCompany recorded the additional consideration, valued at $47,858, as a loss ondeemed extinguishment of debt which has been included in the accompanyingconsolidated statement of operations for the year ended March 31,2010.  The Company did not repay theoutstanding notes on July 1, 2010 and is in default on the notes, althoughwe have not received a formal notice of default from the noteholders.

 

In connection with theprivate placement offering (July 2009) issuance, the Company paid aplacement agent $250,000 (10% of the amount of the notes issued) and anon-accountable expense allowance equal to $75,000 (3% of the amount of thenotes issued).  Also, the Company paid$137,585 in legal and consulting fees in connection with this offering.  Such costs have been deferred and wereamortized over the life of the related notes.

 

Convertible Note

 

On March 17, 2009, theCompany issued a convertible note in the amount of $100,000. The note boreinterest at a rate of 10% per annum. Principal, plus all accrued and unpaidinterest thereon, was due on June 17, 2009. The note was automatically dueand payable, including accrued interest thereon, upon the initial closing of anequity financing of the Company in the minimum amount of $2,000,000. The notewas convertible at the option of the payee into shares of the Company’s commonstock at a conversion price of $0.50 per share. In addition, the Company issued150,000 shares of its common stock to the payee on April 1, 2009. TheCompany allocated a portion of the proceeds from the note to the common stockbased on the relative fair value of the notes and common stock.  Therelative fair value of the common stock, which amounted to $40,299, wasrecorded as a discount to the notes. This amount was accreted to interestexpense over the contracted term of the notes.  The Company did notmake the final payment on the promissory note on June 17, 2009, butobtained an extension of the note through November 4, 2009.  On October 1,2009, the note was repaid in full.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****              ****NOTESPAYABLE (CONTINUED)**

 

On April 6, 2009, theCompany issued a convertible note in the amount of $200,000.  Thenote bears interest at a rate of 10% per annum. Principal, plus all accrued andunpaid interest thereon, was due on October 6, 2009. The note isautomatically due and payable, including accrued interest thereon, upon theinitial closing of an equity financing of the Company in the minimum amount of$2,000,000. The note is convertible at the option of the payee into shares ofthe Company’s common stock at a conversion price of $0.50 per share. Inconnection with the issuance of the $200,000 convertible notes, the Companypaid a private placement fee totaling $26,000. In addition, the Company issued 300,000 shares of its common stock tothe payee.   The Company evaluated the conversion feature embedded inthe note to determine if such conversion feature should be bifurcated from itshost instrument and accounted for as a freestanding derivative. We determinedthat the note met the definition of a conventional debt instrument since itcontained only standard anti-dilution provisions and the holders of these notescould only realize the benefit of the conversion option by exercising it andreceiving the entire amount of proceeds in a fixed number of shares or cash atour option. Accordingly, the note and related conversion option was accountedfor by allocating a portion of the proceeds from the note to the common stockbased on the relative fair value of the note and common stock. The relativefair value of the common stock, which amounted to $80,597, was recorded as adiscount to the note and a corresponding increase to additional paid incapital. This amount was accreted to interest expense over the contracted termof the note. The conversion option had a beneficial conversion feature that wasvalued at $60,597 and it was accreted to interest expense over the contracted termof the note.  The maturity date of thenote was extended to October 12, 2009, and then until February 18,2010.  As consideration for the extensionthe Company granted 50,000 warrants to the noteholders.  The Company estimated the fair value of thewarrants issued using the Black-Scholes option pricing model at $0.75 perwarrant utilizing the following assumptions: expected volatility ranging from131.66%, risk free interest rate ranging from 1.24%, expected term of threeyears and a market price ranging from $1.00. In accordance with ASC 470, the Company recorded the additionalconsideration, valued at $37,535, as a loss on deemed extinguishment of debtand has been included in the accompanying consolidated statement of operationsfor the year ended March 31, 2010. The warrants expire three years fromthe date of issuance and contain a provision allowing for a cashless exercise.On March 1, 2010, $100,000 of the note plus interest of $9,014 wasexchanged for common stock and warrants in connection with an exchangeagreement entered into between the note holder and the Company.  The consideration given to the note holder onthe exchange exceeded the principle and interest owed by $54,507.  Accordingly, the Company recorded a loss onextinguishment of debt for the excess consideration which has been included inthe consolidated statement of operations during the year ended March 31,2010.  The remaining balance on the notewas later extended until April 1, 2010 and subsequent to year end extendeduntil July 1, 2010, and is expected to be repaid using proceeds fromfuture capital raises and/or operations. The Company did not repay the outstanding note on July 1, 2010 andis in default on the note, although we have not received a formal notice ofdefault from the noteholder.

 

On April 17, 2009, theCompany issued a convertible note in the aggregate amount of $50,000 to itsPresident and COO. The note bore interest at a rate of 10% per annum.Principal, plus all accrued and unpaid interest thereon, were due on August 17,2009. The note was automatically due and payable, including accrued interestthereon, upon the initial closing of an equity financing of the Company in theminimum amount of $2,000,000. The note was convertible at the option of thepayee into shares of the Company’s common stock at a conversion price of $0.50per share. In connection with the issuance of the $50,000 convertible notes,the Company paid a private placement fee totaling $6,500.  In addition, the Company issued 75,000 sharesof its common stock to the payee. The Company evaluated the conversion featureembedded in the note to determine if such conversion feature should bebifurcated from its host instrument and accounted for as a freestandingderivative. We determined that the note met the definition of a conventionaldebt instrument since it contained only standard anti-dilution provisions andthe holders of these notes could only realize the benefit of the conversionoption by exercising it and receiving the entire amount of proceeds in a fixednumber of shares or cash at our option. Accordingly, the note and relatedconversion option was accounted for by allocating a portion of the proceedsfrom the note to the common stock based on the relative fair value of the noteand common stock. The relative fair value of the common stock, which amountedto $20,149, was recorded as a discount to the note and a corresponding increaseto additional paid in capital. This amount was accreted to interest expenseover the contracted term of the note. The conversion option had a beneficialconversion feature that was valued at $15,149 and it was accreted to interestexpense over the contracted term of the note. The note was paid in full in August 2009.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****              ****NOTESPAYABLE (CONTINUED)**

 

On April 17, 2009, theCompany issued a convertible note in the aggregate amount of$50,000.  The note bore interest at a rate of 10% per annum.Principal, plus all accrued and unpaid interest thereon, was due on October 17,2009. The notes were automatically due and payable, including accrued interestthereon, upon the initial closing of an equity financing of the Company in theminimum amount of $2,000,000. In connection with the issuance of the $50,000convertible notes, the Company paid a private placement fee totaling $6,500.  In addition, the Company issued 75,000 sharesof its common stock to the payee.   The Company evaluated theconversion feature embedded in the note to determine if such conversion featureshould be bifurcated from its host instrument and accounted for as afreestanding derivative. We determined that the note met the definition of aconventional debt instrument since it contained only standard anti-dilutionprovisions and the holders of these notes could only realize the benefit of theconversion option by exercising it and receiving the entire amount of proceedsin a fixed number of shares or cash at our option. Accordingly, the note andrelated conversion option was accounted for by allocating a portion of theproceeds from the note to the common stock based on the relative fair value ofthe note and common stock. The relative fair value of the common stock, whichamounted to $20,149, was recorded as a discount to the note and a correspondingincrease to additional paid in capital. This amount was accreted to interestexpense over the contracted term of the note. The conversion option had abeneficial conversion feature that was valued at $15,149 and it was accreted tointerest expense over the contracted term of the note. The note was repaid infull in October 2009.

 

12% Senior Convertible Debentures

 

Duringthe year ended March 31, 2010, the Company issued Senior ConvertibleDebentures in the aggregate amount of $7,133,847 in a private placement.  The notes bear interest at a rate of 12% perannum and are due one year from date of issue. Approximately $856,000 was placed into an escrow account at closingwhich represents the 12% interest to be paid on the notes.  During the year ended March 31, 2010, aninvestor agreed to release $240,000 of interest from escrow relating to thatinvestor’s note payable; such funds were utilized by the Company for generaloperating purposes.  In addition,approximately $330,000 of the escrow account was utilized during the year endedMarch 31, 2010, to pay quarterly interest payments.

 

Allnotes issued February 3, 2010 and prior, totaling $6,348,547, wereinitially convertible into one share of common stock with a conversion price of$1.00.  Also, for each dollar invested, awarrant was issued which entitled the note holder to purchase one share ofcommon stock for an initial exercise price of $2.00 per share.  Seebelow for description of subsequent modification of the terms of these notesand warrants.  All notes issued after February 8,2010, totaling $785,300, were convertible into one share of common stock with aconversion price of $0.50.  Also, foreach dollar invested, a warrant was issued which entitles the note holder topurchase one share of common stock for an exercise price of $1.00 per share.

 

Underthe terms of the Debenture, if, at any time while the Debenture is outstanding,the Company, sells or grants any option to purchase or sells or grants or anyright to reprice, or otherwise disposes of or issues (or announces any sale,grant or any option to purchase or other disposition), any common stock orcommon stock equivalents entitling any person to acquire shares of common stockat an effective price per share that is lower than the then conversion price asdefined, then the conversion price is reduced to equal the lower price (“DilutedIssuance Provision”).

 

TheCompany evaluated the conversion feature embedded in the notes to determine ifsuch conversion feature should be bifurcated from its host instrument andaccounted for as a freestanding derivative. Due to the note not meeting the definition of a conventional debtinstrument because it contained a Diluted Issuance Provision, the convertiblenote was accounted for in accordance with ASC 815.  According to ASC 815, the derivativesassociated with the debt instrument were recognized as a discount to the debtinstrument and the discount is being amortized over the life of the note andany excess of the derivative value over the note payable value is recognized asadditional interest expense at issuance date. The Company recognized an initial derivative liability at the time ofeach note issuance, at fair value totaling $4,080,165, during the year ended March 31,2010 in connection with the issuance of the aggregate of $7,133,847 innotes.  Also, $3,792,707 was recorded asa discount to the notes and $287,458 was recognized immediately in theconsolidated statement of operations as interest expense.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****              ****NOTESPAYABLE (CONTINUED)**

 

Further,and in accordance with ASC 815, the embedded derivatives are revalued at eachbalance sheet date and marked to fair value with the corresponding adjustmentas a “gain or loss on derivatives” in the consolidated statement ofoperations.  As of March 31, 2010,the fair value of the embedded derivatives included on the accompanyingconsolidated balance sheet was $3,084,077. During the year ended March 31, 2010, the Company recognized a gainon change in fair value of derivative liability totaling $3,469,225.

 

OnJanuary 22, 2010, the Company received notice from FINRA that shares ofthe Company’s common stock were no longer eligible for trading on the OTCBulletin Board (“OTCBB”), as a result of the Company’s delayed filing of its’Form 10-Q for the quarter ended June 30, 2009.  The Company’scommon stock is currently traded on the OTC “Pink Sheets”.  The removal ofthe Company’s common stock from the OTCBB resulted in the Company being inDefault on its 12% Senior Convertible Debentures, as the Company’s common stockis not currently eligible for quotation on a Trading Market (as defined in theDebenture Agreement).

 

InFebruary 2010, the Company and holders of its 12% Senior ConvertibleDebentures entered into an agreement pursuant to which the holders waived theEvent of Default, in exchange for the following: (1) The Conversion Priceof the Debentures to be reduced to $0.50 (from $1.00); (2) The ExercisePrice of the Warrants to be reduced to $1.00 per share (from $2.00); and (3) Thereferences in Section 1(d), Call Provision, of the Warrants, to $2.50 tobe revised to $1.25.  All of the then Debenture Holders, representingoutstanding 12% Senior Convertible Debentures in the aggregate amount of$6,348,547, agreed to these terms, and waived the Event of Default, byexecution of a waiver letter dated February 8, 2010.  In addition, on February 8, 2010 theCompany’s Board of Directors approved revised agreements, reflecting theserevised terms, to be used for 12% Senior Convertible Debentures issuedsubsequent to February 8, 2010, of which an aggregate of $785,300(discussed above) were issued during March 2010.

 

Asthe 12% Senior Convertible Debentures contain an embedded conversion optionseparately accounted for as a derivative under ASC 815, the reduction in theconversion price is accounted for as a modification, in accordance with ASC470.  Accordingly, the Company recordedan increase to its derivative liability for the difference between the fairvalue of the derivative before and after the modification, and a correspondingincrease in notes discount.  Any excessdiscount over the note payable value is recognized as additional interestexpense at the date of modification in accordance with ASC 815.  The total discount at the date ofmodification is being amortized over the remaining life of the note.  In February 2010, the increase in thederivative value due to the modification was $2,473,103 resulting in anincrease in notes payable discount of $2,207,915 and additional interestexpense for the excess derivative value over the available note payablediscount totaling $265,188**.**

 

TheCompany issued an aggregate of 6,348,547 warrants at an initial exercise priceof $2.00 per share, in conjunction with those Senior Convertible Debenturesissued on or prior to February 8, 2010. See above for description of subsequent modification of the terms ofthese notes and warrants.  The Companyestimated the fair value of these warrants issued using the Black-Scholesoption pricing model at a range of $0.29 to $0.71 per warrant utilizing thefollowing assumptions: expected volatility ranging from 108.87% to 132.40%,risk free interest rate ranging from 1.12% to 1.54%, expected term of threeyears and a market price ranging from $0.65 to $1.06.  The warrants expire three years from the dateof issuance and contain a provision allowing for a cashless exercise.  Accordingly, the Company allocated a portionof the proceeds from the note to the warrant based on the relative fair valueof the note and warrants.  The relative fairvalue of these warrants, which amounted to $2,426,568, was recorded as a discountto the note and a corresponding increase to additional paid in capital.  This discount is being accreted to interestexpense over the contracted term of the note.

 

Asa result of the waiver of the Event of Default (discussed above) by the noteholders, the warrant exercise price on these aggregate of 6,348,547 warrantswas reduced from $2.00 to $1.00.  Inaccordance with ASC 470, the Company accounted for the change in warrantexercise price in connection with the waiver as a debt modification and accordingly,the change in fair value of the warrants at the modification date was chargedto deferred financing and is being accreted over the remaining life of theassociated notes.  The Company estimatedthe fair value of the warrants before and after modification using theBlack-Scholes option pricing model at $0.53 and $0.66, respectively, perwarrant, utilizing the following assumptions: expected volatility ranging from108.20% to 110.46%, risk free interest rate ranging from 1.05% to 1.30%,expected term ranging from 2.88 to 3.00 years and a market price of $0.65.  The resulting increase in fair value of thewarrants totaling $825,311 has been deferred and is being accreted over theremaining life of the associated notes.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****              ****NOTESPAYABLE (CONTINUED)**

 

TheCompany also issued an aggregate of 785,300 warrants at an exercise price of$1.00 per share in conjunction with those Senior Convertible Debentures issuedafter February 8, 2010.  The Companyestimated the fair value of these warrants issued using the Black-Scholesoption pricing model at $0.51 per warrant utilizing the following assumptions:expected volatility ranging from 111.65% to 112.18%, risk free interest rateranging from 1.43% to 1.56%, expected term of three years and a market price of$0.80.  The warrants expire three yearsfrom the date of issuance and contain a provision allowing for a cashlessexercise.  Accordingly, the Companyallocated a portion of the proceeds from the note to the warrant based on therelative fair value of the note and warrants. The relative fair value of these warrants, which amounted to $265,358,was recorded as a discount to the note and a corresponding increase toadditional paid in capital.  Thisdiscount is being accreted to interest expense over the contracted term of thenote.

 

Inconnection with the aggregate issuances of $7,133,847 of notes, the Companypaid a placement agent approximately $713,000 (10% of the amount of the notesissued) and a non-accountable expense allowance equal to approximately $214,000(3% of the amount of the notes issued) and an investment banking fee ofapproximately $357,000 (5% of the amount of notes issued) was paid to theplacement agent.  Also, the Company paidlegal cost totaling approximately $52,000 in connection with the offering.  Additionally, the Company will issue awarrant to its placement agent to purchase up to 4.5% of the fully dilutedoutstanding shares of the Company’s common stock (as defined) proportionate tothe amount of Debentures sold with an exercise price of $0.01 per share.  During the year ended March 31, 2010,the placement agent earned 1,741,853 warrants pursuant to the agreement.  The fair value of the warrants amounted to$1,650,338 using the Black-Scholes option pricing model ranging from $0.64 to$1.05 per warrant utilizing the following assumptions: expected volatilityranging from 108.65% to 132.40%, risk free interest rate ranging from 1.12% to1.56%, expected term of three years and a market price ranging from $0.65 to$1.06.  The warrants expire three yearsfrom the date of issuance and contain a provision allowing for a cashlessexercise and the fair value of the warrants issued is being amortized over therelated notes.

 

Further,upon each exercise of the Warrants issued to investors, the Placement agentwill receive a ten percent (10%) commission and a three percent (3%)non-accountable expense allowance, and will also be issued a three-yearcashless warrant at an exercise price of $1.00, equal to 4.5% of the number ofshares of common stock that such investor warrant was exercisable into.

 

Bridge Loans

 

DuringSeptember 2008, the Company issued two notes payable in the aggregateamount of $50,000 (including a note issued to a shareholder of the Company for$25,000). The notes matured one year from the date of issuance. Additionally,the Company issued a $100,000 note payable in September 2008 which maturedninety days from the date of issuance.  The notes bear interest at10% per annum and require the issuance of 300,000 shares of the Company’s commonstock. The aggregate fair value of the 300,000 shares of the Company’s commonstock was $150,000, or $0.50 per share.  The Company allocated aportion of the proceeds from the notes to the common stock based on therelative fair value of the notes and common stock.  The relative fairvalue of the common stock, which amounted to $75,000, was recorded as adiscount to the notes. The discount was accreted to interest expense over thecontracted term of the notes.

 

Uponmaturity during the year ended March 31, 2009, the note for $100,000 wassatisfied through the issuance of 200,000 shares of the Company’s common stock.

 

Duringthe year ended March 31, 2010, one note for $25,000 plus interest wasrepaid at maturity and the remaining note in the amount of $25,000 was extendedfour times and is now due July 2010. In connection with one extension, the Company issued 6,250 warrants tothe debt holder, valued at $4,692. In accordance with ASC 470, the Companyrecorded the additional consideration given as a modification of the debt whichwas amortized over the extension period. Such consideration has been included in the accompanying consolidatedstatement of operations for the year ended March 31, 2010.

 

DuringOctober, November and December 2008, the Company issued notes payablein the aggregate amount of $200,000 and warrants granting the holders the rightto purchase up to 460,000 shares of common stock at $0.50 per share exercisablefor a period of three years. The aggregate fair value of the warrants issued,amounted to $150,617, which was determined using the Black-Scholes optionpricing model at a range of $0.32 and $0.33 per

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 8.****              ****NOTESPAYABLE (CONTINUED)**

 

warrantutilizing the following assumptions: expected volatility ranging from 105.15%to 110.91%, risk free interest rate ranging from 1.80% to 1.41%, expected termof three years and a market price of $0.50. The warrants expire three yearsfrom the date of issuance and contain a provision allowing for a cashlessexercise.  The notes had a three monthterm and bore interest at a rate of 5% per annum. The Company allocated aportion of the proceeds from the notes to the warrants.  The relativefair value of the warrants, which amounted to $84,420, was recorded as adiscount to the notes.  The discount was accreted to interest expenseover the contracted term of the notes.

 

A bridge loan note in theprincipal amount of $25,000 was paid in full at maturity in February 2009.

 

In April and May 2009,the remaining $200,000 in bridge notes in the aggregate amount of $175,000scheduled to mature in January and February 2009 were extended to April andMay 2009, respectively.  Thematurity of the notes was later extended to June 2009.  In connection with the first extension, theCompany issued 175,000 shares of common stock valued at $50,918 and inconnection with the second extension; the Company issued 425,000 shares ofcommon stock to the debt holders, valued at $191,250.  In accordance with ASC 470, during the yearended March 31, 2010, the Company recorded $146,250, as loss on deemedextinguishment of debt and $45,000 as a modification of debt, which wasamortized over the extension period. During the year ended March 31, 2009, the Company recorded 50,918as a loss on deemed extinguishment of debt. In July 2009, the $175,000 on bridge loans plus interest wasrepaid.

 

On October 22, 2008,the Company issued a note payable in the amount of $25,000 to the then CEO ofthe Company.  The note was due to mature one year from the date ofgrant and bore interest at a rate of 10% per annum. Interest expense amountedto $555 which was recorded as a component of interest expense in theaccompanying consolidated statements of operations for the year ended March 31,2009.  The note was paid in full on January 11, 2009.

 

**NOTE 9.****               ****STOCKHOLDER’SEQUITY**

 

***Amendment to Articles ofIncorporation***

 

InJanuary 2010, shareholders of the Company holding more than a majority ofthe Company’s common stock approved an amendment to the Company’s certificateof incorporation to increase the number of shares of the Company’s Common Stockthat the Company is authorized to issue from 80,000,000 shares of Common Stock,with a par value of $0.0001 per share, to 200,000,000 shares of Common Stockwith a par value of $0.0001 per share (the “Amendment”). The Amendment wasfiled with the State of Delaware Secretary of State on January 21, 2010.

 

***FINRA Notification onStock Listing Eligibility***

 

On January 22, 2010,the Company received notice from the Financial Industry Regulatory Authority(FINRA) that the shares of the Company’s common stock were no longer eligiblefor trading on the OTC Bulletin Board (“OTCBB”), as a result of the Company’sdelayed filing of its’ Form 10Q for the quarter ended June 30,2009.  The Company’s common stock iscurrently traded on the OTC “Pink Sheets”.

 

Amarket maker has filed a Form 15C2-11 with FINRA in order to enable theCompany’s common stock to again be quoted on the OTCBB, although there can beno assurance that this will occur.

 

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**WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2010**

 

**NOTE 9.                STOCKHOLDER’SEQUITY (CONTINUED)**

 

***Private Placement Offering — August 2007***

 

OnAugust 15, 2007, the Company offered for sale, pursuant to a Private PlacementMemorandum, up to 24 units of the Company’s securities (the “Units”), each Unitconsisting of 500,000 shares of the Company’s common stock at $250,000 perUnit, for an aggregate offering price of $6,000,000.

 

Inconnection with the Private Placement, the Company agreed to pay the placementagent (i) placement fees equal to 10% of the gross proceeds of the PrivatePlacement and 3% of the gross proceeds of the Private Placement as anon-accountable expense allowance, which amounted to $780,000; (ii) aninvestment banking fee unrelated to the Private Placement in the amount of$75,000; (iii) issued 1,500,000 shares of the Company’s common stock, with avalue of $0.01 per share; and (iv) granted warrants to purchase an aggregate of1,000,000 shares of the Company’s common stock at an exercise price of $0.50per share, valued at $400,273 utilizing the Black-Scholes option pricing modelat $0.40 per warrant utilizing the following assumptions:  expected volatility of 100.77%, risk freeinterest rate of 5.09%, contractual term of six years and a market price of$0.50. The total fees incurred to the placement agent in connection with thePrivate Placement amounted to $1,270,273 and has been recorded in additionalpaid in capital.

 

TheCompany completed the Private Placement in June 2008 and sold 12,002,040 sharesof its common stock for aggregate gross proceeds of $6,000,000 (net proceeds of$5,039,694). The Company incurred aggregate fees of $1,581,427 in connectionwith the Private Placement comprised of (i) $855,000 of cash paid to theplacement agent; (ii) $90,307 of cash paid to other professionals, (iii)$15,000 for the value of the 1,500,000 shares of common stock issued to theplacement agent; (iv) $400,273 for the value of the 1,000,000 warrants issuedto the placement agent; and (iv) $220,847 for the value of warrants issued forlegal services provided.

 

***Registration Rights***

 

Inthe event the Company files a registration statement with respect to any of itssecurities with the Securities and Exchange Commission (other than aregistration statement on Form S-8 or S-4), the Company will, subject to theterms of a Piggyback Registration Rights Agreement entered into between theCompany and each investor, register the maximum number of investor sharespermitted pursuant to Rule 415 of the Act. The shares underlying the Unitsshall not be entitled to the aforesaid registration rights if those shares arethen eligible to be sold pursuant to Rule 144 of the Securities Act.

 

***Private Placement Offering — December 2008***

 

InDecember 2008, the Company, in connection with a new Private PlacementMemorandum (PPM), offered up to 15 Units at $50,000 per unit for an aggregate purchaseprice of $750,000. Each unit consisted of a $50,000 promissory note (see Note8) and 10,000 shares of the Company’s common stock.  The terms of thepromissory note required repayment of the principal on the earlier of (i)ninety (90) days from the date of the note, (ii) upon the closing of asubsequent financing or (ii) upon payment being received by the Company undercertain conditions of the Dargavel contract.  Each promissory noterequired a $15,000 interest payment at maturity.  As a condition ofthe PPM, the closing on the sale of a minimum of $250,000 in units must besubscribed for before the offering can proceed in accordance with the terms ofthe PPM. The Company was required to pay the placement agent: (i) 10% of thepurchase price of each unit sold; and (ii) 250,000 shares of the Company commonstock upon the placement of the first $250,000 of units; an additional 312,500shares upon the placement of the next $250,000; and (iii) an additional 312,500shares upon the placement of the next $250,000.

 

InJanuary 2009, the Company sold ten units in a private placement and,accordingly, issued promissory notes totaling $500,000 and issued 100,000shares of common stock.    The notes bear interest of$150,000. Principal, plus all accrued and unpaid interest thereon, were due inApril, 2009.  The relative fair value of the common stock, whichamounted to $41,284, was recorded as a discount to the notes. This amount wasaccreted to interest expense over the contracted term of the notes.   TheCompany also issued 562,500 shares of its common

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2010**

 

**NOTE 9.                STOCKHOLDER’SEQUITY (CONTINUED)**

 

stockas fees to the placement agent related to the PPM, valued at $253,126.

 

***Merger and Private Placement Offering — May2009***

 

OnMay 28, 2009 under the Merger Agreement as amended, (i) the stockholders of W2Esurrendered all of the issued and outstanding shares of W2E capital stock andreceived, in exchange for 45,981,770 shares of common stock in theCompany, referred to as “Pubco”; (ii) all warrants to purchase shares of W2Ecommon stock outstanding immediately prior to the Merger were replaced withcorresponding new warrants to purchase shares of Pubco common stock; (iii) theformer stockholders of Pubco retained 1,000,000 shares of common stock ofPubco. The merger was accounted for as a reverse merger and recapitalizationwith the acquiring company being W2E.

 

Simultaneouswith the Merger in May 2009, the Company also initiated a private placementoffering (“May Private Placement”) of up to 4,000,000 units(“Units”). Each Unitconsisted of (i) three shares of common stock, par value $0.001 per share and(ii) a three-year warrant to purchase three additional shares of common stockat an exercise price of $1.25 per share. The Company was attempting to raise$8,000,000 with this transaction. The initial closing of the May PrivatePlacement was on May 28, 2009. The Company completed the offering in August2009, after completing the sale of 600,250 Units at $2.00 per Unit.

 

TheUnits were offered on behalf of the Company by a Placement agent.  In connection with the offering the Companypaid the placement agent commissions, non-accountable expense allowances and aninvestment banking fee totaling approximately $194,000 and incurred legal andother expenses totaling approximately $107,400.    Additionally, the Placement agent receivedwarrants to purchase two million shares valued for an exercise price of $.01per share upon conclusion of the offering in full settlement of all amounts dueto the agent under the investment banking agreement.  Further, upon each exercise of the Warrantsissued to investors, the Placement agent will receive a ten percent (10%)commission and a three percent (3%) non-accountable expense allowance, and willalso be issued a three-year cashless warrant at an exercise price of $1.25,equal to 4.5% of the number of shares of common stock that such investorwarrant was exercisable into.

 

***Common Stock***

 

The Company issued anaggregate of 135,020 shares of common stock in connection with the August 2007Private Placement for gross proceeds of $66,510 (net proceeds of $56,364).

 

 On June 25, 2008, the Company issued 6,000,000shares of common stock in connection with the acquisition of the 50% interestin EWE, valued at $3,000,000, or $0.50 per share.

 

 During June and August 2008, the Companyissued an aggregate 702,560 shares of common stock in connection withconsulting services rendered, valued at approximately $351,000. Accordingly,the Company recorded approximately $351,000 of consulting expense.  Also, in February 2009, the Company issued50,000 shares of common stock in connection with consulting services rendered,valued at $0.45 per share.

 

 On September 17, 2008, the Company issued200,000 shares of common stock with a fair value of $100,000 and a relativefair value of $50,000 in connection with the issuance of bridge loans payable(see Note 8).  On February 17, 2009, theCompany issued 50,000 shares of common stock, with a value of $25,000 and arelative fair value of $12,500, in connection with the issuance of a bridgeloan on September 4, 2008 (see Note 8).

 

 On December 17, 2008, the Company issued200,000 shares of common stock, valued at $100,000, in connection with thesatisfaction of a bridge loan payable.

 

 In January 2009, the Company issued 100,000shares of common stock with a fair value of $45,000 and a relative fair valueof $41,284, in connection with its December 2008 PPM.  The Companyalso issued 562,500

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2010**

 

**NOTE 9.                STOCKHOLDER’SEQUITY (CONTINUED)**

 

shares of its common stockas fees to the placement agent related to the PPM, valued at $253,125.

 

InFebruary and March 2009, the Company issued 175,000 shares of common stock, inconnection with the extension of the maturity of notes payable, valued at$78,750 (see Note 8).

 

InApril 2009, the Company issued 150,000 shares of common stock in connectionwith the issuance of convertible notes during March 2009, valued at $40,299(see Note 8).

 

InApril 2009, the Company issued 50,000 shares of common stock with a fair valueof $25,000 and a relative fair value of $12,500 in connection with the issuanceof a $25,000 promissory note issued in September 2008 (See Note 8).

 

InApril 2009, the Company issued 375,000 shares of common stock with a fair valueof $168,750 and a relative fair value of $100,746 in connection with theissuance of convertible notes.

 

InApril 2009, the Company issued 75,000 shares of common stock with a fair valueof $33,750 and a relative fair value of $20,149 in connection with the issuanceof convertible notes to a related party.

 

OnApril 22, 2009, the Company issued 500,000 shares of common stock in connectionwith consulting services rendered, valued at $0.45 pershare.  Accordingly, the Company recorded $225,000 of consultingexpense during the year ended March 31, 2010.

 

OnApril 22, 2009, the Company issued 500,000 shares of common stock in connectionwith identifying its merger candidate, valued at $0.45 per share. Accordingly,the Company recorded $225,000 of expense during the year ended March 31, 2010.

 

OnApril 22, 2009, the Company issued 1,000,000 shares of common stock inconnection with the extension of the maturity dates of certain notes payablerelated to the December 2008 Private Placement Memorandum, which wererepaid during the year ended March 31, 2010, valued at $450,000.  Alsoin April 2009, the Company issued 425,000 shares of common stock in connectionwith the extension of the maturity dates of certain notes payable, valued at$191,250 (see Note 8).  The Company recordedthe cost as a loss on deemed extinguishment of debt in accordance with ASC 470(see Note 8).

 

OnApril 22, 2009, the Company issued 100,000 shares of common stock, toconsultants in connection with the extension of a bridge loan, valued at $0.45per share.  These costs have been recorded as deferred financingcosts which are being amortized over the term of the notes.

 

OnApril 30, 2009, the Company issued 50,000 shares of common stock in connectionwith consulting services rendered, valued at $0.45 pershare.  Accordingly, the Company recorded $22,500 of consultingexpense during the year ended March 31, 2010.

 

OnMay 4, 2009, the Company issued 750,000 shares of common stock in connectionwith consulting services rendered, valued at $0.45 pershare.  Accordingly, the Company recorded $337,500 of consultingexpense during the year ended March 31, 2010.

 

InMay 2009, in connection with the reverse merger, Maven Media had 3,000,000shares of common stock issued and outstanding. As of the merger date, 2,000,000 shares were canceled and 1,000,000 werereissued in the new company.

 

Duringthe period from May 2009 through August 2009, the Company issued 1,800,750shares of common

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2010**

 

**NOTE 9.                STOCKHOLDER’SEQUITY (CONTINUED)**

 

stock in connection withequity units sold in the May 2009 Private Placement Offering, valued at$1,200,464.  The Company issued 2,500,000shares of common stock with a fair value of $2,318,960 and a relative fairvalue of $1,148,451 in connection with the issue of promissory notes anddebentures between June 2009 and August 2009.

 

InAugust 2009, the Company entered into a consulting agreement for considerationof 200,000 shares of common stock. The agreement required that 100,000 sharesbe issued at inception of the agreement and the remaining 100,000 shares beissued in February 2010.  The value ofthe shares at the date of the agreement was $230,000 which is being amortizedover the one year life of the agreement. Consulting expense totaled $141,538 for the year ended March 31, 2010.  As of March 31, 2010, only 100,000 shareshave been issued to date and the remaining 100,000 shares were issued in April2010.

 

InOctober, 2009, the Company issued 183,335 shares in connection with theexercise of 200,000 warrants at an exercise price of $0.10 per share in acashless exercise.

 

InOctober 2009, the Company issued 1,981,391 shares in connection with theexercise of 2,000,000 warrants at an exercise price of $.01 per share in acashless exercise.

 

InOctober, 2009, the Company entered into a settlement agreement with aconsultant.  This agreement required thatthe Company pay $35,000 and issue 42,000 shares of common stock to theconsultant in exchange for full settlement of all outstanding bills. The valueof the shares issued charged to expense during the period was $44,520.

 

On March 1, 2010, the Companyentered into a settlement agreement with three investors.  This agreement required the Company toexchange the debt obligation ($120,000 plus unpaid interest) for 260,317 sharesof common stock and warrants.  The numberof shares issued was determined by the principal balance plus unpaid interestdivided by the conversion price of $0.50. The value of the common stock ($195,238) plus warrants ($122,574) issuedexceeded the amount owed to the note holders by $187,654.  The excess consideration on the settlementwas charged to loss on extinguishment of debt and included in the consolidatedstatement of operations during the year ended March 31, 2010.

 

***Cancellation and Return of Common Stock***

 

OnMay 7, 2009, pursuant to return to treasury agreements with certain formershareholders such shareholders agreed to return 1,200,000 shares of commonstock to the Company in consideration for $10,503 which were then cancelled.

 

InMay 2009, 1,250,000 shares of common stock, held by a shareholder, werecanceled by the Company for non-payment of their subscription agreementamounting to $12,500.

 

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**WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2010**

 

**NOTE 9.                STOCKHOLDER’SEQUITY (CONTINUED)**

 

***Common Stock Purchase Warrants***

 

Fromtime to time the Company issues warrants to purchase shares of common stock toinvestors, employees and non-employees for services rendered; each warrantrepresents the right to purchase one share of common stock during the warrantperiod, at a predetermined exercise price, ranging from $.01 to $1.25. Historically, warrants have been issued with terms ranging from one to sixyears and are generally, but not always, exercisable immediately uponissuance.  Warrants currently outstanding expire on various dates throughOctober 31, 2014.  The Company accounts for these warrants as equityinstruments in accordance with the Contracts in Entity’s Own Equity provisionof ASC 815, Derivatives and Hedging, and as such, will be classified instockholders’ equity as they meet the definition of “...indexed to the issuer’sstock”.

 

Warrant activity for theperiod from April 1, 2008 to March 31, 2010 is as follows:

 
| ** **                                                                | ** ** | ** **    | ** ** | **Average**  | ** ** |
|---------------------------------------------------------------------------|------------|---------------|------------|--------------|------------|
| ** **                                                                | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| ** **                                                                | ** ** | **Warrants**  | ** ** | **Price**    | ** ** |
| Outstanding at April 1, 2008                                              |       | 2,500,000     |       | $            | 0.54       |   |
| Granted                                                                   |       | 8,910,000     |       | 0.58         |       |
| Exercised                                                                 |       | —        |       | —       |       |
| Forfeited                                                                 |       | —        |       | —       |       |
| Outstanding at March 31, 2009                                             |       | 11,410,000    |       | $            | 0.57       |   |
| Granted                                                                   |       | 22,032,770    |       | 0.93         |       |
| Exercised                                                                 |       | (2,200,000    | )          | 0.02         |       |
| Forfeited                                                                 |       | (1,000,000    | )          | 0.75         |       |
| Outstanding at March 31, 2010                                             |       | 30,242,770    |       | $            | 0.67       |   |
|                                                                      |       |          |       |         |       |
| Weighted average fair value granted during the  year ended March 31, 2010 |       |          |       | $            | 0.93       |   |

 

Theexpected term of warrants granted to employees represents the average periodthe warrants are expected to remain outstanding and is based on the expectedterm calculated using the approach prescribed by SAB 107 for “plain vanilla”options. The Company used this approach as it did not have sufficienthistorical information to develop reasonable expectations about future exercisepatterns and post-vesting employment termination behavior. The expected stockprice volatility for the Company’s stock options for the year ended March 31,2010 was determined by examining the historical volatilities of the Company’sstock plus industry peers.  The Companyused a blended weighted average of the historical volatilities of the Company’sindustry peers when the life of the warrants was greater than the Company’sstock trading life.  The Company willcontinue to analyze the historical stock price volatility and expected termassumption as more historical data for the Company’s common stock becomesavailable. The risk-free interest rate assumption is based on the U.S. Treasuryinstruments whose term was consistent with the expected term of the Company’sstock options. The expected dividend assumption is based on the Company’shistory and expectation of dividend payouts.

 

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**WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2010**

 

**NOTE 9.                STOCKHOLDER’S EQUITY (CONTINUED)**

 

Warrants issued toNon-Employees

 

OnSeptember 15, 2008, the Company issued warrants to purchase a total of 900,000shares of the Company’s common stock to consultants for services previouslyrendered at an exercise price of $0.50.  The warrants expire onSeptember 15, 2013 and contain a provision allowing for a cashless exercise.The fair value of the warrants issued, amounting to $335,214, was determinedusing the Black-Scholes option pricing model at $0.37 per warrant utilizing thefollowing assumptions: expected volatility of 98.16%, risk free interest rateof 2.59%, contractual term of five years and a market price of $0.50.

 

OnNovember 25, 2008 the Company issued warrants to purchase 200,000 shares of theCompany’s common stock to a consultant for services previously renderedsubsequent to March 31, 2008 at an exercise price of $0.50.  Thewarrants expire on November 25, 2011 and contain a provision allowing for acashless exercise.  The fair value of the warrants issued, amountingto $66,562, was determined using the Black-Scholes option pricing model at$0.33 per warrant utilizing the following assumptions: expected volatility of109.83%, risk free interest rate of 1.41%, expected term of three years and amarket price of $0.50.

 

OnDecember 10, 2008 the Company issued warrants to purchase 200,000 shares of theCompany’s common stock to a consultant for services previously rendered at anexercise price of $0.50.  The warrants expire on December 10, 2011and contain a provision allowing for a cashless exercise. The fair value of thewarrants issued, amounting to $66,927, was determined using the Black-Scholesoption pricing model at $0.33 per warrant utilizing the following assumptions:expected volatility of 110.91%, risk free interest rate of 1.21%, expected termof three years and a market price of $0.50.

 

Asmore fully discussed in Note 10, the Company issued warrants to purchase1,300,000 shares of the Company’s common stock to two consultants for servicespreviously rendered. The fair value of the warrants amounted to $440,686.

 

OnMarch 31, 2009, the Company issued warrants to purchase 250,000 shares of theCompany’s common stock for legal services rendered at an exercise price of$0.50.  The warrants expire on March 31, 2014 and contain a provisionallowing for a cashless exercise.  The fair value of the warrantsissued, amounting to $87,651, was determined using the Black-Scholes optionpricing model at $0.35 per warrant utilizing the following assumptions: expectedvolatility of 110.04%, risk-free interest rate of 1.67%, contractual term offive years and a market price of $0.45.

 

OnMarch 31, 2009 the Board of Directors approved the granting of warrants topurchase 2,000,000 shares of the Company’s common stock to a consultant forrecognition of services rendered at an exercise price of $0.50.  Thewarrants were issued on April 2, 2009, with an expiration date of April 2,2014 and contain a provision allowing for a cashless exercise. The fair valueof the warrants issued, amounting to $701,541, was determined using theBlack-Scholes option pricing model at $0.35 per warrant utilizing the followingassumptions: expected volatility of 110.04%, risk-free interest rate of 1.74%,contractual term of five years and a market price of $0.45. At March 31, 2009,the accompanying balance sheet includes $701,541 of accrued expenses, relatedto these warrants.

 

OnAugust 19, 2009, the Company issued warrants to purchase 2,000,000 shares ofthe Company’s common stock to its placement agent in connection with thesettlement of all amounts due under the previous investment bankingagreement.  The warrants were grantedwith an exercise price of $.01.  The warrants were to expire onAugust 19, 2012 and contained a provision allowing for a cashless exercise. Thefair value of the warrants issued, amounting to $2,002,335, was determinedusing the Black-Scholes option pricing model at $1.0012 per warrant utilizingthe following assumptions: expected volatility of 124.2%, risk-free interestrate of 1.54%, contractual term of three years and a market price of$1.01.  The value of the warrants was recorded as a cost of capitalfor the year ended March 31, 2010.  OnOctober 9, 2009, the placement agent exercised the 2,000,000 warrants that wereissued in September 2009 at a price of $.01 per share into common shares in acashless exercise.  The Company issued1,981,391 shares of common stock as a result of this transaction.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 9.****                                                ****STOCKHOLDER’SEQUITY (CONTINUED)**

 

In connection with theextension of debt maturities, in November 2009 the Company issued 146,003warrants with an exercise price of $1.00. The warrants have a three year term and contain a provision allowing fora cashless exercise.  The fair value ofthe warrants issued, amounting  to$109,606, was determined using the Black-Scholes option pricing model at $0.75per warrant utilizing the following assumptions: expected volatility of 131.6%,risk-free interest rate ranging from 1.24% to 1.25%, contractual term of threeyears and a market price of $1.00 (see Note 8).

 

In connection with theCompany’s sale of Convertible Debentures during the year ended March 31,2010 (see Note 8), the Company issued warrants on a one-for one basis for eachdollar invested. A total of 7,133,847 warrants were issued during the yearwhich are exercisable over a three-year period at an exercise price rangingfrom $2.00 to $1.00.  The warrantscontain a provision allowing for a cashless exercise.  The fair value of the warrants issued,amounting to $4,408,186, was determined using the Black-Scholes option pricingmodel ranging from $0.30 to $0.71 per warrant utilizing the followingassumptions: expected volatility ranging from 108.87% to 132.40%, risk-freeinterest rate ranging from 1.12% to 1.56%, contractual term of three years anda market price ranging from $0.65 to $1.06.

 

In consideration of servicesrendered to the Company, a service provider was awarded 100,000 warrants in October 2009with an exercise price of $0.75 per share. The warrants are exercisable over a five-year period and contain aprovision allowing for a cashless exercise. The fair value of the warrants issued, amounting to $86,028, wasdetermined using the Black-Scholes option pricing model at $0.86 per warrantutilizing the following assumptions: expected volatility of 118.92%, risk-freeinterest rate of 2.31%, contractual term of five years and a market price of$1.01.

 

On March 1, 2010, the Company issued 260,317warrants in connection with a debt settlement. The warrants were exercisable over a three year period with an exerciseprice of $1.00.  The fair value of thewarrants issued, amounting to $122,574, was determined using the Black-Scholesoption pricing model at $0.47 per warrant utilizing the following assumptions: expectedvolatility of 112.38%, risk-free interest rate of 1.34%, contractual term ofthree years and a market price of $0.75.  The value of the shares were charged to loss on extinguishment of debtduring the year ended March 31, 2010 (see Note 8).

 

The Company recorded$86,028, and $1,698,580 of consulting expense during the year ended March 31,2010 and March 31, 2009, respectively, relating to these awards.

 

Warrants Issued to Employees

 

On June 20, 2008, theCompany issued warrants to purchase a total of 800,000 shares of the Company’scommon stock to employees as a signing bonus at an exercise price of$0.50.  The warrants expire on June 20, 2013 and contain aprovision allowing for a cashless exercise.  The fair value of thewarrants issued, amounting to $222,092, was determined using the Black-Scholesoption pricing model at $0.28 per warrant utilizing the following assumptions:expected volatility of 92.86%, risk free interest rate of 3.17%, expected termof three years and a market price of $0.50.

 

On September 15, 2008the President and COO was issued warrants to purchase 1,000,000 shares of theCompany’s common stock at an exercise price of $0.50.  The warrantsexpire on September 15, 2013 and contain a provision allowing for acashless exercise.  The fair value of the warrants issued, amountingto $292,437, was determined using the Black-Scholes option pricing model at$0.29 per warrant utilizing the following assumptions: expected volatility of100.75%, risk free interest rate of 2.01%, expected term of three years and amarket price of $0.50.

 

In 2008, the Company issuedwarrants to purchase 2,000,000 shares and 300,000 shares of the Company’scommon stock to its CEO and VP, respectively at an exercise price of $0.50 andcontain a provision allowing for a cashless exercise.  The warrantsexpire on various dates between February 2010 and October 2013.  The fair value of the warrant issued,amounting to $632,348, was determined using the Black-Scholes option pricingmodel at

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 9.****                                                ****STOCKHOLDER’SEQUITY (CONTINUED)**

 

$0.27 per warrant utilizingthe following assumptions:  expectedvolatility of 93.20%, risk free interest rate of 1.94%, expected term of threeyears and a market price of $0.50.  Thefull value of the the warrants was recorded in compensation expense during theyear ended March 31, 2009 as all warrants were fully vested upon issuance.

 

As more fully described inNote 6, in June 2008, the Company issued warrants to purchase 1,500,000shares of the Company’s common stock in connection with its acquisition of the50% interest in EWE. The fair value of these warrants amounted to $259,531.

 

On March 31, 2009 theBoard of Directors approved the granting of warrants to purchase 2,000,000shares of the Company’s common stock to the CEO as a bonus for servicesrendered at an exercise price of $0.50.  The warrants were issued on April 2,2009, with an expiration date of April 2, 2014 and contain a provisionallowing for a cashless exercise. The fair value of the warrants issued,amounting to $541,242, was determined using the Black-Scholes option pricingmodel at $0.27 per warrant utilizing the following assumptions: expectedvolatility of 110.05%, risk-free interest rate of 1.25%, expected term of threeyears and a market price of $0.45.  At March 31, 2009, theaccompanying balance sheet includes $541,200 of accrued expenses, related tothese warrants.

 

On March 31, 2009 theBoard of Directors approved the granting of warrants to purchase 1,400,000shares of the Company’s common stock to the President and COO as abonus for services rendered at an exercise price of $0.50.  Thewarrants were issued on April 2, 2009, with an expiration date of April 2,2014 and contain a provision allowing for a cashless exercise.  Thefair value of the warrants issued, amounting to $378,870, was determined usingthe Black-Scholes option pricing model at $0.27 per warrant utilizing thefollowing assumptions: expected volatility of 110.05%, risk-free interest rateof 1.25%, expected term of three years and a market price of $0.45. At March 31,2009, the accompanying balance sheet includes $378,840 of accrued expenses,related to these warrants.

 

On April 2, 2009, theCompany issued warrants to purchase 350,000 shares of the Company’s commonstock to certain employees previously granted on March 31, 2009 at anexercise price of $0.50.  The warrants expire on April 2, 2014and contain a provision allowing for a cashless exercise.  The fairvalue of the warrants issued, amounting to $94,717, was determined using theBlack-Scholes option pricing model at $0.27 per warrant utilizing the followingassumptions: expected volatility of 110.05%, risk-free interest rate of 1.25%,an expected term of three years and a market price of $0.45.   The valueof the warrants was accrued as compensation expense payable at March 31,2009.

 

On April 2, 2009, theCompany issued warrants to purchase 1,000,000 shares of the Company’s commonstock to the Chief Technology Officer previously granted on March 31, 2009at an exercise price of $0.75.  The warrants expire on April 2,2014 and contain a provision allowing for a cashless exercise.  Thefair value of the warrants issued, amounting to $233,948, was determined usingthe Black-Scholes option pricing model at $0.23 per warrant utilizing thefollowing assumptions: expected volatility of 110.05%, risk-free interest rateof 1.15%, expected term of three years and a market price of$0.45.  The value of the warrants was accrued as compensation expensepayable at March 31, 2009.

 

On May 4, 2009, theCompany issued warrants to purchase 600,000 shares of the Company’s commonstock to employees previously granted on March 31, 2009 at anexercise price of $0.50.  The warrants expire on May 14, 2014and contain a provision allowing for a cashless exercise. The fair value of thewarrants issued, amounting to $162,551, was determined using the Black-Scholesoption pricing model at $0.27 per warrant utilizing the following assumptions:expected volatility of 110.04%, risk-free interest rate of 1.40%, an expectedterm of three years and a market price of $0.45.  The value of thewarrants was accrued as compensation expense payable at March 31, 2009.

 

On July 13, 2009, theCompany granted warrants to purchase 400,000 shares of the Company’s commonstock to the Chief Financial Officer at an exercise price of $0.67 inconnection with an employment agreement.  The warrants expire on July 13,2014 and contain a provision allowing for a cashless exercise.  Thefair value of the warrants issued, amounting to $112,010, was determined usingthe Black-Scholes option pricing model at $0.28 per warrant utilizing thefollowing assumptions: expected volatility of 126.19%, risk free interest rateof 1.60%,

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 9.****                                                ****STOCKHOLDER’SEQUITY (CONTINUED)**

 

expected term of three yearsand a market price of $0.45.

 

On October 1, 2009, theCompany granted warrants to purchase 1,000,000 shares of the Company’s commonstock to an employee at an exercise price of $0.67 in connection with anemployment agreement. The warrants issued vest over a three year period.  The warrants expire on October 1, 2014and contain a provision allowing for a cashless exercise.  The fair value of the warrants issued,amounting to $882,600, was determined using the Black-Scholes option pricingmodel at $0.88 per warrant utilizing the following assumptions: expectedvolatility of 131.63%, risk free interest rate of 1.36%, expected term of threeyears and a market price of $1.06.  TheCompany recorded $147,100 of compensation expense for the year ended March 31,2010 in connection with these warrants.

 

On October 30, 2009,the Company granted warrants to purchase 100,000 shares of the Company’s commonstock to an employee at an exercise price of $0.67 in recognition of continuedservice to the Company.  The warrantsexpire on October 30, 2012 and contain a provision allowing for a cashlessexercise.  The fair value of the warrantsissued, amounting to $70,530 was determined using the Black-Scholes optionpricing model at $0.71 per warrant utilizing the following assumptions:expected volatility of 143.91%, risk free interest rate of 0.90%, expected termof two years and a market price of $1.01. The fair value of the warrants was expensed at the time of issuance asthey vested immediately.

 

The Company recorded$329,640 and  $2,713,048 of compensationexpense during the year ended March 31, 2010 and March 31, 2009,respectively, relating to these awards.

 

***Cancellation of Warrants***

 

InOctober 2009, the Company cancelled 1,000,000 warrants that had previouslybeen issued as partial consideration for the acquisition of EnerwasteEurope.  The warrants were re-issuedearlier in 2009 to the same party, but in a different name, and accordingly theoriginally issued warrants were cancelled.

 

***Warrants issued in Connection with Bridge Loans***

 

During October, November andDecember 2008 the Company issued warrants granting the certain noteholders the right to purchase up to 460,000 shares of common stock at $0.50 pershare exercisable for a period of three years. The aggregate fair value of thewarrants issued, amounted to $150,617, which was determined using theBlack-Scholes option pricing model at a range of $0.32 and $0.33 per warrantutilizing the following assumptions: expected volatility ranging from 105.15%to 110.91%, risk-free interest rate ranging from 1.41% to 1.80%, contractualterm of three years and a market price of $0.50. The notes have a three monthterm and bear interest at a rate of 5% per annum. The warrants expire threeyears from the date of issuance and contain a provision allowing for a cashlessexercise (see Note 8).

 

***Warrants issued in connection with May 2009 Private PlacementOffering***

 

During the period May 2009through August 2009, the Company issued warrants to purchase 1,800,750shares of common stock at an exercise price of $1.25 per share, in connectionwith the equity units sold in the May 2009 Private Placement Offering.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 9.****                                                ****STOCKHOLDER’SEQUITY (CONTINUED)**

 

***Warrants issued in connection with October 2009 Private PlacementOffering***

 

In connection with the October 2009Private Placement Offering (see Note 8), as of March 31, 2010 the Companyissued warrants to purchase 7,133,847 shares of common stock.  As more fully described in Note 8, 6,348,547warrants were originally issued at an exercise price of $2.00.  Pursuant to a waiver agreement the exerciseprice of the warrants were reduced to $1.00. The residual warrants totaling 785,300 all were issued at an exerciseprice of $1.00.  All warrants issuedexpire three years from issuance.

 

In connection with the Private Placement (SeeNote 8), the Company agreed to pay the placement agent in addition to fees paidout of closing, warrants to purchase up to 4.5% of the fully dilutedoutstanding shares of the Company’s common stock proportionate to the amount ofDebentures sold with an exercise price of $0.01 per share.  During the year ended March 31,2010, the placement agent earned 1,741,853 warrants pursuant to the agreement.Further, upon each exercise of the Warrants issued to investors, the Placementagent will receive a ten percent (10%) commission and a three percent (3%)non-accountable expense allowance, and will also be issued a three-yearcashless warrant at an exercise price of $1.00, equal to 4.5% of the number ofshares of common stock that such investor warrant was exercisable into.

 

Detailsof outstanding shares of common stock are as follows:

 
| ** **                                                             | ** ** | **Shares** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|
|                                                                   |       |       |       |
| Shares  of Pubco at March 31, 2009                                |       | 3,000,000  |       |
| Cancellation  of Pubco shares at merger date                           |       | (2,000,000 | )          |
| Recapitalized  shares of W2E’s stockholders at exchange (1:1)     |       | 41,152,100 |       |
| Issuance  of shares in connection with notes payable                   |       | 4,575,000  |       |
| Issuance  of shares in connection with consulting agreements           |       | 2,000,000  |       |
| Issuance  of shares in connection with May 2009 private placement |       | 1,800,750  |       |
| Issuance  of shares in connection with warrant exercises               |       | 2,164,726  |       |
| Issuance  of shares in connection with settlement of accounts payable  |       | 42,000     |       |
| Cancellation  and return of shares                                     |       | (2,450,000 | )          |
| Issuance  of shares in connection with debt settlement                 |       | 260,317    |       |
| Common  stock outstanding at March 31, 2010                       |       | 50,544,893 |       |

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 10.****                                         ****COMMITMENTSAND CONTINGENCIES**

 

***Income Tax Liabilities***

 

At March 31, 2010 and2009, the Company has included in income taxes payable an accrual ofapproximately $127,000, inclusive of interest and penalties of approximately$25,000, that relate to EWI for the period prior to itsacquisition.  Such amounts are included in current liabilities fromdiscontinued operations in the accompanying consolidated balance sheets.

 

***Litigation***

 

In December 2009, theCompany was named in a Complaint filed in the State of New York by a formerconsultant to the Company.  The Complaintalleges Breach of Contract, Breach of the Covenant of Good Faith and FairDealing and Promissory Estoppel related to a consulting agreement entered intobetween the Company and the Claimant. The complaint initially sought damages of $500,000 plus punitivedamages. The Company denies the allegation contained in the Complaint andintends to vigorously defend the matter and otherwise enforce its rights withrespect to the matter.  The Company hasretained counsel and has responded to the Complaint.  Both parties have now agreed to arbitrate thematter, and the filings to commence the arbitration process have been made byboth parties.  The damage claim has beenmodified to a range of $150,000 to $300,000 based on joint arbitration filings. There can be no assurance of the outcome of this matter.

 

***Occupancy Agreement***

 

In April 2010, theCompany entered into a five year lease agreement for office space inGreenville, SC for the Company’s headquarters. The lease is to commence upon the landlord completing a buildout of theleased space.  Upon completion of thebuildout and the Company taking occupancy of the space, the Company will becommitted to aggregate lease payments over a five year period totalingapproximately $400,000.   TheCompany also rents other facilities on a month-to-basis.

 

The Company recorded$312,845 and $240,056 of rent expense during the year ended March 31, 2010and 2009, respectively.

 

***Employment Agreements***

 

On July 13, 2009, theCompany entered into an employment agreement with its Chief Financial Officer (“CFO”).  Theagreement is for a one year term; thereafter the agreement automatically renewsfor successive one year terms, unless terminated sooner, upon 30 daysnotice.   Under the terms of the agreement, the CFO will receivean annual base salary of $175,000.  The CFO’s base salary will bereviewed, from time to time, and may be adjusted at the discretion of theBoard. The first such review shall be at the first anniversary date of thisagreement. In addition, on July 13, 2009, the CFO was granted 400,000warrants to purchase the Company’s common stock at an exercise price of $0.67per share vested two years from the effective date of the registrationstatement, or immediately if the Company fails to raise a minimum of $4,000,000in the equity offering, provided the CFO is still employed by the Company onsuch date.  The warrants expire on July 13, 2014 and contain aprovision allowing for a cashless exercise.  The fair value of thewarrants issued, amounting to $112,010, was determined using the Black-Scholesoption pricing model at $0.28 per warrant utilizing the following assumptions:expected volatility of 126.19%, risk free interest rate of 1.60%, expected termof three years and a market price of $0.45.

 

At March 31, 2010, theCompany has unpaid fees totaling $145,833 to its current CEO, related to unpaidcompensation under the CEO’s employment agreement and unpaid fees totaling$542,000 to its former CEO and current chairman of the board, related to unpaidcompensation and severance pay (See Note 11).  At March 31, 2009, theCompany has unpaid fees totaling $187,500 to its former CEO and now chairman ofthe board, related to unpaid compensation and unpaid fees totaling $103,124 toits current CEO, related to unpaid compensation prior to being CEO. The unpaidfees are included in due to related parties in the consolidated balance sheets.

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 10.****                                         ****COMMITMENTSAND CONTINGENCIES (CONTINUED)**

 

***Transition Agreement***

 

OnMay 28, 2009, the Company, Christopher d’Arnaud-Taylor (“Mr. d’Arnaud-Taylor”)and Peter Bohan entered into a Transition Agreement (the “Transition Agreement”).Pursuant to the Transition Agreement, Mr. d’Arnaud-Taylor agreed that,effective on the final closing of the May Private Placement, he wouldresign as Chief Executive Officer of the Company and at such time hisemployment agreement with the Company would be terminated. He will continue toserve as a director of the Company. Mr. d’Arnaud-Taylor entered into aconsulting agreement, dated as of May 28, 2009 (the “Consulting agreement”).Pursuant to the Consulting Agreement, which became effective upon the finalclosing of the May Private Placement, Mr. d’Arnaud-Taylor will serveas a consultant to W2E Group Holdings and shall be paid an annual fee of$300,000. The Company has guaranteed the payments due to Mr. d’Arnaud-Taylorpursuant to the Consulting Agreement. Upon his resignation, Mr. Bohan willbecome the Company’s Chief Executive Officer. In September 2009, theCompany amended the Transition Agreement such that Mr. Taylor would resignupon termination of the May Private Placement. This was effective September 4,2009 and Mr. Bohan assumed the role of CEO as of that date. The Companyrecorded an accrual of $300,000 for severance to Mr. Taylor in connectionwith his departure and the terms of his employment agreement. This is includedas a component of due to related parties in the consolidated balance sheet asof March 31, 2010 (see Note 11).

 

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**MARCH 31,2010**

 

**NOTE 10.****                                         ****COMMITMENTSAND CONTINGENCIES (CONTINUED)**

 

***Consulting and Other Agreements***

 

On September 15, 2008,the Company entered into a consulting agreement with Atlantic StrategicAdvisors, LLC (“ASA”) whereby ASA will provide consulting services to assist inthe business of the Company, including, without limitation, evaluatingparticular contracts or transactions or executing certain administrativeassignments.  The agreement calls for ASA to be paid $15,000 a monthand terminates on September 30, 2009.  In addition, ASA wasgranted 1,000,000 warrants to purchase the Company’s common stock at anexercise price of $0.50 for previous services rendered as full and finalpayment. The warrants expire on June 30, 2013. The fair value of thewarrants issued, amounting to $364,427, was determined using the Black-Scholesoption pricing model at $0.36 per warrant utilizing the following assumptions:expected volatility of 93.29%, risk free interest rate of 3.57%, contractualterm of five years and a market price of $0.50.   During the yearended March 31, 2009, the warrants resulted in consulting expenses of$364,427.

 

On May 1, 2008, theCompany entered into an agreement with a consultant whereby to assist theCompany in identifying and introducing persons and entities who may be willingto make debt or equity investments in the Company. The agreement expired on October 31,2008. Under the terms of the agreement, in full satisfaction of servicespreviously rendered by the consultant, the Company issued (a) warrants topurchase 300,000 shares of the Company’s common stock at an exercise price of$0.75 per share, expiring on May 1, 2011, which contain a provisionallowing for a cashless exercise and (b) 300,000 shares of the Company’scommon stock, valued at $0.50 per share. In consideration for services to berendered, the Company will pay the consultant a fee equal to five percent ofthe gross proceeds received by the Company in connection with a transaction.The Company has also agreed to advance $5,000 per month against such fee. Thefair value of the warrants issued, amounting to $76,259, was determined usingthe Black-Scholes option pricing model at $0.25 per warrant utilizing thefollowing assumptions: expected volatility of 92.95%, risk free interest rateof 2.53%, contractual term of three years and a market price of$0.50.  During the year ended March 31, 2009, the warrantsresulted in consulting expenses of $76,259.

 

On November 4, 2008 theCompany entered into a one year agreement with the Consultant whereby he willidentify and introduce entities to the Company who may be willing to purchasethe Company’s proprietary waste to energy plants.  He will alsoscreen and qualify potential customers. Should such customer purchase a BOS orother waste to energy plant, he will be paid a finder’s fee of ten percent(10%) of the purchase based on certain criteria contained in the agreement.

 

***Investment Banking Agreement***

 

On March 30, 2009, theCompany entered into an agreement with a registered broker dealer (“Placementagent”) whereby the Placement agent will assist the Company with its investmentbanking requirements which includes assistance with mergers, acquisition andinternal capital structuring, as well as the placement of new debt and/orequity issues. The Placement agent will also assist the Company in placing upto $8 million of the Company’s securities (the “Offering”).

 

The Company is required topay the Placement agent a retainer of $400,000 upon the achievement of certainmilestones. In connection with the Offering, the Company agreed to pay thePlacement agent (i) placement fees equal to 10% of the gross proceeds ofthe Offering and 3% of the gross proceeds of the Offering as a non-accountableexpense allowance; and (ii) issue 3,304,670 shares of the Company’s commonstock.

 

In September 2009, the May PrivatePlacement was terminated.  The Placement agent was previously issued3,304,670 shares of the Company’s common stock for services rendered inconnection with the Offering.  Subsequent to the issuance, the commonshares were canceled and exchanged with warrants to purchase 2,000,000 sharesof the Company’s common stock at an exercise price of $0.01.  Thewarrants expire on August 19, 2012 and contain a provision allowing for acashless exercise. The fair value of the warrants issued, amounting to$2,002,335, was determined using the Black-Scholes option pricing model at$1.0012 per warrant utilizing the following assumptions: expected volatility of124.20%, risk free interest rate of 1.54%, contractual term of three

 

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 10.****                                         ****COMMITMENTSAND CONTINGENCIES (CONTINUED)**

 

years and a market price of$1.01.  The warrants were exercised on acashless basis resulting in the issuance of 1,981,391 shares of common stock inOctober 2009 (see Note 9).

 

**DargavelContract Cost Dispute**

 

During the course of theconstruction of the Dargavel plant, the Company and its customer encountered anumber of significant issues that have resulted in delays and cost increases tothe project.  These issues include the Icelandic economy collapse,project scoping changes, and changes required by engineers hired by thecustomer and the Scottish Environment Protection Agency (“SEPA”).  Theseissues have resulted in substantial increases to the costs to complete thisproject.  The customer had made claims against the Company fordamages and counterclaims were made against the customer.  In April 2010, both parties reached asettlement agreement whereby neither party is obligated to pay the other anyfurther amounts related to this contract.  The Company is committed to bringing theproject to final completion per the specifications of the original agreement(see Note 4).

 

**NOTE 11.****                                         ****RELATEDPARTY TRANSACTIONS**

 

***Consulting Agreements***

 

On February 1, 2008,the Company entered into a consulting agreement with J. Douglas Pitts (“Pitts”),whereby Pitts would serve as the Company’s President and COO.  Theagreement is for a one-year term, unless terminated sooner. Under the terms ofthe agreement, Pitts will receive a salary of $18,950 per month. In addition,Pitts was granted warrants to purchase 1,000,000 shares of the Company’s commonstock. The warrants are exercisable for a period of five years at an exerciseprice of $0.75 per share.  On February 1, 2009 the Company didnot extend its agreement with Pitts.  (See Note 10 for litigationdiscussion).

 

***Deferred compensation***

 

On various dates since 2008, certain officers,directors and other employees have deferred receipt of salary payments.  As of March 31, 2010 and 2009, includedas a component of due to related parties in the Company’s consolidated balancesheet were amounts due to Mr. Taylor totaling approximately $542,500 and$187,500, respectively, and amounts due to Mr. Bohan totalingapproximately $146,000 and $103,000, respectively.  Included in the amounts due Mr. Taylorfor the year ended March 31, 2010, are $300,000 for severance pursuant tohis previous employment agreement which terminated September 4, 2009 and$30,000 of fees deferred under his consulting agreement since inception of theagreement.  All amounts due to relatedparties are non-interest bearing.

 

***Related party advances***

 

During the year ended March 31, 2010, anentity controlled by Mr. Taylor advanced funds to pay certain expenses ofthe Company and for operations.  Theadvances are not interest bearing and are due on demand.  At March 31, 2010, $91,500 is unpaid andincluded in due to related party on the accompanying consolidated balancesheet.

 

***Forgiveness of Promissory Note Payable***

 

On June 18, 2008, aspart of the acquisition of the remaining 50% of EWE (as more fully discussed inNote 6), EWE entered into a promissory note in the amount of $642,732 withvarious parties related to IE, bearing no interest, with principal to be paidin full upon reaching one of the Milestones, but no later than December 31,2008.  On March 14, 2009, IE forgave the $642,732promissory note due to them and W2E was released from its guaranty of the noteand accordingly it has been recorded as an increase in additional paid incapital in the accompanying consolidated statement of stockholders’ equity.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 12.****                                         ****INCOMETAXES**

 

The domestic and foreigncomponents of income (loss) before income taxes from continuing operations areas follows:

 
| ** **                                                                 | ** ** | **Year ended March 31,** | ** **  |
|----------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                 | ** ** | **2010**                      | ** **  | **2009** | ** ** |
| Domestic                                                                   |       | $                             | (9,626,553  | ) | $ | (9,029,914 | ) |
| Foreign                                                                    |       | (2,094,116                    | )           | (12,278,843 | ) |
| Income (loss) from continuing operation before  provision for income taxes |       | $                             | (11,720,669 | ) | $ | (21,308,757 | ) |

 

The provision (benefit) forincome taxes from continuing operations is as follows:

 
| ** **                        | ** ** | **Year ended March 31,** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| Current tax provision (benefit):  |       |                          |       |   |   |
| U.S. Federal                      |       | $                             | —     |   | $ | (77,449 | ) |
| State and local                   |       | —                        |       | — |   |
| Foreign                           |       | —                        |       | — |   |
| Total current                     |       | —                        |       | (77,449 | ) |
|                              |       |                          |       |   |   |
| Deferred tax provision (benefit): |       |                          |       |   |   |
| U.S. Federal                      |       | (4,004,918                    | )          | (7,501,973 | ) |
| State and local                   |       | —                        |       | — |   |
| Foreign                           |       | (125,750                      | )          | — |   |
| Valuation Allowance               |       | 4,130,668                     |       | 3,711,200 |   |
| Total current                     |       | —                        |       | (3,790,773 | ) |
|                              |       |                          |       |   |   |
| Total provision                   |       | $                             | —     |   | $ | (3,868,222 | ) |

 

Deferred income taxes areprovided for the tax effects of temporary differences between the financialreporting basis and the tax basis of assets and liabilities. Significanttemporary differences at March 31, 2010 and 2009 are as follows:

 
| ** **                                 | ** ** | **Year ended March 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| Deferred tax asset                         |       |                          |       |   |   |
| Net operating loss carryforward            |       | $                             | 5,452,760  |   | $ | 1,580,800 |   |
| Warrants                                   |       | 2,004,100                     |       | 1,850,300 |   |
| Common Stock issued for consulting fees    |       | —                        |       | 146,000 |   |
| Amortization of discount on notes payable  |       | (4                            | )          | 72,900 |   |
| Provision for loss on Contract in Progress |       | 28,700                        |       | — |   |
| Depreciation                               |       | 18,096                        |       | — |   |
| Loss on deemed extinguishment of debt      |       | 129,700                       |       | — |   |
| Accrued Management Fees                    |       | 208,500                       |       | 61,200 |   |
| Total deferred tax asset                   |       | 7,841,852                     |       | 3,711,200 |   |
| Less valuation allowance                   |       | (7,841,852                    | )          | (3,711,200 | ) |
| Total net deferred tax asset               |       | $                             | —     |   | $ | — |   |

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 12.****                                         ****INCOMETAXES (CONTINUED)**

 

The following is areconciliation of the U.S. statutory income tax rate to the effective tax ratefrom continuing operations:

 
| ** **                                            | ** ** | **Year ended March 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| U.S. statutory rate                                   |       | (34.00                        | )%         | (34.00 | )% |
| State and local taxes, net of federal benefit         |       | (3.00                         | )%         | (5.00 | )% |
| Change in fair value of embedded derivative           |       | (10.95                        | )%         | — |   |
| Amortization expense related to embedded  derivatives |       | 7.05                          | %          | — |   |
| Gain on legal settlement                              |       | (4.77                         | )%         | — |   |
| Foreign tax rate differential                         |       | 5.90                          | %          | — |   |
| Change in Valuation Allowance                         |       | 35.24                         | %          | 17.42 | % |
| Permanent differences and other                       |       | 4.53                          | %          | 3.43 | % |
|                                                  |       |                          |       |   |   |
| Effective income tax rate                             |       | 0.00                          | %          | (18.15 | )% |

 

The Company is subject totax in Iowa, New York and South Carolina and is expected to apportion incomeunder the single, sales/gross receipts, factor for all three states. Sincethere were no US sales for the year ended March 31, 2010, theapportionment of income is zero and, therefore, the effective tax rate zero.Within New York State, the Company has nexus with New York City whichrecognizes a three factor formula of apportioning income. The apportionmentpercentage is 52.13 and the tax rate is 8.85%, thereby producing an effectivetax rate of 3%.

 

The Company recognized adeferred tax asset of approximately $7,842,000 as of March 31, 2010,primarily relating to net operating loss carry forwards of approximately $14,034,000available to offset future taxable income through 2030. Due to changes inownership, these federal net operating loss carryforwards are subject to annuallimitations in their use in accordance with Internal Revenue Code Section 382.  Accordingly, the extent to which the losscarry forwards can be used to offset future taxable income may be limited.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. The Companyconsiders projected future taxable income and tax planning strategies in makingthis assessment. At present, the Company does not have a sufficient history ofincome to conclude that it is more likely than not that the Company will be ableto realize all of its tax benefits in the near future and therefore a valuationallowance was established for the full value of the deferred tax asset.

 

A valuation allowance willbe maintained until sufficient positive evidence exists to support the reversalof any portion or all of the valuation allowance net of appropriate reserves.Should the Company then continue to be profitable in future periods withsupportable trends, the valuation allowance will be reversed accordingly.

 

Subsidiaries operate indifferent countries and are subject to taxation in separate jurisdictions.Therefore, we are required to calculate and provide for income taxes in each ofthe separate jurisdictions on a global basis and the net operating losses ofunprofitable entities cannot be used to offset the income of more profitableentities. This involves making judgments regarding the recoverability ofdeferred tax assets which can affect the overall effective tax rate. Inaddition, changes in the geographic mix or estimated level of income can affectthe overall effective tax rate.

 

The expiration of thecompany’s U.S. net operating losses is as follows:

 
| 2028  |   | $         | 730,000    |   |
|-------|--------|-----------|------------|--------|
| 2029  |   | 3,323,584 |       |
| 2030  |   | 9,980,314 |       |
| Total |   | $         | 14,033,898 |   |

 

The Company enters intocertain inter-company transactions which involve considerations of transferpricing implications.  Although a formaltransfer pricing study was not undertaken, the Company does not foresee anytransfer pricing issues.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 13.****                                         ****SUBSEQUENT EVENTS**

 

***Senior Convertible Debentures***

 

On various dates between April 1,2010 and June 28, 2010, the Company issued Senior Convertible Debenturesin the aggregate gross amount of $2,355,300 in a privateplacement.  Net of placement agent fees the Company received proceedsof $1,931,345.  The notes bear interest at a rate of 12% per annumand are due one year from date of issue. The notes are convertible into oneshare of common stock with a conversion price of $0.50.  Also, foreach dollar invested, a warrant was issued which entitles the note holder to purchaseone share of common stock for an exercise price of $1.00 pershare.  In connection with the issuance, the Company paid a placementagent $235,530 (10% of the amount of the notes issued) and a non-accountableexpense allowance equal to $70,659 (3% of the amount of the notesissued).  An amount of $282,636 was placed into an escrow account atclosing which represents the 12% interest to be paid on the notes.Additionally, proceeds from this debt issuance were used to repay a $50,000debenture plus accrued interest (see Note 8).

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 13.****                                         ****SUBSEQUENT EVENTS (CONTINUED)**

 

On April 20, 2010, theCompany entered into an agreement with a noteholder to exchange a note payablewith a principal amount of $45,000 plus accrued interest into a 12% SeniorConvertible Debenture with a face value of $48,966.  The Company did not pay any placement agentfees related to the issuance of this Convertible Debenture.  The Company deposited $5,875.92 into escrowrepresenting the 12% interest to be paid on the note per the terms of thedebenture in May 2010.

 

***Exchange of Debt forEquity***

 

On April 15, 2010, theCompany entered into an exchange agreement with a noteholder whereby inexchange for the cancellation of a note payable with a principal balance of$25,000 plus accrued interest the Company agreed to issue 57,849 shares ofcommon stock and a warrant to purchase 57,849 shares of common stock at anexercise price of $1.00 per share.  Thewarrant agreement has a term of three years from date of issue.

 

***Extension of DebtMaturities***

 

On April 1, 2010, theCompany entered into extension agreements with the holders of notes payable inthe amount of $404,000 whereby the due date of the notes payable plus accruedinterest has been extended to July 1, 2010.  There was no additional considerationprovided by the Company in exchange for the agreement to extend the maturitydates.  The Company expects to repaythese notes using proceeds from borrowings or cash from operations.

 

On May 25, 2010, theCompany entered into an extension agreement with a noteholder for two notes inthe aggregate principal amount of $375,000 whereby the due date of the notespayable plus accrued interest has been extended to July 1, 2010.  There was no additional considerationprovided by the Company in exchange for the agreement to extend the maturitydates.  The Company agreed to remitinterest due as of the date of the extension agreement totaling $30,822.  Interest going forward will accrue from thedate of the extension agreement until the date of repayment.  The Company expects to repay these notesusing proceeds from borrowings or cash from operations.

 

***Issuance of Common Stock***

 

In April 2010, theCompany issued 260,317 shares of common stock in connection with debt exchangeagreements entered into dated March 1, 2010 with a value of $0.75 pershare.

 

In April 2010, theCompany issued 100,000 shares of common stock to a consultant as required by anagreement entered into in August 2009 (see Note 9) valued at $1.15 pershare.

 

***Issuance of Warrants***

 

On April 1, 2010, theCompany entered into a consulting agreement for services to be rendered over aone year period.  In exchange forservices to be provided the Company issued a warrant to purchase 500,000 sharesof common stock at an exercise price of $0.50 and contain a provision allowingfor a cashless exercise.  The warrantsexpire on April 1, 2013.  The fairvalue of the warrants issued, amounting to $213,801, was determined using theBlack-Scholes option pricing model at $0.43 per warrant utilizing the followingassumptions:  expected volatility of113.91%, risk free interest rate of 1.63%, expected term of three years and amarket price of $0.60.

 

On April 1, 2010, theCompany entered into a consulting agreement for services to be rendered over aone year period.  In exchange forservices to be provided the Company issued a warrant to purchase 750,000 sharesof common stock at an exercise price of $0.50. The warrants expire on April 1, 2013.  The fair value of the warrants issued,amounting to $320,701, was determined using the Black-Scholes option pricingmodel at $0.43 per warrant utilizing the following assumptions:  expected volatility of 113.91%, risk freeinterest rate of 1.63%, expected term of three years and a market price of$0.60.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 13.****                                         ****SUBSEQUENT EVENTS (continued)**

 

***New Agreements***

 

In May 2010, theCompany entered into a supply agreement with Ascot Environmental, providing aframework for supply of components to Ascot for future waste to energyprojects, including software, services and equipment.  The term of the supply agreement is fifteenyears unless terminated earlier by mutual agreement of both parties.

 

In May 2010,Waste2Energy Group Holdings PLC, Waste2Energy Engineering Limited, Waste2EnergyTechnologies International Limited, each of which are subsidiaries ofWaste2Energy Holdings, Inc., entered into a Manufacturing Agreement withSHBV (Hong Kong) LTD (“SHBV”), dated May 19, 2010 (the “ManufacturingAgreement”).   The term of theManufacturing Agreement is for ten years (from May 19, 2010), unless it isextended by the Company for an additional five years or it is terminated soonerpursuant to its terms.  Pursuant to theManufacturing Agreement the Company agreed that for the term of the Agreementit would grant SHBV an irrevocable and non-transferable license to manufacturecomponents of W2E’s cBOS and sBOS products (the “W2E Products”) exclusively forW2E for use in all countries except Italy, Brazil, Canada and any othermutually agreed to exceptions (the “Territory”).

 

In consideration for theexclusive right to manufacture the Products for use in the Territory SHBVagreed to make the following payments to W2E:

(i)                                    $1,000,000 willbe made by June 17, 2010;

(ii)                                 $1,000,000 willbe made by July 17, 2010;

(iii)                              A furtherpayment in kind of the necessary replacement equipment for the Dargavel EfWfacility to  complete  the waste heat recovery system;

(iv)                             The balance ofup to $5,000,000 from i, ii, iii to be payable within 120 days of May 18,2010 in the event of non conformance to (iii);

(v)                                The balance ofup to $5,000,000 shall be paid in equal installments annually over theremaining term of the agreement within 30 days of May 18th subject to theterms of the agreement.

 

The payment of theabove-referenced payments is based on W2E’s achieving the minimum Quota.  Pursuant to the Manufacturing Agreement, W2Eis to place Cumulative Minimum Annual Orders of at least $60,000,000 in any oneof the ten years of the term of the Manufacturing Agreement and not less than atotal of $600,000,000 for the ten year term of the agreement.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31,2010**

 

**NOTE 14.****                                         ****SUPPLEMENTALDISCLOSURES OF CASH FLOW INFORMATION**

 
| ** **                                                                                                                                          | ** ** | **Twelve Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **March 31, 2010**      | ** ** | **March 31, 2009**      | ** ** |
| Cash  paid for:                                                                                                                                     |       |                              |       |                              |       |
| Interest                                                                                                                                            |       | $                                 | 652,054    |                              | $          | 2,630 |   |
|                                                                                                                                                |       |                              |       |                              |       |
| Acquisition  of Enerwaste Europe, Ltd.:                                                                                                        |       |                              |       |                              |       |
| Current  assets                                                                                                                                     |       | $                                 | —     |                              | $          | 2,148,448 |   |
| Other  liabilities assumed                                                                                                                          |       | —                            |       | (3,947,343                        | )          |
| Building  and equipment                                                                                                                             |       | —                            |       | 208,662                           |       |
| Goodwill                                                                                                                                            |       | —                            |       | 333,500                           |       |
| Technology                                                                                                                                          |       | —                            |       | 7,509,515                         |       |
| Deferred  tax liability                                                                                                                             |       | —                            |       | (2,928,714                        | )          |
| Issuance  of note payable                                                                                                                           |       | —                            |       | (324,068                          | )          |
| Issuance  of common stock                                                                                                                           |       | —                            |       | (3,000,000                        | )          |
| Cash  paid for acquisition                                                                                                                          |       | $                                 | —     |                              | $          | — |   |
|                                                                                                                                                |       |                              |       |                              |       |
| Deferred  tax liability related to acquired intangibles in Investment in Enerwaste  Europe, Ltd.                                                    |       | $                                 | —     |                              | $          | 2,928,715 |   |
|                                                                                                                                                |       |                              |       |                              |       |
| Non-cash  investing and financing activities:                                                                                                       |       |                              |       |                              |       |
| Common  stock issued in connection with notes payable                                                                                               |       | $                                 | 1,413,037  |                              | $          | 62,500 |   |
| Common  stock issued in satisfaction of notes payable                                                                                               |       | —                            |       | 100,000                           |       |
| Common  stock issued in connection with modifications of notes payable                                                                              |       | 641,250                           |       | 78,750                            |       |
| Common  stock issued in connection with private placement                                                                                           |       | —                            |       | 294,409                           |       |
| Common  stock issued for acquisition of Enerwaste Europe, Ltd.                                                                                 |       | —                            |       | 3,000,000                         |       |
| Warrants  issued in connection with notes payable                                                                                                   |       | 2,690,431                         |       | 84,420                            |       |
| Warrants  issued in connection with modifications of notes payable                                                                                  |       | 109,606                           |       | —                            |       |
| Warrants  issued April 2, 2009 and included in accrued expenses payable                                                                        |       | 2,112,870                         |       |                              |       |
| Embedded  derivative created in connection with issuance of notes payable                                                                           |       | 4,080,165                         |       | —                            |       |
| Promissory  note issued for acquisition of Enerwaste Europe, Ltd.                                                                              |       | —                            |       | 324,068                           |       |
| Foregiveness  of promissory note payable, related party                                                                                             |       |                              |       | 642,732                           |       |
| Common  stock outstanding from share exchange transaction                                                                                           |       | 100                               |       | —                            |       |
| Cancellation  and return of common stock                                                                                                            |       | 3,003                             |       | —                            |       |
|                                                                                                                                                |       |                              |       |                              |       |
| Non-cash  operating and financing activities:                                                                                                       |       |                              |       |                              |       |
| Warrants  issued for satisfaction of accrued expenses                                                                                               |       | —                            |       | —                            |       |
| Exchange  of notes payable for common stock and warrants                                                                                            |       | 317,813                           |       |                              |       |
| Issuance  of common stock on settlement of accounts payable                                                                                         |       | 44,520                            |       | —                            |       |
| Additional  consideration from modification of exercise price of warrants resulting from  waivers by lenders                                        |       | 825,311                           |       | —                            |       |
| Additional  consideration from modification of conversion price on 12% Senior Convertible  Debentures resulting from issuance of waivers by lenders |       | 2,207,915                         |       | —                            |       |
| Fair  value of warrants due to placement agent in connection with 12% Senior  Convertible Debentures                                                |       | 1,650,338                         |       | —                            |       |
| Conversion  of accrued expenses to notes payable                                                                                                    |       | 384,384                           |       | —                            |       |

 

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**Item 9.****                                                       ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

None.

 

**Item 9A(T).****                            ****CONTROLS AND PROCEDURES**

 

**(a) DisclosureControls and Procedures**

 

Our principal executive andprincipal financial officers have evaluated the effectiveness of our disclosurecontrols and procedures, as defined in Rules 13a — 15(e) or Rule 15d— 15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of the end of the period covered by this annual report.  They have concluded that, based on suchevaluation, our disclosure controls and procedures were not effective as of March 31,2010.

 

**(b) Management’sAnnual Report on Internal Control Over Financial Reporting**

 

***Overview***

 

Internal control overfinancial reporting as defined in Rules 13a-15(f) or Rule 15d-15(f) refersto the process designed by, or under the supervision of, our principalexecutive officer and principal financial officer, and effected by our board ofdirectors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally acceptedaccounting principles in the United States of America.  Management is responsible for establishingand maintaining adequate internal control over financial reporting forWaste2Energy.

 

Internal control overfinancial reporting cannot provide absolute assurance of achieving financialreporting objectives because of its inherent limitations.  Internal control over financial reporting isa process that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures.  Internal control over financial reportingalso can be circumvented by collusion or improper management override.  Because of such limitations, there is a riskthat material misstatements may not be prevented or detected on a timely basisby internal control over financial reporting. However, these inherent limitations are known features of the financialreporting process.  Therefore, it ispossible to design into the process safeguards to reduce, though not eliminate,this risk.

 

Management has used theframework set forth in the report entitled “Internal Control — IntegratedFramework” published by the Committee of Sponsoring Organizations (“COSO”) ofthe Treadway Commission to evaluate the effectiveness of Waste2Energy’sinternal control over financial reporting. Management has determined that, as of the March 31, 2010measurement date, the Company’s disclosure controls and procedures were noteffective. Furthermore, certain matters involving our internal control overfinancial reporting constitute a material weakness under standards establishedby the Public Company Accounting Oversight Board (“PCAOB”).  The Company’s disclosure controls andprocedures were not effective due to a lack of internal resources to accountfor the completeness of transactions to ensure that information required to bedisclosed by the Company in the reports that the Company files or submits underthe Exchange Act, is recorded, processed, summarized and reported, within thetime periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including the Company’s CEO, as appropriate, to allow timely decisionsregarding required disclosure. The Company is evaluating its structure and processesand procedures so that it can begin to implement corrective action wherenecessary to ensure that the appropriate resources are in place throughout thecompany to ensure the Company’s disclosure controls and procedures areeffective.  Additionally, the Companyhired a Chief Financial Officer in July 2009 and will be evaluating thesystems and required changes needed to strengthen our internal controls.  During the year, the Company consolidateddata collection and retention in the Company’s new Corporate Headquarters inGreenville, SC.  This will help toprovide assurance that key documents and issues resulting in financialstatement disclosure are captured timely and accurately.  Certain enhancements to the control systemincluding the addition of personnel is dependent upon the Company’s ability toobtain new customer orders and increase the Company’s available cash position.

 

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This annual report does notinclude an attestation report of the Company’s independent registered publicaccounting firm regarding internal control over financial reporting. Management’sreport was not subject to attestation by the Company’s independent registeredpublic accounting firm pursuant to temporary rules of the Securities andExchange Commission.

 

**(c) Changesin Internal Control over Financial Reporting**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officerperformed an evaluation as to whether any change in our internal controls overfinancial reporting occurred during the quarter ended March 31, 2010.  Management concluded that, except for thechange discussed above, no significant changes occurred during the quarter.

 

**Item 9B: OTHER INFORMATION**

 

None.

 

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**Part III**

 

**Item 10.****                                                   ****DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

Below are the names andcertain information regarding the Company’s executive officers and directors.Ages shown are as of June 1, 2010.

 
| **Name**                          | ** ** | **Age** | ** ** | **Position**                           |
|-----------------------------------|------------|---------|------------|----------------------------------------|
| Christopher  d’Arnuad-Taylor |       | 64      |       | Chairman of the Board of  Directors    |
| Peter Bohan                       |       | 59      |       | President and Chief  Executive Officer |
| Craig Brown                       |       | 43      |       | Chief Financial Officer                |

 

Directors serve until thenext annual meeting of stockholders or until their successors are elected andqualified.  Officers serve at the discretionof the board of directors.

 

**Christopherd’Arnaud-Taylor, Founder, Chairman**

 

Christopher d’Arnaud-Tayloris the founder of Waste2Energy and been has our Chairman since 2007.  He served as Chief Executive Officer from2007 until September 2009.  Previously,he was the founder, President and CEO of Xethanol Corporation, now known asGlobal Energy Holdings Corp (AMEX:GNH) from its inception in 2000 to July 2006.He continued to serve as a member of its Board of Directors until hisresignation in 2008. Mr. d’Arnaud-Taylor serves as a director ofMetaMorphix, Inc., a private company. Mr. d’Arnaud-Taylor obtainedhis MBA from the London Business School.

 

In October 2006, ashareholder class action complaint was filed in the United States DistrictCourt for the Southern District of New York on behalf of purchasers of Xethanolcommon stock during the period January 31, 2006 through August 8,2006. The complaint alleged, among other things, that Xethanol and some of itsthen current and former officers and directors, including Mr. d’Arnaud-Taylor,engaged in insider trading and made materially false and misleading statementsregarding its operations, management and internal controls in violation of theSecurities Exchange Act of 1934 and Rule 10b-5. Mr. d’Arnaud-Taylor,a former director and the former Chairman of Xethanol was one of the nameddefendants.  The plaintiffs were seeking,among other things, unspecified compensatory damages and reasonable costs andexpenses. Subsequent to that filing, six nearly identical class actioncomplaints (the “Class Action Suits”) were filed in the same court, all ofwhich were consolidated into one action, In re Xethanol CorporationSecurities Litigation, 06 Civ. 10234 (HB) (S.D.N.Y.).  A Stipulation of Settlement, in which all of the defendants expresslydenied all liability, was entered into as of April 30, 2008 which wassubsequently approved by the Court on October 6, 2008.

 

In December 2006, threederivative actions were filed in the United States District Court for the SouthernDistrict of New York, brought on behalf of Xethanol and naming individualdefendants who were some of the former officers and directors of Xethanol,including Mr. d’Arnaud-Taylor (the “Derivative Suits”). The DerivativeSuits alleged that Xethanol was injured by the actions of the individualdefendants based upon the same factual allegations found in the Class ActionSuits described above. The plaintiffs in these suits sought unspecifiedcompensatory damages, injunctive relief and reasonable costs and expenses.These lawsuits were consolidated into one suit entitled In re XethanolCorporation Derivative Litigation, 06 Civ. 15536 (HB) (S.D.N.Y.). Thedefendants filed a motion to dismiss the complaint on April 30, 2007 whichmotion was granted by the Court, with prejudice, on August 20, 2007 andthat case is now closed.  See “RiskFactors.”

 

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**PeterBohan, President and Chief Executive Officer**

 

Peter Bohan has been ourPresident and Chief Executive Officer since September 2009.  Prior to that he served as President andChief Operating Officer since September 2008. Mr. Bohan is a seniorexecutive with international technology and capital equipment expertise. Priorto joining Waste2Energy, from June 2006 to August 2008, Mr. Bohanprovided strategic and business advice to emerging technology and manufacturingcompanies. From June 2006 to August 2008 he was Vice President andGeneral Manager of US Filter Inc.  From1993 to 2005 Mr. Bohan was Vice President and General Manager of BirdMachine Co. During Mr. Bohan’s career, he has gained significantexperience positioning companies supplying capital equipment worldwide, strategicdevelopment of markets and mergers and acquisitions. Mr. Bohan holds adegree in Mechanical Engineering from Heriot-Watt University, Edinburgh and anMBA from Cranfield Institute of Technology. Since 2006 to the present, Mr. Bohan~~ ~~has served as a Board Member ofBisco Environmental Inc., a private company.

 

**CraigBrown, Chief Financial Officer**

 

Craig Brown has been ourChief Financial Officer since July 13, 2009.  Mr. Brown was Vice President Finance ofGlades Pharmaceuticals from 2007 to 2008. From 2000 to 2007, Mr. Brownheld various positions at Millipore Corporation (formerly SerologicalsCorporation), a life sciences company, including Vice President, CorporateController of the Serologicals division (in 2007), Vice President/Controller ofthe Millipore Bioprocess division (in 2006), Vice President/Controller of theCelliance Corporation division (from 2005 — 2006), Director, Finance (from 2003— 2004), and Director, Financial Reporting (from 2000 — 2003). Mr. Brownreceived a BS in Financial Management from Clemson University. Mr. Brownis a Certified Public Accountant.

 

**Section 16(a) BeneficialOwnership Compliance**

 

Section 16(a) ofthe Exchange Act requires our directors and executive officers, and persons whoown more than ten percent of our Common Stock, to file with the Commissioninitial reports of ownership and reports of changes of ownership of our CommonStock. Officers, directors and greater than ten percent stockholders arerequired by SEC regulation to furnish us with copies of all Section 16(a) formsthey file.

 

We do not have affiliatedpersons required to file reports under Section 16(a) of the ExchangeAct.

 

**Code of Ethics**

 

We do not currently have acode of ethics that applies to our Chief Executive Officer, Chief FinancialOfficer, Chief Accounting Officer or Controller, or persons performing similarfunctions.  Because we have only limitedbusiness operations and two (2) officers and one (1) director, we believea code of ethics would have limited utility. We intend to adopt such a code ofethics as our business operations expand and we have more directors, officersand employees.

 

**Audit Committee**

 

We do not currently have aseparately designated standing audit committee established in accordance with Section3(a)(58)(A) of the Exchange Act, or a committee performing similar functions.

 

**Changes in Nominating Process**

 

There are no materialchanges to the procedures by which security holders may recommend nominees toour board of directors.

 

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**Item 11.****                                                   ****EXECUTIVE COMPENSATION**

 

The following table setsforth all compensation paid in respect of our Chief Executive Officer and thoseexecutive officers who received compensation in excess of $100,000 per year forthe period from April 10, 2007 (date of inception) to March 31, 2010.

 

**Summary Compensation Table**

 
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                   | ** ** | **Nonqualified**               | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------------------------|------------|--------------------------------|------------|--------------------|------------|------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Nonequity Incentive** | ** ** | **deferred compensation** | ** ** | **All other** | ** ** | ** ** | ** ** |
| **Name and**                     | ** ** | ** ** | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Awards** | ** ** | **plan compensation**   | ** ** | **earnings**                   | ** ** | **compensation**   | ** ** | **Total**  | ** ** |
| **Principal Position**           | ** ** | **Year**   | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**                      | ** ** | **($)**                        | ** ** | **($)**            | ** ** | **($)**    | ** ** |
|                                  |       |       |       |       |       |       |       |       |       |       |       |                         |       |                           |       |               |       |       |       |
| Christopher d’Arnaud  Taylor (a) |       | 2010       |       | 103,288    |       |       |       |       |       |       |       |                         |       |                           |       | 143,079            | (b)        | 246,367    |       |
| President and CEO                     |       | 2009       |       | 195,000    |       |       |       |       |       |       |       |                         |       |                           |       |               |       | 195,000    |       |
|                                  |       |       |       |       |       |       |       |       |       |       |       |                         |       |                           |       |               |       |       |       |
| Peter Bohan (a)                       |       | 2010       |       | 209,374    |       |       |       |       |       |       |       |                         |       |                           |       | 11,816             | (c)        | 221,190    |       |
| President and CEO                     |       | 2009       |       | 45,833     |       |       |       |       |       |       |       |                         |       |                           |       | 5,173              | (c)        | 51,006     |       |
|                                  |       |       |       |       |       |       |       |       |       |       |       |                         |       |                           |       |               |       |       |       |
| Craig Brown                           |       | 2010       |       | 125,400    |       |       |       |       |       |       |       |                         |       |                           |       | 10,222             | (d)        | 135,622    |       |
| Chief Financial Officer               |       |       |       |       |       |       |       |       |       |       |       |                         |       |                           |       |               |       |       |       |

 

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(a) Pursuant to a transition agreement Mr. Bohan assumed the role of CEO fromMr. Taylor effective September 4, 2009.

(b) Fees earned pursuant to consulting agreement between Mr. Taylor and theCompany commencing September 4, 2009.

(c) Medical premiums paid by Company on behalf of Mr. Bohan.

(d) Medical premiums paid by Company on behalf of Mr. Brown.

 
| **Outstanding Equity Awards at Fiscal Year-End** | ** ** |
|---------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **Option Awards** | ** ** | **Stock Awards** | ** ** |
| **Name**                                                                  | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity Incentive  Plan Awards:  Number of  Securities  Underlying  Unexercised  Unearned Options** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or Units  of Stock that  have not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have not  Vested ($)** | ** ** | **Equity Incentive  Plan Awards:  Number of  Unearned Shares,  Units or Other  Rights that have  not Vested (#)** | ** ** | **Equity Incentive  Plan Awards:  Market or Payout  Value of  Unearned Shares,  Units or Other  Rights that Have  not Vested ($)** | ** ** |
|                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Christopher d’Arnaud  Taylor                                         |       | 2,000,000 |   | — |   | — |   | $ | 0.50 |   | 2/1/13 |   | — |   | — |   | — |   | — |   |
|                                                                      |       | 2,000,000 |   | — |   | — |   | $ | 0.50 |   | 4/2/14 |   | — |   | — |   | — |   | — |   |
|                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Peter Bohan                                                               |       | 1,000,000 |   | — |   | — |   | $ | 0.50 |   | 9/15/13 |   | — |   | — |   | — |   | — |   |
|                                                                      |       | 1,400,000 |   | — |   | — |   | $ | 0.50 |   | 4/2/14 |   | — |   | — |   | — |   | — |   |
|                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Craig Brown                                                               |       | 400,000 |   | — |   | — |   | $ | 0.67 |   | 10/22/14 |   | — |   | — |   | — |   | — |   |

 

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**COMPENSATION OF DIRECTORS**

 

**Director Compensation**

 

No director of the Companyreceived any compensation for services as director for the year ended March 31,2010.

 

**Compensation Committee**

 

The Company has nocompensation committee and does not rely on a compensation consultant indetermining the amount or form of executive and director compensation.

 

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**Item 12.****                                                   ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The following table setsforth the number of shares known to be owned by all persons who own at least 5%of the Company’s outstanding common stock, the Company’s directors, theexecutive officers, and the directors and executive officers as a group as of June 20,2010, unless otherwise noted. Unless otherwise indicated, the stockholderslisted in the table have sole voting and investment power with respect to theshares indicated.

 
| **Directors and Officers:**                        |   |       |   |   |   |
|----------------------------------------------------|--------|------------|--------|--------|--------|
|                                               |   |       |   |   |   |
| Christopher  d’Arnaud Taylor                  |   | 10,000,000 | (3)    | 18.3   | %      |
| Peter  Bohan                                       |   | 3,405,000  | (4)    | 6.4    | %      |
| Craig  Brown                                       |   | 400,000    | (5)    | 0.8    | %      |
| All  officers and directors as a group (3 persons) |   | 13,805,000 | (6)    | 24.0   | %      |
|                                               |   |       |   |   |   |
| **Beneficial owners of more than 5%:**             |   |       |   |   |   |
|                                               |   |       |   |   |   |
| Loch  Carron LLC (7)                               |   | 5,000,000  |   | 9.9    | %      |
| Friofinnur  Einarsson (8)                          |   | 7,500,000  | (8)    | 14.4   | %      |

 

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| (1) | Except as otherwise  indicated, the address of each beneficial owner is 1 Chick Springs Road,  Suite 218, Greenville, SC 29609.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Applicable percentage  ownership is based on 50,702,742 shares of Common Stock outstanding as of  July 1, 2010, together with securities exercisable or convertible into  shares of Common Stock within 60 days of July 1, 2010 for each  stockholder. Beneficial ownership is determined in accordance with the  rules of the SEC and generally includes voting or investment power with  respect to securities. Shares of Common Stock that are currently exercisable  or exercisable within 60 days of July 1, 2010 are deemed to be  beneficially owned by the person holding such securities for the purpose of  computing the percentage of ownership of such person, but are not treated as  outstanding for the purpose of computing the percentage ownership of any  other person. |
| (3) | Includes  (i) 4,000,000 shares issuable upon exercise of presently exercisable  warrants at an exercise price of $.50 per share, (ii) 1,500,000 shares  owned by Mr. d’Arnaud-Taylor’s wife for which he disclaims beneficial  ownership, and (iii) 1,000,000 shares registered in the name of Anglo  Suez LLC, a company owned and controlled by Mr. d’Arnaud-Taylor.                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4) | Includes 2,400,000 shares  issuable upon exercise of presently exercisable warrants at an exercise price  of $.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5) | Includes 400,000 shares  issuable upon exercise of presently exercisable warrants at an exercise price  of $0.67 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (6) | Includes 6,400,000 shares  issuable upon exercise of presently exercisable warrants at an exercise price  of $.50 and 400,000 shares issuable upon exercised warrants at $.67 per  share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (7) | The control person of Loch  Carron is Neil Sharp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (8) | Includes  (i) 6,000,000 shares owned by Mr. Einarsson’s wife for which he  disclaims beneficial ownership and (ii) 500,000 shares issuable upon  exercise of presently exercisable warrants at an exercise price of $.50 per  share and 1,000,000 shares issuable upon exercisable of presently exercisable  warrants at an exercise price of $.75 per share which are owned by FEIN  Environmental Consulting.                                                                                                                                                                                                                                                                                                                                                                             |

 

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**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

The Company has not adoptedany equity compensation plan as of March 31, 2010.

 

**Item 13.****                                                   ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

Related parties can includeany of our directors or executive officers, certain of our stockholders andtheir immediate family members. A conflict of interest occurs when anindividual’s private interest interferes, or appears to interfere, in any waywith the interests of the company as a whole. Except for the ownership of oursecurities, none of the directors, executive officers, holders of more thanfive percent of the Company’s outstanding common stock, or any member of theimmediate family of any such person have, to our knowledge, had a material interest,direct or indirect, in any transaction or proposed transaction, during thefiscal year ended March 31, 2010, in which the Company was or is to be aparticipant and the amount involved exceeds $120,000.

 

**Procedures for Approval ofRelated Party Transactions**

 

Our Board is charged withreviewing and approving all potential related party transactions.  All such related party transactions must thenbe reported under applicable SEC rules. We have not adopted other procedures forreview, or standards for approval, of such transactions, but instead reviewthem on a case-by-case basis.

 

None

 

**DirectorIndependence**

 

Our sole director is notindependent as that term is defined under the Nasdaq Marketplace Rules.

 

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**Item 14.****                                                   ****PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

Thefollowing table shows the aggregate fees that we incurred for audit,audit-related, tax and other services rendered by Marcum LLP (formerly Marcum &Kliegman LLP) for the years ended March 31, 2010 and 2009:

 
| ** **          | ** ** | **Year ended**          | ** ** | **Year ended**          | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **          | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
| ** **          | ** ** | ** **              | ** ** | ** **              | ** ** |
| Audit  Fees         |       | $                       | 190,643    |                    | $          | 240,000 |   |
|                |       |                    |       |                    |       |
| Audit-Related  Fees |       | $                       | —     |                    | $          | 123,888 |   |
|                |       |                    |       |                    |       |
| Tax  Fees           |       | $                       | —     |                    | $          | — |   |
|                |       |                    |       |                    |       |
| All  Other Fees     |       | $                       | —     |                    | $          | — |   |

 

*AuditFees.*  This category includes the feesfor professional services performed by Marcum LLP for the audit of our annualconsolidated financial statements, review of consolidated financial statementsincluded in our Quarterly Reports on Form 10Q or services that arenormally provided by Marcum in connection with statutory and regulatory filingsor engagements.

 

*Audit-relatedfees*.  This category consists ofassurance and related services provided by Marcum that are reasonably relatedto the performance of an audit or review of our financial statements and arenot reported above under “Audit Fees”.  The fees in this category were principally related to work associatedwith the reverse merger which occurred in 2009.

 

*Tax fees*.  Marcum performed no tax related services forthe Company for 2010 or 2009.

 

*All OtherFees*.  This category consists of anyother products or services provided by Marcum not described above.  There were no products or services providedunder this category for either 2010 or 2009.

 

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**Part IV**

 

**Item 15.****                                                   ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 

(a) *Consolidated Financial Statements of Waste2EnergyHoldings, Inc.:*

 

Included in Part II ofthis Report:

 

ConsolidatedStatement of Operations and Comprehensive Loss for the years endedMarch 31, 2010 and 2009

ConsolidatedBalance Sheets as of March 31, 2010 and 2009

ConsolidatedStatements of Cash Flows for the years ended March 31, 2010 and 2009

ConsolidatedStatements of Stockholder’s Equity for the years ended March 31, 2010 and2009

Notesto Consolidated Financial Statements, for the years ended March 31, 2010and 2009

Reportof Marcum LLP,  Independent RegisteredPublic Accounting Firm, on the consolidated financial statements ofWaste2Energy Holdings, Inc. for the years ended March 31, 2010 and2009

 

(b) *Pro Forma Financial Information- N/A*

 

(c) *Shell Company Transactions. See (a) and (b) of this Item9.01.-N/A*

 

(d) *Exhibits:*

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                    |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1.1               |       | Articles of Incorporation  (10)                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                               |
| 3.1.2               |       | Certificate of Ownership  and Merger, filed with the Delaware Secretary of State on July 17, 2009  (3)                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                               |
| 3.1.3               |       | Certificate of Amendment,  filed with the Delaware Secretary of State on January 21, 2010 (7)                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                               |
| 3.2                 |       | Bylaws (10)                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                               |
| 4.1                 |       | Form of Promissory  Note (3)                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                               |
| 4.2                 |       | Form of Debenture (4)                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                               |
| 4.3                 |       | Form of Debenture (6)                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                               |
| 4.4                 |       | Form of Warrant (6)                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                               |
| 4.5                 |       | Form of Debenture (8)                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                               |
| 4.6                 |       | Form of Warrant (8)                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                               |
| 10.1                |       | Agreement and Plan of  Merger, dated May 6, 2009, among the Company, Waste2Energy, Inc.,  and Waste2Energy Acquisition Co. (filed as an exhibit to the Company’s 8-K  filed May 11, 2009 and incorporated herein by reference) |
|                |       |                                                                                                                                                                                                                                               |
| 10.2                |       | Amendment No. 1 to  Agreement and Plan of Merger (1)                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                               |
| 10.3                |       | Separation Agreement,  dated May 28, 2009, between Maven Media Holdings, Inc.,                                                                                                                                                           |

 

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|   |   | Waste2Energy, Inc.  and Adrienne Humphreys (1)                                                                                                                                                                                                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.4   |   | Form of Subscription  Agreement (1)                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Form of Warrant (1)                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | Employment Agreement,  dated September 15, 2008, between Waste2Energy, Inc. and Peter  Bohan (1)                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Employment Agreement,  dated April 1, 2008, between Waste2Energy, Inc. and Christopher  d’Arnaud-Taylor (1)                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | Transition Agreement by  and between Maven Media Holdings, Inc., Waste2Energy, Inc.,  Waste2Energy Group Holdings, PLC Christopher d’Arnaud-Taylor and Peter Bohan,  dated May28, 2009 (1)                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.9   |   | Consulting Agreement  between Christopher d’Arnaud-Taylor, Waste2Energy Group Holdings, PLC, Maven  Media Holdings, Inc. and Waste2Energy, Inc., dated May 28,  2009 (1)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | Amended and Restate  Employment Agreement, by and between Maven Media Holdings, Inc.,  Waste2Energy, Inc., and Craig Brown (2)                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Amendment No. 1 to  Transition Agreement, by and between Waste2Energy Holdings, Inc.,  Waste2Energy, Inc., Waste2Energy Group Holdings PLC, Christopher  d’Arnaud-Taylor, and Peter Bohan (5)                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Amendment No. 1 to  Consulting Agreement, by and between Waste2Energy Holdings, Inc.,  Waste2Energy, Inc., Waste2Energy Group Holdings PLC, and Christopher  d’Arnaud-Taylor (5)                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Master Supply Agreement,  dated April 21, 2010, by and between affiliates of Waste2Energy  Holdings, Inc., Waste2Energy Engineering Limited, Waste2Energy Group  Holdings PLC, and Waste2Energy Technologies International Limited and Ascot  Environmental Limited and UK Capital Ventures Holdings Limited (9) |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | Manufacturing Agreement by  and Between SHBV (Hong Kong) LTD, Waste2Energy Group Holdings PLC,  Waste2Energy Engineering Limited, and Waste2Energy Technologies International  Limited (11)                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Section 302  Certification of Principal Executive Officer                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 31.2   |   | Section 302  Certification of Principal Financial Officer                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 32.1   |   | Section 906  Certification of Principal Executive Officer                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                       |
| 32.2   |   | Section 906  Certification of Principal Financial Officer                                                                                                                                                                                                                                                             |

 

----

(1)  Incorporated byreference to the Form 8-K, filed with the Securities and ExchangeCommission on June 3, 2009;

(2)   Incorporated by reference to the Form 8-K,filed with the Securities and Exchange Commission on July 17, 2009;

 

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(3)   Incorporated byreference to the Form 8-K, filed with the Securities and ExchangeCommission on July 23, 2009;

(4)   Incorporated by reference to the Form 8-K,filed with the Securities and Exchange Commission on August 10, 2009;

(5)   Incorporated by reference to the Form 8-K,filed with the Securities and Exchange Commission on September 15, 2009;

(6)   Incorporated by reference to the Form 8-K,filed with the Securities and Exchange Commission on October 7, 2009;

(7)   Incorporated by reference to the Form 8-K,filed with the Securities and Exchange Commission on January 27, 2010;

(8)   Incorporated by reference to the Form 8-K,filed with the Securities and Exchange Commission on March 9, 2010;

(9)   Incorporated by reference to the Form 8-K,filed with the Securities and Exchange Commission on May 11, 2010;

(10) Incorporated byreference to the Form S-1, filed with the Securities and ExchangeCommission on May 22, 2008.

(11) Incorporated byreference to the Form 8-K filed with the Securities and ExchangeCommission on June 3, 2010

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities and Exchange Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 

**WASTE2ENERGYHOLDINGS, INC.**

 
|                            |   |                                                               |
|---------------------------------|--------|--------------------------------------------------------------------|
| Dated:  July 12, 2010 | By:    | /s/ Peter Bohan                                                    |
|                            |   | Name  Peter Bohan                                             |
|                            |   | Title  Chief Executive Officer  (Principal Executive Officer) |

 

In accordance with theExchange Act, this report has been signed below by the following persons on July 12,2010, on behalf of the registrant and in the capacities indicated.

 

 
| /s/ Peter Bohan                       |   |
|---------------------------------------|--------|
| Peter Bohan                           |   |
| Chief Executive Officer               |   |
| (principal executive  officer)        |   |
|                                  |   |
| /s/ Craig L. Brown                    |   |
| Craig L. Brown                        |   |
| Chief Financial Officer               |   |
| (principal financial  officer)        |   |
|                                  |   |
| /s/ Christopher d’Arnaud  Taylor |   |
| Christopher  d’Arnaud-Taylor     |   |
| Director                              |   |

 

104

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