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, 2011





o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission File Number: 000-254888





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(formerly RG Global Lifestyles, Inc.)


(Exact name of registrant as specified in its charter)





California
33-0230641(State or other jurisdiction ofincorporation or organization)
(I.R.S. Employer Identification No.)




2377 W Foothill, Suite 18, Upland, CA
91786(Address of principal executive offices)
(Zip Code)





Registrant’s telephone number:(801) 810-9888





Securities registered under Section 12(b) of the Act:  None





Securities registered under Section 12(g) of the Act:





Common Stock $.001 par value


(Title of Class)





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





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





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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K. o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.





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





Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x





The aggregate market value of the voting and non-voting common stock held by non-affiliates as of June 29, 2011 was approximately $13,730,000.





The number of shares outstanding of the issuer’s Common Stock as of June 29, 2011was 219,739,436.





DOCUMENTS INCORPORATED BY REFERENCE





None.











TABLE OF CONTENTS





PageCautionary Statement Regarding Forward-Looking Information
1PART IITEM 1. BUSINESS
2ITEM 2. PROPERTIES
6ITEM 3. LEGAL PROCEEDINGS
6ITEM 4. [Removed and Reserved]
6PART IIITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
6ITEM 6. SELECTED FINANCIAL DATA
8ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
8ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
12ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
12ITEM 9A. CONTROLS AND PROCEDURES.
12ITEM 9B. OTHER INFORMATION
13PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
14ITEM 11. EXECUTIVE COMPENSATION
17ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
19ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
20ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
22ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
22











CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION





All statements contained in this Annual Report on Form 10-K, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words "believe", "anticipate", "expect" and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties that may cause actual results to differ materially. Consequently, all of the forward-looking statements made in this Annual Report on Form 10-K are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.





The safe harbors of forward-looking statements provided by Section 21E of the Securities Exchange Act of 1934 are unavailable to issuers of penny stock. Our shares may be considered penny stock and such safe harbors set forth under the Private Securities Litigation Reform Act of 1995 may not be available to us.





As used in this Annual Report on Form 10-K, unless the context requires otherwise, "we", "us" or the "Company" or SET Corp. means Sustainable Environmental Technologies Corporation and its divisions and subsidiaries.





1





PART I





ITEM 1.  BUSINESS





Company History





SET Corp.





Sustainable Environmental Technologies Corporation (the “Company” or “SET Corp”), formerly known as RG Global Lifestyles, Inc., is a company dedicated to responsible resource utilization through the strategic balance of Environmental, Societal and Economic growth. Headquartered in Southern California, SET Corp is setting the standard for responsible principles of Sustainable Development.  These steadfast values are evident through patented technologies and strategic acquisitions, which solve environmental issues with an economic advantage. SET Corp limits their customer’s environmental impact while conserving valuable and diminishing resources that are essential to future generations.




Current and future services include, and are expected to include innovative echo-technologies that provide patented treatment, recovery, reclamation and re-injection services for produced water (associated with the oil and gas industry) and complete sustainable energy solutions that that bridge the gap between existing energy inefficient buildings and the sustainable development and design needs of tomorrow.




In addition to these areas of expertise SET Corp provides customized services that include design, construction management, operation and maintenance services, and equipment manufacturing for industrial and municipal sectors.  With strategic partnerships, through prominent global manufacturers and distributors, SET Corp has access to a worldwide sales and distribution network.





On July 7, 2010, SET Corp entered into an agreement (the "Agreement") to acquire Pro Water, LLC (“Pro Water”), a Utah limited liability company, with its sole equity member Metropolitan Real Estate LLC (the “Member), a New York limited liability company. Pro Water owns and operates an injection well disposal refinery (“DIW”) in Duchesne, Utah; the operations were assumed by the Member on October 1, 2009. Under the terms of the Agreement, the Company acquired 100% of the equity of Pro Water from its sole member, and Pro Water became a wholly-owned subsidiary of SET Corp. in exchange for the payment of 20,000,000 shares of SET Corp.’s restricted common stock, a secured convertible promissory note (the "Note") payable quarterly over the period of one year from the closing date in the amount of $2.0 million, with an interest rate of 5%, and a conversion feature at the option of the holder to convert the Note into shares of restricted common stock at a price of $0.10 per share, and the assumption of Pro Water debts.  The Note is secured by all the assets of Pro Water and the wastewater treatment facility owned by SET CORP. Metropolitan Real Estate LLC is an entity controlled by Horst Franz Geicke, a significant shareholder of the Company.





On July 12, 2010, the terms of the Agreement were amended whereby the number of shares of common stock paid for were increased to 33,333,333 (from 20,000,000), and the conversion rate of the $2,000,000 related Note, which previously all converted at $0.10 at the option of the holder, such amended to so that $1,600,000 of the note may be converted at $0.20 per share and $400,000 may be converted at $0.025 per share.  The Note is due based on the following: $100,000 paid on or before September 30, 2010, $200,000 paid on or before December 31, 2010, $200,000 paid on or before March 31, 2011 and the remaining amount of $1,500,000 with unpaid interest on or before June 30, 2011. The $100,000 payment due in September 2010, was paid in October 2010.





On January 14, 2011, the terms of the Note were amended for a second time. As of the date of the amendment, the unpaid principal amount was $1,880,000. Under the terms of the second amendment, the term of the Note was extended for five years and all accrued interest has been forgiven. The Company is to make 60 monthly payments of $35,478 commencing January of 2011 and concluding December of 2015. All other terms, including conversion and interest rates have remained the same. The Company accounted for the change in terms of the debt as an extinguishment of the debt due to the significant change in the repayment period. See Note 8 for additional information regarding the Note.





In the third quarter of 2010, SET Corp, through World Environmental Solutions Pty Ltd, launched MultiGen in Australasia the preliminary response has exceeded expectations and the first unit will be shipped to Australia in July 2011.  This model represents the first in a line of units that is able to produce water from the air, while overcoming the excessive energy demands of previous models of this type of equipment.




MultiGen provides numerous eco-tech solutions that bridge the gap between existing energy inefficient buildings and the sustainable development and design needs of tomorrow.  By providing a complete sustainable solution, each MultiGen is able to provide 65kWh of electricity, up to 2,000 liters of water per day and provide supplemental air conditioning and heating.  MultiGen is able to produce energy at half the price of the grid, while saving up to 400 tons of carbon each year.  With an average ROI of 20 years for solar, MultiGen has an ROI of 5 years and is 78% more efficient than a comparable solar panel installation.




2




The acquisition of Pro Water was accounted for as a reverse acquisition in accordance with Accounting Standards Codification (“ASC”) 805 Business Combinations. The Company determined for accounting and reporting purposes that Pro Water was the acquirer because of the significant holdings and influence of the control group of Pro Water before and after the acquisition. As a result of the transaction the Pro Water control group owns in excess of 44% of issued and outstanding common stock of SET Corp on a diluted basis.  In addition, in connection with the acquisition certain members of management were required to sign voting agreements.  As of January 2011, these voting agreements expired. The Control Group of Pro Water could elect or appoint or to remove a majority of the members of the governing body of the Company due to the significant holdings of the Company’s common stock. The Control Group of Pro Water could have influence on the organization as they have provided funding for operations of SET Corp, prior to the acquisition, in an attempt to settle debts prior to the reverse acquisition. In addition, the Pro Water Control Group initially had a $2.0 million note payable, currently balance of approximately $1.8 million at March 31, 2011, in which additional influence can be subjected.  In addition, Pro Water is significantly larger than SET Corp in terms of assets and operations. Additionally, the future operations of Pro Water will be the Company intended primary operations and more indicative of the operations of the consolidated entity on a go forward basis.





Principal Products and Services





SET Corp.





SET Corp is a company dedicated to responsible resource utilization through the strategic balance of Environmental, Societal and Economic growth. Headquartered in Southern California, SET Corp is setting the standard for responsible principles of Sustainable Development.  These steadfast values are evident through patented technologies and strategic acquisitions, which solve environmental issues with an economic advantage. SET Corp limits their customer’s environmental impact while conserving valuable and diminishing resources that are essential to future generations.




Current and future services include, and are expected to include innovative echo-technologies that provide patented treatment, recovery, reclamation and re-injection services for produced water (associated with the oil and gas industry) and complete sustainable energy solutions that that bridge the gap between existing energy inefficient buildings and the sustainable development and design needs of tomorrow.




In addition to these areas, SET Corp provides customized services that include design, construction management, operation and maintenance services, and equipment manufacturing for industrial and municipal sectors.  With strategic partnerships, through prominent global manufacturers and distributors, SET Corp has access to a worldwide sales and distribution network.





Pro Water Injection Well





On July 7, 2010, the Company acquired Pro Water LLC and its Blue Bench Deep Injection Well (“DIW”). In addition, Pro Water owns and operates an injection well disposal refinery in Duchesne, Utah.  The Company acquired Pro Water to expand its water processing services. Through Pro Water’s DIW, it has established a customer base that is currently generating positive monthly cash flows.  Furthermore since January of this year, business at the DIW has steadily increased as local governments increase regulations and restrictions for disposing produced water. The DIW’s will remain one of the few, if not the only, available methods for disposing produced water in the near future.





The DIW resides on two five-acre parcels. With the exception of a few outlying buildings, the DIW has been completely redesigned to increase the capacity for production and allow the DIW to operate during the winter months. With the completion of the upgrades and automation, the redesigned DIW is capable of handling over 7,000 barrels per day of produced water.  Efficiency and automation designs allow the DIW to operate with minimal labor while achieving maximum production results. The DIW serves as a show piece, as it is the most modern and innovative injection well in the state of Utah.  Plans are being prepared for a research and development laboratory.  Pro Water will utilize this laboratory to efficiently test, develop and implement its technologies.  This steady stream of produced water, from various customers allows the development and testing of technologies without the disadvantages of relying on single third party producers, which negatively affected the operations of the Wyoming plant.





While there are several key factors to obtaining new business, the ratio of available business per customer is based solely on the number of wells the customer has within the serviceable radius of the injection well.  As new gas wells are developed within the serviceable radius of the well, the ratio of customers to percentage of business will decrease.





DynIXTM Technology





SET Corp also manufactures plants that utilize its proprietary (DynIXTM) wastewater treatment technology, based on an ion-exchange process for the treatment and reclamation of produced water, from the oil and gas industry. The DynIXTM Technology can be used as a pretreatment that allows systems such as RO filtration to work more efficiency or as a standalone system that removes sodium and other pollutants from produced water allowing it to be returned to the environment within local, state and federal environmental compliance regulations. The successful removal of the treated produced water in turn allows energy companies to harvest and sell methane, gas and oil associated with such fields. The Company receives a royalty from the customer for every barrel of water treated and purified.





3




In April of 2008, we constructed and successfully tested our first plant in Wyoming in connection with an agreement with Yates Petroleum, Inc. This agreement was structured on a “build, own and operate” economic model whereby we provided a “turnkey” plant to Yates Petroleum and charges a royalty per barrel of cleaned wastewater. The Company received a fixed royalty for every barrel of waste water treated and purified and maintained ownership of the equipment under a five year contract.  After unsuccessfully attempting to negotiate a higher royalty rate, the Company decided to shut the plant down until a buyer could be found.  Subsequent to this, Yates Petroleum, Inc. cancelled its agreement with the Company and the plant was ultimately assigned to Yates Petroleum, Inc.





Recently, the Company has changed its strategy from solely a build to sell manufacturing environment to include a royalty based model whereby the Company would license its DynIXTM Technology to achieve royalty income.  SET Corp has signed licensing agreements for Australia and Asia with World Environmental Solutions Pty Ltd (“WES”).  WES has proposals in various stages; however, currently there are no definitive agreements.





MultiGen Technology





On August 27, 2010, the Company entered into a Technology Purchase Agreement with WES, an Australian company, for a 12% investment in WES, the purchase of certain technologies, including all intellectual property rights and pending patents #2008 8237617 and 12/261585, related to water extraction and electricity generation referred to as MultiGen. The Company expects to deliver its first MultiGen unit to Australasia in July 2011.





MultiGen combines a number of highly efficient, reliable, low emission and commercially proven propriety technologies with its own patent-pending water making technology. This unique integrated solution includes an air to water maker, air-cooled absorption chiller(s), natural gas turbine, and heat exchanger, together with a gas compressor, pump, exhaust ducting and controls.  There is also an option to add an automatic power controller that supplies the right amount of voltage and current to the loads to function optimally.





Onsite generation of water and electrical power provide supplementary essential resource supplies that can reduce reliance on water authorities and power utilities resulting in much greater efficiencies with respect to water and energy usage, security of supply, and lowering of GHG emissions all at less cost. An onsite MultiGen system can also act to reduce the financial impact of ever increasing utility charges and maintenance associated with existing infrastructure such as an evaporative cooling tower. In some cases revenue can also be derived, in off peak use periods, by selling power back to the grid or providing a secure and reliable source of power as an additional service to a facility’s tenants in the event of public utility failure.





Combined cooling, heating and power (“CCHP”) techniques such as tri-generation, used by MultiGen, are employed to generate a number of useful energy products using a single fuel source enabling many functions to operate simultaneously. This includes pure water making, clean electricity generation, hot and chilled water, hot and cooled air for heating and cooling. The efficiencies and financial savings when compared to using grid supplied power for the same functions are significant.





System components can be easily configured and scaled to meet a specific set of requirements. Some of these may include capturing evaporating air from a cooling tower and reusing the water or disposing of an existing gas boiler and replacing it by using MultiGen’s waste exhaust to heat the water. Produced cool air can also be used to support existing air conditioning systems or air condition areas such as machinery rooms or lift wells. Excess water generated and not used could be stored for later use while generated electricity can reduce the amount of grid electricity required, or excess amounts can be fed back to the grid if available and permitted by the local energy retailer.





MultiGen provides numerous eco-tech solutions that bridge the gap between existing energy inefficient buildings and the sustainable development and design needs of tomorrow.  By providing a complete sustainable solution, each MultiGen is able to provide 65kWh of electricity, up to 2,000 liters of water per day and provide supplemental air conditioning and heating.  MultiGen is able to produce energy at half the price of the grid, while saving up to 400 tons of carbon each year.  With an average ROI of 20 years for solar, MultiGen has an ROI of 5 years and is 78% more efficient than a comparable solar panel installation.




World Environmental Solutions Pty Ltd (“WES”)





WES was established in 2004 with the main goal of developing, commercializing and introducing technologies that are innovative, energy efficient and in many aspects unique. To date the resulting products have significant applications and implications across many industries such as residential and commercial construction, mining, air conditioning and importantly the water industry.  Together with its strategic business partners they have introduced a series of superior systems and products into the Australasian market.  These proprietary systems provide businesses with the capacity to protect future water supplies as well as cutting edge materials that enable energy efficient buildings that can survive many natural disasters. Efficiency gains related to the cost of heating and cooling buildings can be as much as 50%. The resulting services allow companies and individuals to reduce their carbon footprint without drastically changing their daily lives.





Prior Company Businesses





Prior to its current business in water treatment in the energy arena, and since its inception, the Company, under prior management teams, was involved in several businesses and engaged in various air to water, energy drink, nutraceutical, and other consumer, retail and commercial ventures, all of which have been abandoned to more fully focus on the development of environmental technologies, as referenced above.




4




In particular, in late 2006, the Company commenced operations in the bottled energy drink and oxygenated water industry as OC Energy Drink.  The Company has discontinued investing in its energy drink line in order to focus its resources on the development of its sustainable environmental technologies and licensing its various technologies. Thus, the OC Energy Drink operations are reflected as discontinued operations since the fourth quarter of 2009.





Status of Publicly Announced New Products and Services





See above for discussion of acquisition of Pro Water and MultiGen Technology.





Competition





Pro Water has three competitors in Utah. Water Disposal Inc. (“WDI”) has two injection wells that are located in Roosevelt and are approximately 24 miles further away from the primary oil producers in the vicinity than our well. This is important as the trucking costs are greater than the disposal costs for injecting the water. The closer you are the lower the overall disposal coast will be. The third disposal site is an evaporation pit one mile further than our facility.





DynIXTM currently has direct competition from Ionics, GE Water, and EMIT Water Discharge Technology.  Many of these competitors have established histories of operation and greater financial resources than the Company, enabling them to finance acquisitions and development opportunities, to pay higher prices for the same opportunities, and to develop and support their own operations. In addition, these companies have greater name recognition.





MultiGen Technology is the first of its kind and does not currently have any competition. As far as similar types of green technology that would be similar would be solar panels or windmills. Although both of these systems produce electrical power they do not provide the additional benefits of producing free heating or air conditioning nor do they produce free water as an additional byproduct. MultiGen provides numerous eco-tech solutions that bridge the gap between existing energy inefficient buildings and the sustainable development and design needs of tomorrow.  By providing a complete sustainable solution, each MultiGen is able to provide 65kWh of electricity, up to 2,000 liters of water per day and provide supplemental air conditioning and heating.  MultiGen is able to produce energy at half the price of the grid, while saving up to 400 tons of carbon each year.  With an average ROI of 20 years for solar, MultiGen has an ROI of 5 years and is 78% more efficient than a comparable solar panel installation.





World Environmental Solutions Pty Ltd represents two product lines of the Company. The first is the DynIX system for cleaning Produced Water from Coal Bed Methane CBM or Coal Seam Gas CSG wells as they call them in Australia.   Ionics, GE Water, and EMIT Water Discharge Technology would be the same competitors in Au as we sell against here in the US. Many of these competitors have established histories of operation and greater financial resources than the Company, enabling them to finance acquisitions and development opportunities, to pay higher prices for the same opportunities, and to develop and support their own operations. In addition, many of these companies have greater name recognition. As far as the Multigen technology goes it is so new that there are no direct competitors yet as the product is just being released. . As far as similar types of green technology that would be similar would be solar panels or windmills. Although both of these systems produce electrical power they do not provide the additional benefits of producing free heating or air conditioning nor do they produce free water as an additional byproduct.





Intellectual Property





The Company owns the DynIXTM wastewater technology protected by US patent 6776913 and proprietary know how which is expected to form the basis for further patents filings based on the fundamentals in the issued patent.





The Company has two other pending patents for the Multigen Technology in Australia and the United States, #2008 8237617 and 12/261585





Government Approval





Pro Water LLC received a permit for passing a Mechanical Integrity Test (“MIT”) test, done by the state of Utah. This permit is valid for five years. In addition to the MIT, we do monthly reporting of all injection numbers to the Utah Department of Oil, Gas, and Mining (“UDOGM”).





MultiGen Technology has no government permits required other than standard building and electrical permits that would be required for industrial electric and air conditioning installations.





Employees





As of March 31, 2011, the Company has seven full time and no part time employees. The Company has two part time consultants that assist with billing and accounting.





5





ITEM 2.  PROPERTIES





The Company rents office space of approximately 1,850 square feet of office space in Upland, California of approximately $2,500 per month in which houses its corporate operations.





The Company operates the DIW on approximately 10 acres in Duchesne, Utah, which is owned by the Company.





ITEM 3.  LEGAL PROCEEDINGS











ITEM 4.  [Removed and Reserved]





PART II





ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Market Information





The Company's Common Stock currently is quoted on the OTCQB under the symbol “SETS”. The following tables set forth the high and low bid information for the Common Stock for each quarter within the last two fiscal years:





QUARTERLY COMMON STOCK PRICE RANGES





Quarter Ended

High


LowJune 30, 2009

$
0.10


$
0.05September 30, 2009

$
0.19


$
0.05December 31, 2009

$
0.06


$
0.01March 31, 2010

$
0.07


$
0.02June 30, 2010

$
0.12


$
0.03September 30, 2010

$
0.09


$
0.03December 31, 2010

$
0.06


$
0.03March 31, 2011

$
0.05


$
0.04





These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.





6





Holders





There were approximately 227 holders of record of the Company’s Common Stock as of June 29, 2011.





Dividends





The Company does not anticipate paying dividends in the foreseeable future.  There are no restrictions on the Company’s present ability to pay dividends to shareholders of its Common Stock, other than those prescribed by California law.





Securities authorized for issuance under equity compensation plans





In order to compensate our officers, directors, employees and/or consultants, our Board and stockholders adopted the 2006 Incentive and Non-Statutory Stock Option Plan (the “2006 Plan”), the 2007 Incentive and Non-Statutory Stock Option Plan (“2007 Plan”), and the 2010 Incentive and Non-Statutory Stock Option Plan (“2010 Plan”).





The 2006 Plan has a total of 10,000,000 shares reserved for issuance, the 2007 Plan has a total of 6,000,000 shares reserved for issuance, and the 2010 Plan has a total of 20,000,000 shares reserved for issuance.





As of the end of the fiscal year ended March 31, 2011, we have issued the following stock options and shares under the Plans:





Equity Compensation Plan Information





Plan category

Number of securitiesremaining to be issuedupon exercise ofoutstanding options,warrants and rights

(a)


Weighted average

exercise price of

outstanding options,

warrants and rights

(b)


Number of securities

remaining available forfuture issuance

(c)Equity compensation plans approved by security holders: 2006 Plan


2,033,455


$
0.25



-Equity compensation plans approved by security holders: 2007 Plan


870,500


$
0.24



-Equity compensation plans approved by security holders: 2010 Plan


6,025,000


$
0.03



12,970,673Equity compensation not pursuant to a plan


100,000


$
0.20



-Total


9,028,955


$
0.10



12,970,673





Recent Sales of Unregistered Securities





None





7





ITEM 6.  SELECTED FINANCIAL DATA





Not applicable.





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





See Item 1 for discussion regarding our Business.





In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Annual Report.




For a full discussion of our business please see Item 1 which begins on Pg. 2 of this Report





Results of Operations for the Fiscal Year Ended March 31, 2011 and for the Period from October 1, 2009 (Inception) to March 31, 2010.





The following table summarizes the results of continuing operations amounts of the Company for the periods and dates shown:




For the Year Ended

March 31, 2011


October 1, 2009 (Inception) to

March 31, 2010Combined Statement of Operations Data:Revenue

$
2,617,400


$
507,313Cost of revenue


1,020,205



337,973Operating expenses


1,351,897



197,549Operating income (loss)


245,298



(28,209
)Other expense


(674,638
)


(274
)Loss from continuing operations


(429,340
)


(28,483
)Net loss

$
(355,439
)

$
(28,483
)


Revenues increased $2,110,087 or 416%, for the year ended March 31, 2011 compared to the period of the prior year presented. This increase resulted from a 21% increase in revenue from its major customer that accounted for 86% of revenue compared to 65% for the prior period presented. The increase in revenue is due to the complete redesign and upgrade of the DIW and management’s decision to implement temporary receiving facilities during the redesign process.  By guaranteeing customers that they would receive uninterrupted service, the temporary receiving facilities allowed management to secure customers several months in advance of the upgrade completions.  Furthermore by providing customers with exceptional customer service and competitive pricing that does not fluctuate significantly, management has created a marketing edge that separates the DIW from that of local competition.  Due to improvements made subsequent to the prior period presented, the injection well is automated and fully winterized.  The injection well not only has additional capacity but its increased efficiency for processing produced water, allows four trucks to simultaneously unload.  This greatly reduces wait times and ultimately results in the Company and our customers saving both time and money.





Cost of revenue increased $682,232 or 202%, for the year ended March 31, 2011 compared to the prior period presented. As a percentage of revenues, cost of revenue was 39% compared to 67% in the prior period presented. Items included within cost of revenues represent labor, depreciation and amortization, equipment rental, supplies, utilities, repair and maintenance. Principal factors contributing to the increase in cost of revenue included additional depreciation due to improvements made to the injection well subsequent to the prior comparable period and an increase in variable expenditures such as utilities due to the increased barrels produced. Payroll related costs are primarily fixed due to the minimal staffing required to monitor the facility and thus do not fluctuate significantly from period to period.





Total operating expenses increased $1,154,348 or 584% for the year ended March 31, 2011 compared to the prior period presented due to the increased operations and the addition of SET Corp since the acquisition. Operating expenses include management and administrative personnel costs (including non-cash stock-based compensation), corporate office costs, accounting fees, depreciation and amortization, legal expense, information systems expense, product marketing, sales expense and research and development expenses.  Increases expenditures included approximately $115,000 for stock based compensation, $204,000 in professional fees, $205,000 in salaries and wages, $379,359 in consulting agreements, and general corporate expenditures for SET Corp for rent, utilities, etc in which were not present in the previous comparable period. In addition, research and development expenses of approximately $54,000 in 2011 represented costs incurred in our development of our initial MultiGen system.





Total other expense increased $674,364 or 246,118% for the year ended March 31, 2011 compared to the prior period presented due to an increase in financing activities and debt settlement negotiations. Other income (expense) includes interest income, interest expense, change in fair value of derivative liability, and gain on settlement of payables and accrued liabilities. The increase during the current period was related to approximately $234,210 of amortization expense related to the beneficial conversion feature recorded in connection with the $2.0 million note payable to the former shareholder of Pro Water and $381,459 in amortization related to the $775,000 convertible note due previously to Horst Beicke and related entities.




8




Segment Results for the Fiscal Year Ended March 31, 2011 and for the Period from October 1, 2009 (Inception) to March 31, 2010





The following should be read in conjunction with the annual financial results of fiscal 2011 for each reporting segment. See “Notes to Consolidated Financial Statements, Note 12 — Segment Information.” The Company evaluates the performance of its segments based on net income (loss) from continuing operations. Certain income and charges are not allocated to segments in the Company’s management reports because they are not considered in evaluating the segments’ operating performance. The following is a summary of information about profit or loss by segment.




For the Year Ended

March 31, 2011


Period from October 31, 2009 (Inception) to

March 31, 2010Pro Water


SETCORP


Total


Pro Water


SETCORP


TotalRevenues

$
2,617,400


$
-


$
2,617,400


$
507,313


$
-


$
507,313Cost of revenues


1,020,205



-



1,020,205



337,973



-



337,973Gross profit


1,597,195



-



1,597,195



169,340



-



169,340Operating expenses:General and administrative


364,642



933,473



1,298,115



197,549



-



197,549Research and development


-



53,782



53,782



-



-



-Total operating expenses


364,642



987,255



1,351,897



197,549



-



197,549Operating income (loss)


1,232,553



(987,255
)


245,298



(28,209
)


-



(28,209
)Other income (expense):Interest income


38



37



75



-



-



-Interest expense


(229,311
)


(510,410
)


(739,721
)


(274
)


-



(274
)Change in fair value of derivative liability


-



(102,584
)


(102,584
)


-



-



-Gain on settlement of payables and accrued liabilities


-



167,592



167,592



-



-



-Total other expense


(229,273
)


(445,365
)


(674,638
)


(274
)


-



(274
)Net income (loss) before provision for income taxes


1,003,280



(1,432,620
)


(429,340
)


(28,483
)


-



(28,483
)Provision for income taxes


800



-



800



-



-



-Net income (loss) from continuing operations


1,002,480



(1,432,620
)


(430,140
)


(28,483
)


-



(28,483
)Net income from discontinued operations







74,701











-Net loss









$
(355,439
)









$
(28,483
)





Pro Water





All revenues and cost of revenues are associated with the Pro Water segment. See explanation above regarding changes in revenues and cost of revenues.





Total operating expenses increased $167,093 or 85% for the year ended March 31, 2011 compared to the prior period presented due to the corporate salaries allocated of $160,000, increased operations, and improvements made to the injection well of the Company as discussed above. Also as a result, as a percentage of revenue, operating expenses decreased from 39% to 14% due to the significant improvement in revenue.





Total other expense increased $228,999 or 83,576% for the year ended March 31, 2011 compared to the prior period presented due to an increase in financing activities. Other income (expense) includes interest income and interest expense. The increase during the current period was primarily related to $200,000 of amortization expense related to the beneficial conversion feature recorded in connection with the $2.0 million note payable to the former shareholder of Pro Water.





SET Corp





There is no revenue generated by this segment for any of the periods presented. In addition, the historical results of operations for SET Corp are not presented for the period from October 1, 2009 (Inception) to March 31, 2010 due to the reverse acquisition requiring the historical information of Pro Water to be presented for the period from October 1, 2009 (Inception) to March 31, 2010.





Total operating expenses for the year ended March 31, 2011 were $987,255. Operating expenses include management and administrative personnel costs (including non-cash stock-based compensation), corporate office costs, accounting fees, depreciation and amortization, legal expense, information systems expense, product marketing, sales expense and research and development expenses.  Expenditures included approximately $115,000 for stock based compensation, $204,000 in professional fees, $205,000 in salaries and wages, $379,359 in consulting agreements, and general corporate expenditures for SET Corp for rent, utilities, etc in which were not present in the previous comparable period. In addition, research and development expenses of approximately $54,000 in 2011 represented costs incurred in our development of our initial MultiGen system.





9




Total other expense for the year ended March 31, 2011were $445,365. Other expense was the result of financing activities and debt settlement negotiations. Other income (expense) includes interest expense, change in fair value of derivative liability, and gain on settlement of payables and accrued liabilities.





LIQUIDITY AND MANAGEMENT’S PLANS
 
 As shown in the accompanying consolidated financial statements, during the year ended March 31, 2011, the Company incurred an operating loss from continuing operations before income taxes of $429,340.  As of March 31, 2011, we had a working capital deficit of $1,636,306.  In addition, the Company’s operations are primarily concentrated with one customer which represented 86% of total revenues.  During the year ended March 31, 2011, the Company generated positive cash flows from operations of $566,541. The net loss during the year ended March 31, 2011 was primarily due to non-cash charges in connection with the amortization of discounts convertible notes payable due to beneficial conversion features and loss on derivative liability. During the year ended March 31, 2011, the Company funded operations through cash flows generated from the Pro Water segment, capital contributions and sales of common stock. In addition, in January 2011 management refinanced the convertible note in connection with the Pro Water segmentfor an increased period of five years. The refinancing of the convertible note payable in connection with the Pro Water acquisition will allow management to utilize current cash flow to effectively pay down existing debt and provide the necessary capital for future growth.In fiscal 2012, the Company intends to fund operations and pay down liabilities through cash on hand and the positive cash flow being generated by the Pro Water segment. In addition, the Company intends to continue to negotiate the settlement of liabilities incurred in connection with the reverse acquisition of SET Corp.
 
 If current and projected revenue growth does not meet Management estimates, the Management may choose to raise additional capital through debt and/or equity transactions, renegotiate current convertible debt obligations, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation.  Currently, the Company does not have any commitments or assurances for additional capital nor can the Company cannot provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. The Company believes its plans will enable the Company to continue for a period in excess of one year from the date of the most recent balance sheet.




OPERATING ACTIVITIES





Cash provided by operating activities during the year ended March 31, 2011 and used in operations for the period from October 1, 2009 (Inception) to March 31, 2010 were $566,541 and $31,024, respectively.  In 2011, this was the result of a net loss of $355,439 offset by non-cash and non-operating items (depreciation, stock-based compensation, change in fair value of warrant liability, stock issued for services, and interest expense from the amortization of debt discounts) totaling $1,394,837 and net usage of current assets and liabilities of $472,857. In 2011, the usage of cash was primarily due to the increase in our operations which caused assets such as accounts receivable and prepaids to increase. In addition, we have made an effort to decrease our accounts payable. In 2010, the increase in cash is directly related to the Company extending payments on accounts payable to preserve capital.





INVESTING ACTIVITIES





Cash used in investing activities during the year ended March 31, 2011 and for the period from October 1, 2009 (Inception) to March 31, 2010 were $822,469 and $463,707, respectively. In 2011 and 2010, the primary investing activity was purchase of fixed assets related to the injection well of $858,509 and $463,707 offset by cash provided by the reverse acquisition of $36,040 in 2011. Significant expenditures were made by the Company to automate, winterize and add additional stations to the injection well for increased production.




10





FINANCING ACTIVITIES





Financing cash flows during the year ended March 31, 2011 amounted to $80,288 and consisted $208,000 of proceeds from sale of common stock, $150,000 of contributed capital, payments on a related party convertible note payable of $203,280, and payment on notes payable of $74,432. The Company used the proceeds to fund operations and make improvements to the DIW. In addition, payments made were in accordance with agreements in place. In the 2010 period, financing cash flows amounted to $776,041 and consisted of capital contributions of $780,000. These contributions were necessary to fund operations and make improvements to the DIW.




CRITICAL ACCOUNTING POLICIES





We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.





The methods, estimates, and judgment we use in applying our most critical accounting policies have significant impact on the results we report in our financial statements. The Securities and Exchange Commission (“SEC”) has defined "critical accounting policies" as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates are described below under the heading "Revenue Recognition." We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates.





IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS





We adopted ASC 350Intangibles – Goodwill and Other. The Statement requires that long-lived assets and certain identifiable intangibles held and used by us be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. We evaluate the recoverability of long-lived assets based upon forecasted undercounted cash flows for our pending patents, investment, at cost, and DIW. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 350 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.





Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value. Estimates of expected future cash flows represent management's best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored.





REVENUE RECOGNITION





The Company generates revenues from its deep injection water disposal well. Customers are charged on a per barrel rate for the water in which the Company disposes. Revenue is recorded when the water is disposed assuming all the revenue recognition criteria stated below are satisfied. In connection with the water disposal, the Company reclaims oil which is suspended within the water. Periodically, the Company sells this reclaimed oil to third parties and revenue is recognized upon sale assuming all the revenue recognition criteria stated below are satisfied. We record revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the prices for the services performed and the collectability of those amounts.  In addition, the Company extends credit to customers in which have shown the ability to pay for the services. At times the Company extends credit to new customers; however, such is not done until we are satisfied through references, evidence of financial soundness, etc. Provisions for allowances are performed periodically and estimates for uncollectable amounts are recorded as necessary based on our estimates.







11





CONVERSION FEATURES AND WARRANTS ISSUED WITH CONVERTIBLE DEBT





The Company's derivative financial instruments consist of embedded derivatives related to the senior convertible secured notes. These embedded derivatives include the conversion feature and the detachable warrants. As of the inception date of the agreement the debt was not considered conventional as defined in EITF 05-2, “The Meaning of "Conventional Convertible Debt Instruments" in issue No. 00-19”, codified into ASC 815. The accounting treatment of derivative financial instruments requires that the Company record the conversion feature and related warrants at their fair values and record them at fair value as of each subsequent balance sheet date. Any change in fair value is to be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.





EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27, “Application of Issue 98-5 to Certain Convertible Instruments”, both codified into ASC 470 governs the calculation of an embedded beneficial conversion, which is treated as an additional discount to the to the instruments where derivative accounting (explained above) does not apply. The amount of the value of warrants and beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. The discounts relating to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt.




OFF-BALANCE SHEET ARRANGEMENTS





The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The financial statements required to be filed in this Annual Report, begin on page F-1 of this report.





ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.





ITEM 9A. CONTROLS AND PROCEDURES
 
 Disclosure Controls and Procedures
 
 As required by SEC Rule 13a-15 or Rule 15d-15, our Chief Executive and Principal Accounting Officers carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing evaluation, we have concluded that our disclosure controls and procedures are not effective as of March 31, 2011 and that they do not allow for information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive and Principal Accounting Officers as appropriate to allow timely decisions regarding required disclosure.
 
 Internal Control over Financial Reporting
 
 Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





12




Management’s assessment of the effectiveness of the small business issuer’s internal control over financial reporting is as of the March 31, 2011. We believe that internal control over financial reporting is not effective. We have identified the following current material weaknesses considering the nature and extent of our current operations and any risks or errors in financial reporting under current operations:
 
 ·
Lack of procedures and/or expertise needed to prepare all required financial disclosures; and evidence that employees lack the qualifications and training to fulfill their assigned functions.
 
 This material weakness was first identified by our former Chief Executive and Principal Accounting Officer during the year ended March 31, 2008. This weakness continues to exist as of the March 31, 2011 reporting date as we were required to restate our September 30, 2010 quarterly financial statements in May 2011 due to the identification of a material error in connection with the recording and amortization of a beneficial conversion feature on a convertible note. The error was initially discovered in November 2010 by the Company’s financial reporting expert. We are currently in process of remediating thus material weaknesses by implementing appropriate procedures related to the identification of such items and the related financial statement disclosures. We expect to complete remediation of this material weakness during the first fiscal quarter of 2012.
 
 Changes in Internal Control Over Financial Reporting.
 
 During the fourth quarter of the fiscal year ended March 31, 2011, the following material weaknesses previously disclosed were remediated:
 
 ·
Inadequate staffing and supervision.
 ·
Substantiation and evaluation of certain general ledger account balances including the lack of reconciliations and improper cut-offs;
 ·
Inadequate approval and substantiation of cash disbursements
 
 
 These material weaknesses were first identified by our former Chief Executive and Principal Accounting Officer during the year ended March 31, 2008. We implemented additional policies, procedures, and controls to address these issues in December 2010 and January 2011. To address these issues we hired two accountants to assist in the day to day operations of the Company and to elevate some of the staffing, supervision and segregation of duties issues. In addition, we engaged a consultant in which is a certified public accountant with significant experience in technical accounting issues and SEC reporting to assist in the accurate preparation of the Company’s financial reporting. This additional accounting staff and consultant are assisting us in improving our internal and external reporting including improving our procedures regarding appropriate segregation of duties, authorization and substantiation of cash disbursements, the preparation of monthly reconciliations, timely review of these reconciliations, the identification, research and recording of difficult accounting transactions and accurate external reporting.
 
 This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits us to provide only management’s report in this annual report.





ITEM 9B.  OTHER INFORMATION





None.





13





PART III





ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE





Board of Directors





The Company's Board of Directors currently consists of five (5) authorized directors. The following sets forth certain information about each of the directors:




ROBERT GLASER, 57, DIRECTOR since 2009 and CHIEF EXECUTIVE OFFICER since 2011.  Mr. Glaser is CEO of SET Corp and is responsible for overseeing all quarterly and yearly budgets, assuring corporate compliance with local, state and federal agencies, management of corporate staff and consultants, upholding the company image, achieving sustained growth and managing day to day operations.




Mr. Glaser served over 25 years as President of an American based manufacturing company. Utilizing Six Sigma and Lean Manufacturing disciplines he has received numerous awards for excellence from customers such as DEP Corp and Alberto Culver in addition to accolades for quality and innovation in managing mega projects for Coca-Cola, Disney and Burger King. Mr. Glaser has an extensive background in engineering and has been recognized for achievements in strategic management, while receiving 3 President Awards and ranking in the top 5% of industry CEO’s. His expertise includes electrical and mechanical design, engineering, and machinery building from inception to completion. He has managed work forces of up to 350 people and was known as an industry Guru. Achieving the impossible was the norm. His skills include machinery design, managing large workforces; detail oriented planning, forecasting, and creating short and long term company goals. From 2004-2008 he ran Glaser Corp which did consulting for the container and packaging industry.





On September 25, 2009 the Board of Directors elected Bob Glaser to be an Executive Director of the Company.  From April 2008-December 2010 Mr. Glaser served as SET Corp’s VP of Operations. From June 2006 to April 2008 Mr. Glaser served as an independent consultant to a subsidiary of SET Corp.





STEVE RITCHIE, 66, retired Brig. Gen. USA, DIRECTOR since 2005. Gen. Ritchie became an advisory board member to the Company in August 2005 and subsequently became a Director in October 2005. Prior to joining the Company in these positions, Mr. Ritchie had a career in the US Air Force, culminating with the rank of Brigadier General.




KEITH MORLOCK, 35, DIRECTOR AND CORPORATE SECRETARY since 2009. Mr. Morlock is CEO of SET Corp’s wholly owned subsidiary Pro Water and is responsible for the management, sales and operations of its class II deep injection well. Mr. Morlock also serves as President of SET IP Holdings, where he is responsible for the evaluation, testing, certification and expansion of corporate technology and acquisitions. Mr. Morlock has extensive history in GMP, SOP’s and over 14 years of dealing with regulatory agencies including the EPA, SEC and the FDA. He was responsible for implementing and overseeing water treatment designs related to critical areas in pharmaceutical manufacturing. In addition his expertise includes researching, analyzing, and monitoring financial, technological, and demographic factors to capitalize on market opportunities and minimizing competitive activity. He has developed and executed comprehensive operational and marketing plans, both short and long range, to support the sales and revenue objectives of the organization.




On September 25, 2009, the Board of Directors elected Keith Morlock to be an Executive Director of the Company.  From April 2008 to December 2010 Mr. Morlock served as SET Corp’s VP of Business Development.  From December 2006 to April 2008 Mr. Morlock served as a consultant to a subsidiary of SET Corp.





BILL BALL, 69, INTERIM CHAIRMAN OF THE BOARD OF DIRECTORS since April 2011, comes to us from a background of nearly fifty years of engineering, sales, management, and executive management.  Bill started his working career in the mechanical engineering department of a very large oil and gas company.  He later served as a product development specialist and was a business development pioneer for a major oilfield chemicals company, and two environmental products and engineering companies.  He managed a team of over 800 products and services people for the world’s largest oilfield equipment company.  Bill formed his own engineering design and consulting company, High Tech Consultants (HTC) in 1992, and has been granted patents in the US and Canada.





WALTER IVISION, 58, DIRECTOR, since September 2010 joins the SET Corp board after our acquisition of the pending patented technologies of WES. He brings to the SET Corp board fresh ideas gained by international business experience. He is the CEO and Founder of WES where he has been responsible for the evaluation of SET Corp technologies in the Australian CSG Industry. Mr. Ivison has over 35 years of business experience in manufacturing, marketing, innovation and distribution, gathered in the USA, Australia, the UK and Japan. During the last five years he has been based in Australia developing the now commercially available MultiGen machines for the water starved continent of Australia. Set Corp now intends to market this technology to USA and International markets.




14





Former Director





GRANT KING, 56, DIRECTOR from 2004 to April 2011, Mr. King has served as General Manager and Managing Director of two major manufacturing and export companies in Bangkok, Thailand since 1990. From September 1996 to September 2000, Mr. King served as President of various wholly-owned subsidiaries of SET Corp. and between October 2000 and June 2004, Mr. King was managing his own business interests overseas. From 1997 to July 2003, he also served as president and CEO of L.L. Knickerbocker (Thai) Co. Ltd. in Thailand. Mr. Grant King did not stand for reelection and was replaced with an interim Chairman at the April 5, 2011 Annual Shareholder Meeting.





Current Executive Officers and Significant Employees and Consultants





In addition to Mr. Glaser and Mr. Morlock, whose biographical information is set forth above, the following are the Company’s significant officers, employees and consultants:





During the fiscal year ended March 31, 2011, Cynthia Glaser served as Controller and Principal Accounting Officer.





Family Relationships





Bob Glaser, the Company’s Chief Executive Officer and Cynthia Glaser, the Company’s Controller and Principal Accounting Officer are married.





Involvement in Certain Legal Proceedings





To the best of our knowledge, for the past five years, no director or officer of the Company has been involved in any of the following: (1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.





Adverse Proceedings





There exists no material proceeding to which any director or officer is a party adverse to the Company or has a material interest adverse to the Company.





Compliance with Section 16(A) of the Exchange Act





Section 16 of the Securities Exchange Act of 1934 requires SET Corp’s executive officers, directors and persons who own more than 10% of a registered class of SET Corp equity securities to file reports of ownership and changes in ownership. Based on a review of such forms, SET Corp believes that during the last fiscal year, except for the following, all of its executive officers, directors and ten percent shareholders complied with the Section 16 reporting requirements:


●
Steve Ritchie filed late one report for two transactions●
Keith Morlock filed late two reports for four transactions●
Bob Glaser filed late two reports for four transactions●
Cynthia Glaser filed late one report for one transaction●
Grant King failed to file five reports for eight transactions●
Wallie Ivison failed to file one report for one transaction●
Horst Geicke failed to file two reports for three transactions
 
 Code of Ethics





The Company has adopted a code of ethics that is applicable to our directors and officers. Our code of ethics is posted on our website and can be accessed at WWW.SETCORP.US





Nominating and Compensation Committees





The Board of Directors does not have a standing nominating committee, compensation committee or any committees performing similar functions. As there are only four Directors serving on the Board, it is the view of the Board that all Directors should participate in the process for the nomination and review of potential Director candidates and for the review of the Company's executive pay practices. It is the view of the Board that the participation of all Directors in the duties of nominating and compensation committees ensures not only as comprehensive as possible a review of Director candidates and executive compensation, but also that the views of independent, employee, and shareholder Directors are considered.




15




The Board does not have any formal policy regarding the consideration of director candidates recommended by shareholders; any recommendation would be considered on an individual basis. The Board believes this is appropriate due to the lack of such recommendations made in the past, and its ability to consider the establishment of such a policy in the event of an increase of such recommendations. The Board welcomes properly submitted recommendations from shareholders and would evaluate shareholder nominees in the same manner that it evaluates a candidate recommended by other means. Shareholders may submit candidate recommendations by mail to SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION: 2377 W Foothill, Suite 18, Upland, CA 92807. With respect to the evaluation of director nominee candidates, the Board has no formal requirements or minimum standards for the individuals that it nominates. Rather, the Board considers each candidate on his or her own merits. However, in evaluating candidates, there are a number of factors that the Board generally views as relevant and is likely to consider, including the candidate’s professional experience, his or her understanding of the business issues affecting the Company, his or her experience in facing issues generally of the level of sophistication that the Company faces, and his or her integrity and reputation. With respect to the identification of nominee candidates, the Board has not developed a formalized process. Instead, its members and the Company’s senior management have recommended candidates whom they are aware of personally or by reputation.





Board Meetings and Annual Meeting Attendance





The Board of Directors acted 13 times by unanimous written consent in lieu of a meeting during this period.





The Company held an Annual Shareholder Meeting for the fiscal year ended March 31, 2010 on April 5, 2011.





Audit Committee





The Company's currently does not have an Audit Committee and the Board of Directors serves this function.





16








ITEM 11. EXECUTIVE COMPENSATION
 
 SUMMARY COMPENSATION TABLE
 
 The following table sets forth the compensation of our Executive Officers for the fiscal year ending on March 31, 2011 and for the period from October 1, 2009 (Inception) to March 31, 2010.
 
 Name and Principal Position
Year

Salary

($)

Bonus

($)

Stock Awards

($)


Option Awards

($) (3)

Non-Equity Incentive Plan Compensation

($)

Change in Pension Value and Nonqualified Deferred Compensation Earnings

($)

All Other Compensation ($)
Total ($)Robert Glaser
2010


-

-

-



-

-

-

-

-CEO and Director
2011


119,780

7,200

22,500
(4)


25,000
(2)
-

-

-

206,612Cynthia Glaser
2010


-

-

-



-

-

-

-

-Principal Financial Officer
2011


77,527

4,560

6,750
(4)


-

-

-

-

88,837Keith Morlock
2010


36,006

-

-



-
(2)
-

-

-

36,006Manager of Pro Water
2011


137,934

7,200

22,500
(4)


25,000

-

-

-

224,766Grant King
2010



-
-

-



-

-

-

-

-Former CEO and Director (1)
2011


-

-

113,500
(5)


32,132

-

-

-

145,632
 ____________________
 (1)
Mr. King resigned as Chief Executive Officer of the Company on  August 25, 2010, and did not stand for re-election as Director of the Company on April 5, 2011.
 (2)
Options relating to Director Compensation for Mr. Glaser and Mr. Morlock are disclosed on Director Compensation Table.
 (3)
See Note 2 to the consolidated financial statements for assumptions used in valuing stock compensation.
 (4)
Discretionary performance-based stock bonuses for the fiscal year ended March 31, 2011
 (5)
Mr. King elected to receive his salary in stock in lieu of cash.
 
 
 17
 
 Narrative Disclosure to Summary Compensation Table
 
 Material Employment Terms for Bob Glaser and Keith Morlock
 
 Pursuant to employment agreements adopted on November 1, 2010, as amended on April 7, 2011, Bob Glaser, our CEO, and Keith Morlock, Manager of Pro Water LLC and our Corporate Secretary, earn: (1) annual base salaries of $144,000, (2) have the opportunity for base salary increases, annual cash and stock option bonuses based on Company performance metrics; (3) certain expense reimbursement; and (4) certain executive benefits.
 
 If either Mr. Glaser or Mr. Morlock are terminated without cause, as defined in the agreements, such officer shall be entitled to a payment of 8 months of the current base salary and will receive acceleration of vesting of outstanding stock options issued pursuant to the agreements.
 
 Material Employment Terms for Cynthia Glaser
 
 Pursuant to an employment agreement adopted on November 1, 2010, Cynthia Glaser, our CFO, earns: (1) an annual base salary of $76,000, (2) has the opportunity for base salary increases, annual cash and stock option bonuses based on Company performance metrics; (3) certain expense reimbursement, and (4) certain executive benefits.
 
 If Mrs. Glaser is terminated without cause, as defined in her agreement, she shall be entitled to a payment of 6 months of her current base salary and will receive acceleration of vesting of outstanding stock options issued pursuant to the agreement.
 
 DIRECTOR COMPENSATION
 
 The following table sets forth the compensation of our directors for the fiscal year ending on March 31, 2011 and for the period from October 1, 2009 (Inception) to March 31, 2010, respectively (if not addressed in the Executive Officer Compensation table above).
 
 Name

Year

Fees Earned or Paid in Cash

($)


Stock Awards

($)


Option

Awards ($)(1)


Non-Equity Incentive Plan Compensation

($)


Change in Pension Value and Nonqualified Deferred Compensation Earnings

($)


All Other Compensation

($)


Total

($)Steve Ritchie

2010


-



-



-



-



-



-



-2011


-



-



32,132



-



-



-



32,132Bill Ball

2010


-



-



-



-



-



-



-2011


-



-



-



-



-



-



-Walter Ivision

2010


-



-



-



-



-



-



-2011


-



-



-



-



-



-



-Robert Glaser

2010


-



-



-



-



-



-



-2011


-



-



27,132



-



-



-



57,132Keith Morlock

2010


-



-



-



-



-



-



-2011


-



-



27,132



-



-



-



57,132
 ____________________
 (1) See Note 2 to the consolidated financial statements for assumptions used in valuing stock compensation.
 
 
 18
 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
 
 Option Awards








Stock AwardsName

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

($)Robert Glaser


804,658



295,342



$
0.0025



7/7/2013500,000



$
0.05



3/31/2021Keith Morlock


804,658



295,342



$
0.025



7/7/2013500,000



$
0.05



3/31/2021Grant King


300,000







$
0.06



various dates thru 2014804,658



295,342



$
0.025



7/7/2013Steve Ritchie


804,658



295,342



$
0.025



7/7/2013Cynthia Glaser






125,000



$
0.05



3/31/2021
 
 ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDERS MATTERS





The following table sets forth the current common stock ownership of (i) each person known by the Company to be the beneficial owner of five percent (5%) or more of the Company's common based upon approximately 221,449,436 shares outstanding as of March 31, 2011, (ii) each officer and director of the Company individually, and (iii) all officers and directors of the Company as a group. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options and/or warrants held by that person that are currently exercisable, as appropriate, or will become exercisable within sixty (60) days of the reporting date are deemed outstanding, even if they have not actually been exercised. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, each person has sole voting and investment power with respect to the shares of common stock shown, and all ownership is of record and beneficial. The address of each owner is in care of the Company at 2377 W Foothill, Suite 18, Upland, CA 92807.





TITLE OF

CLASS

NUMBER OF

SHARES

NOTE

PERCENT OF

CLASS

NAME OF BENEFICIAL OWNERCommonCommon

94,848,184



34.73%

Horst GeickeCommon

20,187,763



9.15%

Grant King, former CEO and DirectorCommon

7,336,658

(1)

*

Robert Glaser, CEO and DirectorCommon

270,548

(1)

*

Cynthia Glaser, Principal Financial OfficerCommon

8,404,658

(1)

*

Keith Morlock, Manager of Pro Water and DirectorCommon

804,658

(1)

*

Steve Ritchie, DirectorCommon

-

(1)

*

Bill Ball, Interim Chairman of Board of DirectorsCommon

-

(1)

*

Walter Ivision, Director





(1) All officers and directors as a group (6 persons) Amount to approximately 7.9%.





19





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





During the fiscal year ended March 31, 2011 and period from October 1, 2009 (Inception) to March 31, 2010, the Company had the following related party transactions:





Horst Geicke





Convertible Notes Payable to Horst Geicke and Related Entities





On the Effective Date, the Company assumed various convertible note agreements with an accredited investor and shareholder for proceeds totaling $775,000 and accrued interest of $50,000.   In addition at the Effective Date, a discount on the convertible debt remained of $381,459. On July 7, 2010, the holder converted the note and accrued interest into 31,000,000 shares of the Company’s common stock. Upon conversion the Company, recorded the remaining discount to interest expense. In addition, all accrued interest of $50,000, was forgiven, and treated as a capital contribution due to the related party nature of the transaction as such recorded to additional paid in capital.





Convertible Note Payable to Metropolitan Real Estate LLC





As discussed in Note 1, on July 7, 2010, the Company entered into an agreement to acquire Pro Water. In connection with the acquisition, the member of Pro Water received a $2.0 million secured convertible promissory note payable over the period of one year from the closing date, incurring interest at 5% annually and a conversion feature at the option of the holder into shares of the Company’s common stock at a price of $0.10 per share.  The note is secured by all the assets of Pro Water.  No beneficial conversion feature was recorded in connection with the note as the conversion price represented the closing price of the Company’s common stock on the date of the agreement. In addition, the Company recorded the $2,000,000 convertible note as a reduction to additional paid-in capital as it was deemed to be a return of capital initially contributed to Pro Water by the member.





On July 12, 2010, the terms of the acquisition were amended whereby the conversion rate of the $2,000,000 related secured convertible promissory note, which previously all converted at $0.10 at the option of the holder, such amended to so that $1,600,000 of the note may be converted at $0.20 per share and $400,000 may be converted at $0.025 per share.  The convertible note is due based on the following: $100,000 paid on or before September 30, 2010, $200,000 paid on or before December 31, 2010, $200,000 paid on or before March 31, 2011 and the remaining amount of $1,500,000 with unpaid interest on or before June 30, 2011. The $100,000 payment due in September 2010 was paid in October 2010.  On July 12, 2010, since the conversion price of $0.025 related to $400,000 was significantly less than the fair value of the Company’s common stock per the closing market price, a beneficial conversion feature was present. The Company valued the beneficial conversion feature as of the date of the amended agreement in the amount of $696,000, and recorded the maximum discount allowed of $400,000 against the note. The discount is being amortized over the term of the note using the straight line method due to the relatively short maturity of the note. The amortization of the discount was approximately $200,000 during the nine months ended December 31, 2010. As of December 31, 2010, the unamortized discount was approximately $200,000.





On January 14, 2011, the terms of the convertible note were amended. As of the date of the amendment, the unpaid principal amount was $1,880,000. Under the terms of the new agreement, the term of the note was extended to five years and all accrued interest was forgiven. The Company is to make 60 monthly payments of $35,478 commencing January 2011 and concluding December 2015. All other terms, including conversion and interest rates remained the same. The effective interest rate for the year ended March 31, 2011 was 22%. Under ASC 470, Debt, the Company accounted for the change in terms of the debt as an extinguishment of the debt due to the significant change in the repayment period which impacted the expected cash flows in excess of 10%. Thus, the existing discount of $183,333 was removed and a new discount, with a beneficial conversion feature of $400,000 was recorded. Due to Geicke being a significant shareholder, no gain or loss was recorded and the result of the extinguishment was recorded to additional paid in capital. In addition, due to the extension of the payment terms, the Company has reflected $1,453,016 as long term on the accompany consolidated financial statements which represents amounts due in excess of one year per the payment schedule from the March 31, 2011 balance sheet date. In addition, at March 31, 2011, the $382,455 discount which was present at March 31, 2011 on the note was allocated between short and long term based on the expected annual amortization of which $139,196 has been allocated to short term with the remaining $243,259 allocated to long term. The following is the expected amortization for the remaining discount under the effective interest rate method for the years ending March 31: $139,196, $109,318, $77,964, $45,005, and $11,113 in 2012, 2013, 2014, 2015, and 2016, respectively.





Robert Glaser





On the Effective Date, the Company granted 1,100,000 stock options to Robert Glaser with an exercise price of $0.025 per share. The options vest over one year. On January 13, 2011, the Company’s Board of Directors approved the issuance of 500,000 shares of common stock valued at $22,500 to Robert Glaser as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan. On March 31, 2011 the Company granted500,000 stock options to Robert Glaser with an exercise price of $0.05 per share according to his employment contract. The options vest over one year.




20





Cynthia Glaser





On January 13, 2011, the Company’s Board of Directors approved the issuance of 150,000 shares of common stock valued at $6,750 to Cynthia Glaser as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan. On March 31, 2011 the Company granted125,000 stock options to Cynthia Glaser with an exercise price of $0.05 per share according to her employment contract. The options vest over one year.





At March 31, 2011, the Company owes an entity controlled by Cynthia and Robert Glaser $24,085 for management services previously provided under a consulting contract. Payments to this entity during the year ended March 31, 2011 were $54,500.





Keith Morlock





On the Effective Date, the Company granted 1,100,000 stock options to Keith Morlock with an exercise price of $0.025 per share. The options vest over one year. On January 13, 2011, the Company’s Board of Directors approved the issuance of 500,000 shares of common stock valued at $22,500 to Keith Morlock as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan. On March 31, 2011 the Company granted500,000 stock options to Keith Morlock with an exercise price of $0.05 per share according to his employment contract. The options vest over one year.





At March 31, 2011, the Company owes an entity controlled by Keith Morlock $35,411 for management services previously provided under a consulting contract. Payments to this entity during the year ended March 31, 2011 were $16,500. See Note 14 for disclosures regarding an amendment to Keith Morlock’s employment contract.





Grant King





On July 7, 2010, the Company issued 14,000,000 shares of its common stock to Grant King, the Company’s former Chief Executive Officer and Director in exchange for the conversion of $357,000 of unpaid, accrued and other compensations due to Mr. King. On the Effective Date, the Company granted 1,100,000 stock options to Grant King with an exercise price of $0.025 per share. The options vest over one year.





On January 13, 2011, the Company’s Board of Directors approved the issuance of 300,000 shares of common stock valued at $13,500 to Grant King as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan.





On December 31, 2010, the Company entered into a twenty-four (24) month consulting agreement with Grant King, former Officer and Director of the Company. Under the agreement, the Company agreed to issue a total of 8,000,000 shares of common stock in 2,000,000 increments every six months, payable at the beginning of each six-month period. On the date of the agreement, the Company valued the 8,000,000 shares at $400,000 based upon the closing market price of the Company’s common stock.  The value of the shares will be expensed over the two year service period. On January 5, 2011, the Company issued the first 2,000,000 shares of common stock pursuant to the consulting agreement.





21





ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





Detail of fees paid to dbbmckennon:





a.
Audit Fees:  Aggregate fees billed for professional services rendered for the audit of our annual financial statements for the periods ended March 31, 2011 and 2010, were approximately $35,770 and $25,000 respectively.b.
Audit-Related Fees:  There were no fees billed for audit-related services for the periods ended March 31, 2011 and 2010.c.
Tax Fees.  Fees billed for tax services were $0 and $3,000 for the periods ended March 31, 2011 and 2010, respectively.





AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES





The Company’s Board of Directors who acts as the Audit Committee has policies and procedures that require the pre-approval by the Audit Committee of all fees paid to, and all services performed by, the Company’s independent accounting firms. At the beginning of each year, the Audit Committee approves the proposed services, including the nature, type and scope of services contemplated and the related fees, to be rendered by these firms during the year. In addition, Audit Committee pre-approval is also required for those engagements that may arise during the course of the year that are outside the scope of the initial services and fees pre-approved by the Audit Committee.





Pursuant to the Sarbanes-Oxley Act of 2002, 100% of the fees and services provided as noted above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.





ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





See Exhibit Index below.





In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, duly authorized.






SUSTAINABLE ENVIRONMENTAL TEHCHOLOGIES CORPOATIONDated: June 29, 2011
/s/ Robert GlaserBy: Robert Glaser,Chief Executive Officer,Dated: June 29, 2011
/s/ Cynthia GlaserBy: Cynthia GlaserChief Financial Officer





22





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






Signature

Title

Date/s/ Steve Ritchie

Director

June 29, 2011Steve Ritchie/s/ Robert Glaser

Director

June 29, 2011Robert Glaser








/s/ Keith Morlock

Director

June 29, 2011Keith Morlock










23





EXHIBIT INDEX





Exhibit

Number
Description10.1
Amendment No. 1 to Pro Water Acquisition Agreement (2)10.2
Amendment to Horst Geicke Note (1)21.1
Subsidiaries31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





(1) Incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q as filed with the SEC on February 17, 2011.





(2) Incorporated by reference from Exhibit 10.1 to the Company’s Annual Report on Form 10-K as filed with the SEC on July 31, 2009.





24





Index to Consolidated Financial Statements








Report of Independent Registered Public Accounting Firm
F-1Consolidated Balance Sheets
F-2Consolidated Statements of Operations
F-3Consolidated Statements of Stockholders’ Equity (Deficit)
F-4Consolidated Statements of Cash Flows
F-5Notes to Consolidated Financial Statements
F-6





25
 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Shareholders and Board of Directors


Sustainable Environmental Technologies Corporation (formerly RG Global Lifestyles, Inc.)





We have audited the accompanying consolidated balance sheets of Sustainable Environmental Technologies Corporation (formerly RG Global Lifestyles, Inc.) and its subsidiaries (the “Company”) as of March 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year ended March 31, 2011 and the period from October 1, 2009 (Inception) to March 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of March 31, 2011 and 2010. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sustainable Environmental Technologies Corporation (formerly RG Global Lifestyles, Inc.) and subsidiaries as of March 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the year ended March 31, 2011 and the period from October 1, 2009 (Inception) to March 31, 2010, in conformity with accounting principles generally accepted in the United States.








/s/ dbbmckennon




Newport Beach, California
 June 29, 2011
  F-1





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(FORMERLY RG GLOBAL LIFESTYLES, INC.)


CONSOLIDATED BALANCE SHEETS





As of March 31,

2011


As of March 31,

2010AssetsCurrent assets:Cash and cash equivalents

$
105,260


$
281,310Accounts receivable, net of allowance for doubtful accounts of$6,000 and $3,000, respectively


367,024



213,780Prepaids and other current assets


36,962



7,395Current assets of discontinued operations


410



-Total current assets


509,656



502,485Property and equipment, net


1,989,892



1,128,327Other assets


40,230



-Investment, at cost


91,466



-Intangible assets, net


434,519



187,600Goodwill


66,188



66,188Total Assets

$
3,131,951


$
1,884,600Liabilities and Stockholders' Equity (Deficit)Current liabilities:Accounts payable

$
639,343


$
132,108Accrued salaries, wages, and related party consulting fees


239,205



14,324Accrued liabilities


337,905



23,585State income taxes payable


25,823



-Related party convertible notes payable, net of discount of $139,196


204,509



-Notes payable


579,753



3,166Current liabilities of discontinued operations


119,424



-Total current liabilities


2,145,962



173,183Related  party convertible notes payable, long-term, net of discount of $394,308


1,258,707



-Notes payable, long-term


63,606



-Warrant liability


247,284



-Asset retirement obligation


9,900



9,900Total liabilities


3,725,459



183,083Commitments and ContingenciesStockholders' Equity (Deficit)Preferred stock, $0.001 par value, 10,000,000 shares authorized;4,582,827 and zero issued at March 31, 2011 and 2010, none outstanding


-



-Common stock, $0.001 par value, 300,000,000 shares authorized;at March 31, 2011 and 2010, 219,739,436 and 33,333,333 issued; 219,449,436 and 33,333,333 outstanding, respectively


219,449



33,333Additional paid-in capital


3,454,340



1,696,667Accumulated deficit


(4,267,297
)


(28,483
)Total stockholders' equity (deficit)


(593,508
)


1,701,517Total Liabilities and Stockholders' Equity (Deficit)

$
3,131,951


$
1,884,600
 
 The accompanying notes are an integral part of these consolidated financial statements.
  F-2





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(FORMERLY RG GLOBAL LIFESTYLES, INC.)


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE YEAR ENDED MARCH 31, 2011 AND PERIOD FROM OCTOBER 1, 2009 TO MARCH 31, 2010





For the Year Ended

March 31, 2011


October 1, 2009 (Inception) to March 31, 2010Revenues:Water processing (Note 2)

$
2,390,998


$
466,588Reclaimed oil


226,402



40,725Total revenues


2,617,400



507,313Cost of revenues:Water processing


849,461



216,657Reclaimed oil


170,744



121,316Total cost of revenues


1,020,205



337,973Gross profit


1,597,195



169,340Operating expenses:General and administrative


1,298,115



197,549Research and development


53,782



-Total operating expenses


1,351,897



197,549Operating income (loss)


245,298



(28,209
)Other income (expense):Interest income


75



-Interest expense


(739,721
)


(274
)Change in fair value of derivative liability


(102,584
)


-Gain on settlement of payables and accrued liabilities


167,592



-Total other expense


(674,638
)


(274
)Loss before provision for income taxes


(429,340
)


(28,483
)Provision for income taxes


800



-Net loss from continuing operations


(430,140
)


(28,483
)Net income from discontinued operations


74,701



-Net loss

$
(355,439
)

$
(28,483
)Net loss per share:Basic - continuing operations

$
(0.00
)

$
(0.00
)Basic - discontinued operations

$
0.00


$
0.00Diluted - continuing operations

$
(0.00
)

$
(0.00
)Diluted - discontinued operations

$
0.00


$
0.00Weighted average shares - basic


164,156,298



33,333,333Weighted average shares - diluted


164,156,298



33,333,333





The accompanying notes are an integral part of these consolidated financial statements.




F-3





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(FORMERLY RG GLOBAL LIFESTYLES, INC.)


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


FOR THE PERIOD FROM OCTOBER 1, 2009 (INCEPTION) TO MARCH 31, 2010 AND THE YEAR ENDED MARCH 31, 2011





Common Stock


Additional


Accumulated


Total Stockholders'Shares


Amount


Paid-in Capital


Deficit


Equity (Deficit)Balances - October 1, 2009 (Inception)


33,333,333


$
33,333


$
(33,333
)

$
-



-Assets contributed by members


-



-



950,000



-



950,000Capital contributed


-



-



780,000



-



780,000Net loss


-



-



-



(28,483
)


(28,483
)Balances - March 31, 2010


33,333,333



33,333



1,696,667



(28,483
)


1,701,517Contributed capital


-



-



150,000



-



150,000Convertible note payable issued in connection with Pro Water acquisition, including discount of $400,000 for beneficial conversion feature


-



-



(1,600,000
)


-



(1,600,000
)Reverse acquisition of SET Corp


106,982,899



106,983



-



(3,883,375
)


(3,776,392
)Stock issued for conversion of convertible notes payable


31,000,000



31,000



794,000



-



825,000Stock issued for cash


7,020,000



7,020



200,980



-



208,000Common stock issued to related parties for services, accrued wages and consulting fees


37,317,500



37,318



1,004,072



-



1,041,390Common stock issued for services


595,704



595



12,450



-



13,045Common stock issued in connection with asset acquisition/cost basis investment


2,000,000



2,000



98,000



-



100,000Fair market value of warrants issued in connection with asset acquisition/cost basis investment


-



-



233,599



-



233,599Common stock issued in settlement of accounts payable and accured liabilities


1,200,000



1,200



484,189



-



485,389Debt extinguishment on modification of convertible note


-



-



265,612



-



265,612Stock-based compensation


-



-



114,771



-



114,771Net loss


-



-



-



(355,439
)


(355,439
)Balances - March 31, 2011


219,449,436


$
219,449


$
3,454,340


$
(4,267,297
)

$
(593,508
)





The accompanying notes are an integral part of these consolidated financial statements.




F-4





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(FORMERLY RG GLOBAL LIFESTYLES, INC.)


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEAR ENDED MARCH 31, 2011 AND PERIOD FROM OCTOBER 1, 2009 (INCEPTION) TO MARCH 31, 2010





For the Year Ended

March 31, 2011


October 1, 2009 (Inception) to March 31, 2010Cash flows from operating activities:Net loss

$
(355,439
)

$
(28,483
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Amortization of debt discounts related to beneficialconversion features and warrants


621,782



-Loss on divestiture of asset held for sale


30,000Settlement of accounts payable and accrued liabilitiestreated as contributed capital


400,000



-Change in fair value of derivative liabilities


102,584Depreciation and amortization


125,701



41,494Stock-based compensation


114,771



-Change in operating assets and liabilities:Accounts receivable


(152,571
)


(213,780
)Prepaid expenses


(47,318
)


(271
)Accounts payable


(158,860
)


132,107Accrued liabilities


(62,710
)


37,909Income taxes payable


(51,399
)


-Net cash provided by (used in) operating activities


566,541



(31,024
)Cash flows from investing activities:Purchase of property and equipment


(858,509
)


(463,707
)Cash provided by reverse acquisition


36,040



-Net cash used in investing activities


(822,469
)


(463,707
)Cash flows from financing activities:Contributed capital


150,000



780,000Proceeds from sale of common stock


208,000



-Payments on related party convertible note payable


(203,280
)


-Payments on notes payable


(74,432
)


(3,959
)Net cash provided by financing activities


80,288



766,041Net increase (decrease) in cash


(175,640
)


281,310Cash of discontinued operations


(410
)


-Cash - beginning of period


281,310



-Cash - ending of period

$
105,260


$
281,310SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest

$
24,722


$
274Income taxes

$
51,399


$
-Non-cash investing and financing activities:Asset retirement obligation

$
-


$
9,900Assets contributed by member

$
-


$
950,000Issuance of common stock in settlement of accounts payableand accrued liabilities

$
1,539,824


$
-Issuance of convertible note in connection with Pro Water acquisition

$
2,000,000


$
-Issuance of convertible note, common stock, and warrants for cost investment and pending patents

$
376,440


$
-Issuance of common stock in connection with convertible debtand accrued interest

$
825,000


$
-Fair value of beneficial conversion feature recorded on Pro Water note

$
400,000


$
-Purchase of equipment with note payable

$
66,035


$
-









F-5





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(FORMERLY RG GLOBAL LIFESTYLES, INC.)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








Note 1 – Organization, History and Significant Accounting Policies and Procedures





Organization and History





Sustainable Environmental Technologies Corporation (the “Company” or “SET Corp”) is a company dedicated to responsible resource utilization through the strategic balance of Environmental, Societal and Economic growth. Headquartered in Southern California, SET Corp is setting the standard for responsible principles of Sustainable Development.  These steadfast values are evident through patented technologies and strategic acquisitions, which solve environmental issues with an economic advantage. SET Corp limits their customer’s environmental impact while conserving valuable and diminishing resources that are essential to future generations.





Current and future services include, and are expected to include innovative echo-technologies that provide patented treatment, recovery, reclamation and re-injection services for produced water (associated with the oil and gas industry) and complete sustainable energy solutions that that bridge the gap between existing energy inefficient buildings and the sustainable development and design needs of tomorrow.





In addition to these areas of expertise SET Corp provides customized services that include design, construction management, operation and maintenance services, and equipment manufacturing for industrial and municipal sectors.  With strategic partnerships, through prominent global manufacturers and distributors, SET Corp has access to a worldwide sales and distribution network.





On August 27, 2010, the Company entered into a Technology Purchase Agreement with World Environmental Solutions Pty Ltd (“WES”), an Australian company, for a 12% investment in WES, the purchase of certain technologies, including all intellectual property rights and pending patents, related to water extraction and electricity generation referred to as MultiGen. The Company expects to deliver its first MultiGen unit to Australasia in July 2011.





MultiGen provides numerous eco-tech solutions that bridge the gap between existing energy inefficient buildings and the sustainable development and design needs of tomorrow.  By providing a complete sustainable solution, each MultiGen is able to provide 65kWh of electricity, up to 2,000 liters of water per day and provide supplemental air conditioning and heating.  MultiGen is able to produce energy at half the price of the grid, while saving up to 400 tons of carbon each year.  With an average ROI of 20 years for solar, MultiGen has an ROI of 5 years and is 78% more efficient than a comparable solar panel installation.





On July 7, 2010 (the “Effective Date”), SET Corp entered into an agreement to acquire Pro Water, LLC (“Pro Water”), a Utah limited liability company (formerly a Colorado limited liability company) with its sole equity member Metropolitan Real Estate LLC (the “Member), a New York limited liability company. Pro Water owns and operates an injection well disposal refinery (“DIW”) in Duchesne, Utah; the operations were assumed by the Member on October 1, 2009 (“Inception”).  Under the terms of the Agreement, the Company acquired 100% of the equity of Pro Water from its sole member, and Pro Water became a wholly-owned subsidiary of the Registrant in exchange for the payment of 20,000,000 shares of the Company’s restricted common stock, a secured convertible promissory note payable quarterly over the period of one year from the closing date in the amount of $2.0 million, with an interest rate of 5% and a conversion feature at the option of the holder into shares of the Company’s common stock at a price of $0.10 per share, and the assumption of Pro Water debts.  The note is secured by all the assets of Pro Water and the wastewater treatment facility owned by SET Corp. Metropolitan Real Estate LLC is an entity controlled by Horst Franz Geicke, a significant shareholder of the Company.





On July 12, 2010, the terms of the acquisition were amended whereby the number of shares of common stock paid for Pro Water was increased to 33,333,333 (from 20,000,000), and the conversion rate of the $2,000,000 related secured convertible promissory note, which previously all converted at $0.10 at the option of the holder, such amended to so that $1,600,000 of the note may be converted at $0.20 per share and $400,000 may be converted at $0.025 per share.  The convertible note is due based on the following: $100,000 paid on or before September 30, 2010, $200,000 paid on or before December 31, 2010, $200,000 paid on or before March 31, 2011 and the remaining amount of $1,500,000 with unpaid interest on or before June 30, 2011. The $100,000 payment due in September 2010 was paid in October 2010.





On January 14, 2011, the terms of the convertible note were amended. As of the date of the amendment, the unpaid principal amount was $1,880,000. Under the terms of the new agreement, the term of the note was extended to five years and all accrued interest was forgiven. The Company is to make 60 monthly payments of $35,478 commencing January 2011 and concluding December 2015. All other terms, including conversion and interest rates remained the same. The Company accounted for the change in terms of the debt as an extinguishment of the debt due to the significant change in the repayment period. See Note 8 for additional information.





F-6




The acquisition of Pro Water was accounted for as a reverse acquisition in accordance with Accounting Standards Codification (“ASC”) 805 Business Combinations. The Company determined for accounting and reporting purposes that Pro Water is the acquirer because of the significant holdings and influence of the control group of Pro Water before and after the acquisition. As a result of the transaction the Pro Water control group owns in excess of 44% of issued and outstanding common stock of SET Corp on a diluted basis.  In addition, in connection with the acquisition certain members of management were required to sign voting agreements.  As of January, these voting agreements expired. The control group of Pro Water could elect or appoint or to remove a majority of the members of the governing body of the Company due to the significant holdings of the Company’s common stock. The control group of Pro Water could have influence on the organization as they have provided funding for operations of SET Corp, prior to the acquisition, in an attempt to settle debts prior to the reverse acquisition. In addition, the Pro Water control group initially had a $2.0 million note payable, approximately $1,800,000, at March 31, 2011 in which additional influence can be subjected.  In addition, Pro Water is significantly larger than SET Corp in terms of assets and operations. Additionally, the future operations of Pro Water will be the Company intended primary operations and more indicative of the operations of the consolidated entity on a go forward basis.





Accordingly, the assets and liabilities of Pro Water are reported at historical costs and the historical results of Pro Water will be reflected in this and future SET Corp filings as a change in reporting entity.  The assets and liabilities of SET Corp will be reported at fair value on the date of acquisition, and results of operations will be reported from the date of acquisition.  The assets and liabilities of SET Corp were reported at their carrying values, which approximated fair value, and no goodwill was recorded. The results of SET Corp have been included in the accompanying consolidated financial statements from the Effective Date. The following is a schedule of SET Corp’s assets and liabilities at the Effective Date:





Assets:Cash and cash equivalents

$
35,630Prepaid expenses and other current assets


9,827Current assets of discontinued operations


3,503Property and equipment


24,667Other assets


10,231Assets of discontinued operations, long term


30,000Total Assets


113,858Liabilities:Accounts payable


747,023Accrued liabilities


1,149,763State income taxes payable


77,223Notes payable


455,500Current liabilities of discontinued operations


230,738Accounts payable, long term


11,883Accrued liabilities, long term


684,879Convertible notes payable, long term


388,541Warrant liability


144,700Total Liabilities


3,890,250Net liabilities in excess of assets

$
(3,776,392
)





Since Pro Water assumed operations on Inception due to the change in reporting entity, there are no reportable periods in 2009 to compare to those periods reported herein for 2010.  The excess liabilities assumed were accounted for as a deemed distribution through a charge to the Company’s accumulated deficit.





F-7




The following unaudited pro forma information was prepared as if the acquisition had taken place at the beginning of the period for the year ended March 31, 2011 and period from October 1, 2009 (Inception) to March 31, 2010:





Pro-Forma CombinedFor the Year Ended

March 31, 2011


October 1, 2009 (Inception) to

March 31, 2010Revenue

$
2,617,400


$
507,313Net loss from continuing operations

$
(756,814
)

$
(1,380,515
)Net loss per share:Basic and diluted - continuing operations

$
(0.00
)

$
(0.01
)





Note 2 – Accounting Policies and Basis of Presentation





Managements’ Plans


As shown in the accompanying consolidated financial statements, during the year ended March 31, 2011, the Company incurred an operating loss from continuing operations before income taxes of $429,340.  As of March 31, 2011, we had a working capital deficit of $1,636,306.  In addition, the Company’s operations are primarily concentrated with one customer which represented 86% of total revenues.  During the year ended March 31, 2011, the Company generated positive cash flows from operations of $566,541. The net loss during the year ended March 31, 2011 was primarily due to non-cash charges in connection with the amortization of discounts convertible notes payable due to beneficial conversion features and loss on derivative liability. During the year ended March 31, 2011, the Company funded operations through cash flows generated from the Pro Water segment, capital contributions and sales of common stock. In addition, in January 2011 management refinanced the convertible note in connection with the Pro Water segment for an increased period of five years. The refinancing of the convertible note payable in connection with the Pro Water acquisition will allow management to utilize current cash flow to effectively pay down existing debt and provide the necessary capital for future growth. In fiscal 2012, the Company intends to fund operations and pay down liabilities through cash on hand and the positive cash flow being generated by the Pro Water segment. In addition, the Company intends to continue to negotiate the settlement of liabilities incurred in connection with the reverse acquisition of SET Corp. During the year ended March 31, 2011, the Company settled payables and accrued liabilities of approximately $1,501,000. Subsequent to year end, the Company, settled payables and accrued liabilities of approximately $15,000.
  If current and projected revenue growth does not meet Management estimates, the Management may choose to raise additional capital through debt and/or equity transactions, renegotiate current convertible debt obligations, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation.  Currently, the Company does not have any commitments or assurances for additional capital nor can the Company cannot provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. The Company believes its plans will enable the Company to continue for a period in excess of one year from the date of the most recent balance sheet.


Principles of Consolidation


The consolidated financial statements include the assets, liabilities and operating results of the Company and its wholly-owned subsidiaries, Pro Water, SET IP Holdings LLC, after elimination of all material inter-company accounts and transactions. OC Energy and balances related to the Company’s former wastewater treatment plant are classified as discontinued operations.





Estimates


The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include the valuation of derivatives, equity instruments such as options and warrants, and provision for income taxes. Actual results could differ from those estimates.





Fair Value of Financial Instruments


Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:





Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.


Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.


Level 3 - Unobservable inputs which are supported by little or no market activity.




F-8




The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Derivative instruments include the warrant liability (Level 2). Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including volatilities and interest rates. Therefore, derivative instruments are included in Level 2.





Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2011 and 2010. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaids, accounts payable, accrued liabilities, notes payable, and convertible notes payable. Fair values for these items were assumed to approximate carrying values because of their short term in nature or they are payable on demand.





The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at March 31, 2011:




Level 1


Level 2


Level 3


TotalAssetsCash  and cash equivalents

$
105,260


$
-


$
-


$
105,260Total assets measured at fair value

$
105,260


$
-


$
-


$
105,260LiabilitiesDerivative instruments

$
-


$
247,284


$
-


$
247,284Total liabilities measured at fair value

$
-


$
247,284


$
-


$
247,284


The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at March 31, 2010:




Level 1


Level 2


Level 3


TotalAssetsCash and cash equivalents

$
281,310


$
-


$
-


$
281,310Total assets measured at fair value

$
281,310


$
-


$
-


$
281,310





The Company measures certain assets at fair value on a nonrecurring basis. These assets include cost method investments when they are deemed to be other-than-temporarily impaired, assets acquired and liabilities assumed in an acquisition or in a nonmonetary exchange, and property and equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. During the year ended March 31, 2011 and the period from October 1, 2009 (Inception) to March 31, 2010, the Company did not have any significant assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.





Concentrations





Credit Risk





At times, the Company maintains cash balances at a financial institution in excess of the $250,000 FDIC insurance limit. In addition, at times the Company extends credit to customers in the normal course of business, after an evaluation of the credit worthiness. The Company does not expect to take any unnecessary credit risks causing significant causing write-offs of potentially uncollectible accounts. The Company also maintains reserves for potential credit losses. The Company considers the following factors when determining if collection of a fee is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms.





Customer





The geographic location of the injection well is a direct factor with relation to the radius of customer’s wells that can be economically serviced. While there are several key factors to obtaining new business, the ratio of available business per customer is based solely on the number of wells the customer has within the serviceable radius of the injection well. As new gas wells are developed within the serviceable radius of the well, the ratio of customers to percentage of business will decrease. Until new wells are developed the expected customer to business ratio are not expected to change. During year ended March 31, 2011, the Company had one (1) customer that accounted for approximately 86% of its revenue and 92% of its accounts receivable at March 31, 2011. Duringthe period from October 1, 2009 (Inception) through March 31, 2010, the Company had two (2) customers that accounted for approximately 65% and 21% of its revenue and 67% and 25% of its accounts receivable at March 31, 2011, respectively. The loss of this customer would have an adverse impact on the consolidated financial condition, results of operations, and cash flows.





Cash Equivalents


All highly-liquid investments with a maturity of three (3) months or less are considered to be cash equivalents.




F-9




Property and Equipment


Property and equipment are recorded at cost and depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The estimated lives of property and equipment are as follows:





Injection well
20 yearsMachinery and equipment, furniture and equipment
Five to ten yearsBuildings
25 yearsLand
not depreciated





Impairment of Long-Lived and Purchased Intangible Assets


The Company has adopted ASC 350 Intangibles – Goodwill and Other. The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undercounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 350 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.





Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value. Estimates of expected future cash flows represent management's best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored. At March 31, 2011, the Company has not recognized any impairment of long-lived assets.





Conversion Features and Warrants Issued with Convertible Debt


The Company's derivative financial instruments consist of embedded derivatives related to the senior convertible secured notes. These embedded derivatives include the conversion feature and the detachable warrants. As of the inception date of the agreement the debt was not considered conventional as defined in EITF 05-2, “The Meaning of "Conventional Convertible Debt Instruments" in issue No. 00-19”, codified into ASC 815. The accounting treatment of derivative financial instruments requires that the Company record the conversion feature and related warrants at their fair values and record them at fair value as of each subsequent balance sheet date. Any change in fair value is to be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income.





EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27, “Application of Issue 98-5 to Certain Convertible Instruments”, both codified into ASC 470 governs the calculation of an embedded beneficial conversion, which is treated as an additional discount to the to the instruments where derivative accounting (explained above) does not apply. The amount of the value of warrants and beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. The discounts relating to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt.





Investment, at Cost


The Company accounts for their investment in World Environmental Solutions Pty (“WES”) using the cost method due to the limited ownership and influence on the entity. Under the cost method, the investment was recorded at cost at the time of purchase. The Company does not adjust this investment unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account. The aggregate carrying amount of our cost-method investment at March 31, 2011 was $91,466, representing a 12% ownership in WES. The Company reviews the carrying value of this investment at each balance sheet date. When impairment indicators exist, we generally use discounted cash flow analyses to determine the fair value. During the year ended March 31, 2011, the Company has not recognized any losses related to our cost-method investment in WES. At March 31, 2011, the Company determined that the fair value of the WES investment exceeded its carrying value.





Goodwill


Under the current accounting standards, the Company requires that goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to an annual impairment test which has two steps to determine whether an asset impairment exists. The first step of the impairment test identifies potential impairment by comparing the fair value with the carrying amount of the reporting unit, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment test shall be performed to measure the amount of the impairment loss, if any. Intangibles with indefinite useful lives are measured for impairment by the amount that the carrying value exceeds the estimated fair value of the intangible. The fair value is calculated using the income approach. Intangible assets with definite useful lives will continue to be amortized over their estimated useful lives. Any impairment is recorded at the date of determination.




F-10




The Company’s policy provides for annual evaluation of goodwill on the first day of the fourth fiscal quarter and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the operating segment level by comparing the segments' net carrying value, including goodwill, to the fair value of the segment. The fair values of our segments are estimated using a combination of the income or discounted cash flows approach and the market approach, which uses comparable market data. If the carrying amount of the segment exceeds its fair value, goodwill is potentially impaired and a second test would be performed to measure the amount of impairment loss, if any. All goodwill is associated with the Pro Water segment. At March 31, 2011, the Company has determined that the fair value of the Pro Water segment is substantially in excess of the carrying value.





Derivative Financial Instruments


Derivative financial instruments, as defined in ASC 815, Accounting for Derivative Financial Instruments and Hedging Activities, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.





The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments including senior convertible notes payable and freestanding stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.





The Company estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objectively measuring fair values. In selecting the appropriate technique, consideration is give to, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company's operating results will reflect the volatility in these estimate and assumption changes.





Revenue Recognition


For revenue from product sales, the Company recognizes revenue in accordance with ASC 605, Revenue Recognition. The Company generates revenues from its deep injection water disposal well. Customers are charged on a per barrel rate for the water in which the Company disposes. Revenue is recorded when the water is disposed assuming all the revenue recognition criteria stated below are satisfied. In connection with the water disposal, the Company reclaims oil which is suspended within the water. Periodically, the Company sells this reclaimed oil to third parties and revenue is recognized upon sale assuming all the revenue recognition criteria stated below are satisfied. The Company records revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the prices for the services performed and the collectability of those amounts.  In addition, the Company extends credit to customers in which have shown the ability to pay for the services. At times the Company extends credit to new customers; however, such is not done until the Company is satisfied through references, evidence of financial soundness, etc. Provisions for allowances are performed periodically and estimates for uncollectable amounts are recorded as necessary based on management’s estimates.




Cost of Revenues


Costs of revenues include costs related to revenue recognized; such costs represent labor, depreciation and amortization, equipment rental, supplies, utilities, repair and maintenance.





General and Administrative Expenses


General and administrative expenses include management and administrative personnel costs; corporate office costs; accounting fees, legal expense, information systems expense, and product marketing and sales expense.





Research and Development Expenses


Research and development expenses consist of expenses related to its MultiGen technology, which is still in its preliminary stages and of which its future benefits are uncertain.





Net Loss Per Share


Net loss per share is provided in accordance with ASC 260, Earnings per Share. Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number of common shares outstanding during the period, after giving effect to dilutive common stock equivalents, such as stock options, warrants and convertible debt. The following is a summary of outstanding securities which have been excluded from the calculation of diluted net loss per share because the effect would have been anti-dilutive for the year ended March 31, 2011 and period from October 1, 2009 (Inception) to March 31, 2010:




F-11




For the Years Ended

March 31, 2011


October 1, 2009 (Inception) to

March 31, 2010Common stock options


2,450,000



-Common stock warrants


-



-Convertible notes


23,555,029



-26,005,029



-





The Company excluded 6,578,955 options and 20,412,525 warrants from the calculation for the year ended March 31, 2011 as the exercise prices were in excess of the average closing price of the Company’s common stock. There were no dilutive securities outstanding for the period from October 1, 2009 (Inception) to March 31, 2010.





Advertising Costs


The Company expenses all costs of advertising as incurred. The Company expensed $2,667 and $0 of advertising costs during the year ended March 31, 2011 and for the period from October 1, 2009 (Inception) to March 31, 2010, respectively.





Stock-Based Compensation


ASC 718, Share-Based Payment requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of ASC 718 include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans.





The Company adopted ASC 718, which requires disclosure of the fair value and other characteristics of stock options and more prominent disclosure about the effects of an entity’s accounting policy decisions with respect to stock-based compensation on reported net loss. The Company has reflected the expense of such stock based compensation based on the fair value at the grant date for awards consistent with the provisions of ASC 718.





In connection with the adoption of ASC 718, the fair value of our share-based compensation has been determined utilizing the Black-Scholes pricing model. The fair value of the options granted is amortized as compensation expense on a straight line basis over the requisite service period of the award, which is generally the vesting period. The fair value calculations involve significant judgments, assumptions, estimates and complexities that impact the amount of compensation expense to be recorded in current and future periods.





The following weighted average variables were used in the Black Scholes model for all option issuances valued during the fiscal year ended March 31, 2011. There were no options granted during the period from October 1, 2009 (Inception) to March 31, 2010.





Year ending

March 31,

Stock Price at

Grant Date

Dividend

Yield

Exercise Price

Risk Free

Interest Rate

Volatility

Average

Life2011

$
0.03

-%

$
0.03

0.39%

257%

4.11





The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, codified into ASC 505.  The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete.  In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.





Segment Reporting


The Company reports its segments under ASC 280, Segment Reporting, which establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. As of March 31, 2011, the Company has two segments: Pro Water and SET Corp, with Pro Water being the only revenue producing segment.





Income Taxes


The Company follows ASC 740, Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.




F-12




Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.





Note 3 – Acquisitions / Investment





On October 1, 2009 (also referred to as the “Acquisition Date”), Metropolitan Real Estate LLC (“Member”), acquired all the issued and outstanding interests in the Deep Injection Well (“DIW”) for $950,000 from a third party (the “Sellers”).  The Company accounted for the transaction as a business combination whereby the purchase price was allocated to the fair market value of the assets received. The Member acquired the business to operate the DIW and did not incur any other liabilities, other than the asset retirement obligation of $9,900. In addition, attached to the DIW is a royalty agreement of $0.10 per barrel, which is paid to a previous well owner for every barrel that disposed down the current injection well. The Company did not include this royalty as it was determined an operating cost and was not payable to the Sellers.





Fair values of assets acquired on the Acquisition Date are as follows:





Injection well

$
613,976Machinery and equipment


67,836Customer relationship


202,000Goodwill


66,188Total

$
950,000





See Note 2 for disclosure of tangible asset lives. The customer relationships are being amortized over the period of seven years from the acquisition date of October 1, 2009. The goodwill is not subject to amortization and will not be deductible for income tax purposes. During the year ended March 31, 2011 and the period from October 1, 2009 (Inception) to March 31, 2010, the Company recorded amortization expense to cost of goods sold related to the customer relationship of $28,556 and $14,400, respectively. The net carrying value of the customer relationship as of March 31, 2011 was $159,044. Future amortization expense of the customer relationship is expected to be as follows for the years ending March 31: $28,857, $28,857, $28,857, $28,857 $28,857, and $14,759 in 2012, 2013, 2014, 2015, 2016, and thereafter, respectively. Goodwill represents expected synergies from the merger of operations. These synergies include a full management team and a formalized corporate organizational structure to expand the operations.  In addition, there were limited intangible assets in which did not qualify for separate recognition, such as an established workforce, but the effects on the consolidated financial statements are immaterial.





The following unaudited pro forma results of operations were prepared as if the acquisition had taken place at the beginning of the respective period for the year ended March 31, 2011 and period from October 1, 2009 (Inception) to March 31, 2010 are as follows:





For the Year Ended

March 31, 2011


October 1, 2009 (Inception) to March 31, 2010Revenue

$
2,617,400


$
507,313Net loss

$
(756,814
)

$
(1,380,515
)





In addition, all revenues presented within these financial statements were generated from the DIW.





Cost Investment and Pending Patents





On August 27, 2010, the Company entered into a Technology Purchase Agreement (“Agreement”) with World Environmental Solutions Pty Ltd (“WES”), an Australian company, for an investment in WES, the purchase of certain technologies, including all intellectual property rights and patents and patent applications, related to water extraction and electricity generation (“Technology”). The Company entered into the agreement to expand their water processing operations.





The material terms of the Agreement are as follows: (1) the Technology is transferred from WES to Company; (2) WES issues a 12% equity interest in WES to Company; (3) WES issues a two year option to Company to purchase an additional 3% equity interest of WES for an exercise price of $350,000; (4) Company issues a 25 year license to WES to use the Technology for sales in the Australia region and pay Company a 10% royalty on net sales; (5) 2,000,000 shares of the Company’s common stock to WES; (6) Company shall issue 5,000,000 shares of its common stock to WES upon customer confirmation of successful installation of a product sale of a minimum amount of $250,000 by WES incorporating the Technology; (7) Company shall issue up to a maximum of 10,000,000 shares of its common stock to WES based on WES sales of products incorporating the Technology at a rate of one share per $1.00 in gross revenue related to such sales; (8) Company shall pay WES a 10% royalty on Company (and its agents – excluding WES) net sales of products incorporating the Technology up to an aggregate maximum of $1,800,000; (9) Company issues a convertible promissory note to WES in the amount of $200,000, without interest or maturity, convertible into Company common stock at a rate of $0.35 per share; (10) Company issues WES a three year warrant to purchase 5,000,000 shares of Company common stock at a price of $0.35 per share; and (11) Company grants to WES a right of first refusal to be the exclusive sales agent for other Company technologies in Australia. On the date of issuance, the Company recorded a discount of $157,159 related to the convertible note at a rate of 11% per annum. The convertible note will be amortized to interest expense over 15 years based on the expected payback period of the loan.




F-13




The Company recorded the transaction as an asset purchase at a cost basis based on the following consideration:





Common stock

$
100,000Convertible note payable, long-term


42,841Warrants


233,599Total

$
376,440





The common stock was valued on the date of the agreement using the closing market price of the Company’s common stock. See Note 7 regarding discussion of the convertible note.





The warrants were valued using the Black-Scholes option pricing model using the following assumptions:





Annual dividend yield


-Expected life in years


3.00Risk-free interest rate


0.83%Expected volatility


255%





The Company allocated the purchase price between $284,974 to the pending patents and $91,466 to the cost investment in WES based on the relative fair value of each item based on future expected cash flows. In connection with the pending patents, the Company expects to amortize the value of the patents over an estimated life of 15 years which is the approximate remaining life and projected cash flows of the pending patents. During the year ended March 31, 2011, the Company amortized $9,499, which is included in general and administrative expense. At March 31, 2011, the net carrying value of the pending patents was $275,475. Future amortization expense is expected to be as follows for the years ending March 31: $18,998, $18,998, $18,998, $18,998, $18,998, and $180,535 in 2012, 2013, 2014, 2015, 2016, and thereafter, respectively. In addition, since the transaction is being accounted for as an asset acquisition the contingent compensation will be accounted for when triggered. As of March 31, 2011, none of the contingent consideration had been triggered. In addition, the cost investment was still being carried at its initial value of $91,466 as management determined expected future cash flows at March 31, 2011 we sufficient to cover the carrying value.





Note 4 – Property and Equipment





Property and equipment as of March 31, 2011 and 2010 consisted of the following:





March 31,2011


March 31, 2010Injection well

$
613,976


$
613,976Machinery and equipment


1,393,046



482,945Buildings


7,500



7,500Land


51,000



51,000Furniture and fixtures


28,464



-Accumulated depreciation


(104,094
)


(27,094
)Total

$
1,989,892


$
1,128,327





During the year ended March 31, 2011 and the period from October 1, 2009 (Inception) to March 31, 2010, the Company recorded depreciation expense of $87,646 and $27,094, respectively.





Asset Retirement Obligations





The Company recognizes asset retirement costs under ASC 410, Asset Retirement and Environmental Obligations in the period in which they are incurred. Under a water treatment contract with a former customer, the Company’s owned the building and equipment but did not own the land. At the termination of the contract, the Company was required to return the land to its original condition. At March 31, 2011, the Company recorded an asset retirement obligation of approximately $99,307 related to this obligation. The liability is currently reflected as a current liability included of discontinued operations. The obligation, initially $200,000, was incurred in connection with the reverse acquisition of SET Corp. In connection with the Yates settlement disclosed in Note 11, the Company’s obligation to remediate the land was significantly reduced and thus the liability was reduced.




F-14




At March 31, 2011, the Company recorded an asset retirement obligation of approximately $9,900 related to the DIW.





Note 5 – Discontinued Operations





The financial results of the Company discontinued operations which consist of OC Energy and the former wastewater plant from the period of acquisition through March 31, 2011 are as follows:




For the Year Ended

March 31, 2011


October 1, 2009 (Inception) to

March 31, 2010Product sales

$
-


$
-Water treatment royalties


-



-Income taxes


-



-Income from discontinued operations after income taxes

$
74,701


$
-





The following is the combined condensed balance sheets of OC Energy and the former wastewater treatment plant as of March 31, 2011:





March 31, 2011AssetsCurrent assets:Cash and cash equivalents

$
410Total current assets

$
410LiabilitiesCurrent liabilities:Accounts payable

$
20,116Accrued expenses


99,307Total liabilities

$
119,423





Management believes there are no contingent liabilities related to discontinued operations.





Note 6 – Certain Balance Sheet Elements





Accrued Liabilities





At March 31, 2011 and 2010, the Company’s accrued liabilities are as follows:





March 31,2011


March 31, 2010Accrued interest

$
192,162


$
-Royalty payable


51,798



16,548Other


93,945



7,037Total

$
337,905


$
23,585





Note 7 – Notes Payable





Note Payable to Vendor





On the Effective Date, the Company assumed a promissory note to a vendor in settlement of $410,500 in accounts payable. The vendor manufactured and installed the Company’s discontinued water treatment facility.  The note bears interest at 10% per annum with a one-time default penalty of 10% of the principal balance, and is secured by the Company’s Interceptor Plant contract and the equipment that was manufactured by the vendor.   The Company is currently in default on this note. In addition, the Company has accrued interest and penalties of $145,838 at March 31, 2011.




F-15




MOU Note Payable





On the Effective Date, the Company assumed a promissory note of $45,000 in connection with a memorandum of understanding to purchase SET Corp’s discontinued water treatment plant.   The note bears interest at 10% with a default rate of 18%.   As of March 31, 2011, the note is in default and interest is being accrued at the default rate.





Convertible Notes Payable to Horst Geicke and Related Entities





On the Effective Date, the Company assumed various convertible note agreements with an accredited investor and shareholder for proceeds totaling $775,000 and accrued interest of $50,000.   In addition at the Effective Date, a discount on the convertible debt remained of $381,459. On July 7, 2010, the holder converted the note and accrued interest into 31,000,000 shares of the Company’s common stock. Upon conversion the Company, recorded the remaining discount to interest expense. In addition, all accrued interest of $50,000, was forgiven, and treated as a capital contribution due to the related party nature of the transaction as such recorded to additional paid in capital.





Convertible Note Payable to WES





On August 27, 2010, in connection with the Agreement, the Company issued a convertible promissory note to WES in the amount of $200,000, without interest or maturity, convertible into Company common stock at a rate of $0.35 per share. The convertible note payable is payable at the Company’s discretion. The note is secured by the Technology. On the date of issuance, no beneficial conversion feature was present. The Company determined that they would pay the note in approximately 15 years. Thus, the Company recorded a discount of 11% in the amount of $157,159 against the notes. The discount will be amortized to interest expense over the period of estimated maturity using the effective interest method. During the year ended March 31, 2011, the Company recorded interest expense of $6,112 and the note had an unamortized discount of $151,047. See Note 3 for information regarding the Transaction with WES.





Equipment Loan





In June 2010, the Company entered into a note payable agreement with an equipment provider for a machine in the amount of $38,745. The note bears interest at 7.25% per annum and is payable in 24 equal installments of $1,739, with the first installment due in July 2010. As of March 31, 2011, the amount due on this loan was $24,868.





Convertible Note Payable to Metropolitan Real Estate LLC





As discussed in Note 1, on July 7, 2010, the Company entered into an agreement to acquire Pro Water. In connection with the acquisition, the member of Pro Water received a $2.0 million secured convertible promissory note payable over the period of one year from the closing date, incurring interest at 5% annually and a conversion feature at the option of the holder into shares of the Company’s common stock at a price of $0.10 per share.  The note is secured by all the assets of Pro Water.  No beneficial conversion feature was recorded in connection with the note as the conversion price represented the closing price of the Company’s common stock on the date of the agreement. In addition, the Company recorded the $2,000,000 convertible note as a reduction to additional paid-in capital as it was deemed to be a return of capital initially contributed to Pro Water by the member.





On July 12, 2010, the terms of the acquisition were amended whereby the conversion rate of the $2,000,000 related secured convertible promissory note, which previously all converted at $0.10 at the option of the holder, such amended to so that $1,600,000 of the note may be converted at $0.20 per share and $400,000 may be converted at $0.025 per share.  The convertible note is due based on the following: $100,000 paid on or before September 30, 2010, $200,000 paid on or before December 31, 2010, $200,000 paid on or before March 31, 2011 and the remaining amount of $1,500,000 with unpaid interest on or before June 30, 2011. The $100,000 payment due in September 2010 was paid in October 2010.  On July 12, 2010, since the conversion price of $0.025 related to $400,000 was significantly less than the fair value of the Company’s common stock per the closing market price, a beneficial conversion feature was present. The Company valued the beneficial conversion feature as of the date of the amended agreement in the amount of $696,000, and recorded the maximum discount allowed of $400,000 against the note. The discount is being amortized over the term of the note using the straight line method due to the relatively short maturity of the note. The amortization of the discount was approximately $200,000 during the nine months ended December 31, 2010. As of December 31, 2010, the unamortized discount was approximately $200,000.





On January 14, 2011, the terms of the convertible note were amended. As of the date of the amendment, the unpaid principal amount was $1,880,000. Under the terms of the new agreement, the term of the note was extended to five years and all accrued interest was forgiven. The Company is to make 60 monthly payments of $35,478 commencing January 2011 and concluding December 2015. All other terms, including conversion and interest rates remained the same. The effective interest rate for the year ended March 31, 2011 was 22%. Under ASC 470, Debt, the Company accounted for the change in terms of the debt as an extinguishment of the debt due to the significant change in the repayment period which impacted the expected cash flows in excess of 10%. Thus, the existing discount of $183,333 was removed and a new discount, with a beneficial conversion feature of $400,000 was recorded. Due to Geicke being a significant shareholder, no gain or loss was recorded and the result of the extinguishment was recorded to additional paid in capital. In addition, due to the extension of the payment terms, the Company has reflected $1,453,016 as long term on the accompany consolidated financial statements which represents amounts due in excess of one year per the payment schedule from the March 31, 2011 balance sheet date. In addition, at March 31, 2011, the $382,455 discount which was present at March 31, 2011 on the note was allocated between short and long term based on the expected annual amortization of which $139,196 has been allocated to short term with the remaining $243,259 allocated to long term. The following is the expected amortization for the remaining discount under the effective interest rate method for the years ending March 31: $139,196, $109,318, $77,964, $45,005, and $10,972 in 2012, 2013, 2014, 2015, and 2016, respectively.






F-16




Note Payable to Vendor for Settlement of Accrued Liability





See Note 11 for note payable to vendor for settlement of accrued liability.





Note Payout Schedules





Future payments under notes payable are expected to be as follows for the years ending March 31: $579,793 and $63,606 in 2012 and 2013, respectively. These amounts include the notes disclosed above and in Note 11.





Future payments under related party notes payable are expected to be as follows for the years ending March 31: $343,705, $361,289, $379,773, $399,203, $312,750, and $200,000 in 2012, 2013, 2014, 2015, 2016, and thereafter, respectively.





Note 8 – Income taxes





Due to the reverse acquisition, as of March 31, 2010, SET Corp only consisted of Pro Water, a Utah LLC accounted for as a pass through entity prior to the acquisition date of July 7, 2011.





The following table presents the current and deferred income tax provision for federal and state income taxes for the year ended March 31, 2011 and period from October 1, 2009 (Inception) to March 31, 2010:





2011


2010Current tax provision:Federal

$
-


$
-State


800



-Total


800



-Deferred tax provision (benefit)Federal


(575,438
)


-State


(89,077
)


-Decrease in valuation allowance


664,515



-Total


-



-Total provision for income taxes

$
800


$
-





Current taxes only consist of minimum taxes to the State of California which are insignificant and have not been presented.




F-17




Reconciliations of the U.S. federal statutory rate to the actual tax rate for the year ended March 31, 2011 and period from October 1, 2009 (Inception) to March 31, 2010 are as follows:





2011


2010US federal statutory income tax rate


34%



0.0%State tax– net of benefit


3.3 %



0.0%37.3 %



0.0%Permanent differences


234.3 %



0.0%Accrued expenses


(157.5 %
)


0.0%Stock compensation


12.6%



0.0%Intangibles


1.8 %



0.0%Property, plant and equipment


(301.5 %
)


0.0%Others


(14.4 %
)


0.0%Decrease in valuation allowance


187.4 %



0.0%Effective tax rate


0.0 %



0.0 %





The components of the Company’s deferred tax assets and (liabilities) for federal and state income taxes as of March 31, 2011 and 2010 consisted of the following:





2011


2010Current deferred tax assets (liabilities):Accrued expenses

$
266,225


$
-Total current deferred tax assets


266,225



-Non-current deferred tax assets and liabilities:State taxes


(52,320
)


-Stock options


44,761



-Intangibles


6,329



-Others


2,340



-Net operating losses


880,619



-Total non-current deferred tax assets


881,729



-Valuation allowance

(1,147,954
)


-Net deferred tax assets (liabilities)

$
-


$
-





During the year ended March 31, 2011, the valuation allowance decreased by $664,545.  At March 31, 2011 the Company had approximately $2,257,997 of federal and state gross net operating losses allocated to continuing operations available. The net operating loss carry forward, if not utilized, will begin to expire in 2031 for federal purposes and 2021 for state purposes.





Based on the available objective evidence, including the Company’s limited operating history and current liabilities in excess of assets, management believes it is more likely than not that the net deferred tax assets at March 31, 2011, will not be fully realizable. Due to the uncertainty surrounding realization of the deferred tax asset, the Company has provided a full valuation allowance against its net deferred tax assets at March 31, 2011.





As of March 31, 2011, the Company has a State tax liability of $25,823, which was the result of unpaid taxes by SET Corp. The Company continues to make payments on the obligation. Interest and penalties on such liabilities is immaterial. In addition, due to the significant change in ownership of SET Corp in connection with the acquisition of Pro Water, the Company determined that SET Corp’s historical NOLs had potentially been impaired due to IRS Section 382 limitations. Thus, the net operating losses prior to July 7, 2010 have been eliminated from the NOL carryforwards disclosed above.





F-18





Note 9 – Stockholders’ Equity (Deficit)





General





On July 7, 2010, a majority of the Company’s shareholders, in the form of a written consent authorized: the amendment of the Company’s Amended and Restated Articles of Incorporation to: (a) change the name of the Company to Sustainable Environmental Technologies Corporation; and (b) increase the authorized number of shares of common stock to 300,000,000; (2) and approve the adoption of the Company’s 2010 Incentive and Nonstatutory Stock Option Plan, which reserves twenty million (20,000,000) shares of the Company’s common stock for issuance as stock options and grants to qualified recipients.





Series A Preferred Stock





As of March 31, 2011, there are no shares of Series A Preferred Stock (“Series A”) outstanding as all had been converted into common stock prior to the reverse acquisition. Each Series A share is convertible into six shares of the Company’s common stock one year after issuance.  In additions, the Series A has preference over the common stock related to dividends and liquidation. Upon the issuance of 1,000,000 shares of Series A, the Company shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Articles of Incorporation) the written consent or affirmative vote of the holders of at least 75% of the then outstanding shares of Series A, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class.





In the event the Company shall at any time after the Series A original issue date and prior to three years from such date, issue additional shares of common stock, without consideration or for a consideration per share less than the applicable Series A conversion price ($0.025/share) in effect immediately prior to such issue, then the Series A conversion price shall be reduced, concurrently with such issue, to the consideration per share received by the Company for such issue or deemed issue of the additional shares of common stock; provided that if such issuance or deemed issuance was without consideration, then the Company shall be deemed to have received an aggregate of $0.001 of consideration for all such additional shares of common stock issued or deemed to be issued, and the conversion ratio will be changed accordingly.





Capital Contributions





During the year ended March 31, 2011, the former owner of Pro Water contributed $150,000 to that entity.





During the period from October 1, 2009 (Inception) to March 31, 2011, the former owner of Pro Water contributed $780,000 to that entity.





Reverse Acquisition





On the Effective Date, 106,982,899 shares of common stock were retained by SET Corp’s shareholders as a result of the reverse acquisition. See Note 1 for additional information





Common Stock Issued For Cash





During the year ended March 31, 2011, the Company received proceeds totaling $208,000 resulting in the issuance of 7,020,000 shares of common stock.





Common Stock to be Issued





As of March 31, 2011, proceeds of $25,000 remain for future issuances of common stock. The proceeds have been recorded as accrued liabilities, as to date the required common shares have not been issued.





Common Stock Issued to Related Parties for Accrued Liabilities and Services





On July 7, 2010, the Company issued 14,000,000 shares of its common stock to Grant King, the Company’s Chief Executive Officer and Director in exchange for the conversion of $357,000 of unpaid, accrued and other compensations due to Mr. King.





On July 7, 2010, the Company issued 9,750,000 shares of its common stock to Bob Glaser, an Officer and Director in exchange for the conversion of $248,625 of unpaid and accrued compensation due to Mr. Glaser.





On July 7, 2010, the Company issued 7,000,000 shares of its common stock to Keith Morlock, an Officer and Director in exchange for the conversion of $178,500 of unpaid and accrued compensation due to Mr. Morlock.





On July 8, 2010, the Company issued 1,000,000 shares of its common stock to Grant King, the Company’s Chairman of the Board, from its 2006 Incentive and Non Statutory Stock Option Plan in exchange for the conversion of $59,800 of unpaid and accrued compensation due to Mr. King.





In December 2010, the Company issued 1,442,500 shares of its common stock valued at $51,690 to various individuals on behalf of Grant King, the Company’s former Chief Executive Officer and Director in exchange for the conversion of $51,690 of unpaid, accrued and other compensations due to Mr. King.




F-19




On January 13, 2011, the Company’s Board of Directors approved the issuance of 2,125,000 shares of common stock valued at $106,250 to various officers and consultants of the Company as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan. The corresponding expense was recorded to general and administrative expense.





On December 31, 2010, the Company entered into a twenty-four (24) month consulting agreement with Grant King, former Officer and Director of the Company. Under the agreement, the Company agreed to issue a total of 8,000,000 shares of common stock in 2,000,000 increments every six months, payable at the beginning of each six-month period. On the date of the agreement, the Company valued the 8,000,000 shares at $400,000 based upon the closing market price of the Company’s common stock.  The value of the shares will be expensed over the two year service period. On January 5, 2011, the Company issued the first 2,000,000 shares of common stock pursuant to the consulting agreement. During the year ended March 31, 2011, the Company recorded compensation expense of $50,000 to general and administrative expense.  See Note 10 for estimated stock-based compensation to be recorded in future years.





Common Stock Issued for Services





On July 7, 2010, the Company issued 500,000 shares of its common stock as compensation for past legal services of $9,887 to a third party consultant which offset amounts payable to the consultant.





On December 15, 2010, the Company issued 95,704 shares of its common stock valued at $3,158 as compensation for past consulting services of $3,158 to a third party consultant which offset amounts payable to the consultant.





Common Stock Issued to Settle Accounts Payable and Accrued Liabilities





On November 1, 2010, the Company reached a settlement with a vendor. Accrued liabilities and accounts payable of $16,514 and $10,000, respectively, were settled for $7,465 in cash payments and 300,000 shares of common stock valued at $9,900. The shares of common stock were issued on December 15, 2010. As a result, a gain on settlement of $9,149 was recorded as other income expense.





In March 2011, the Company reached a settlement with a former consultant for in which past due accrued liabilities and accounts payable of $161,600 were settled for $15,000 in cash payments and 200,000 shares of common stock valued at $6,600. As a result, a gain on settlement of $140,000 was recorded as other income expense.





On October 26, 2010, the Company reached a settlement with Catalyx Fluid Solutions, Inc. and all its partners, including Juzer Jangbarwala, formerly a Company director and member of management. Accrued liabilities and accounts payable of $478,407 were settled for $50,000 in cash payments and 675,000 shares of common stock valued at $22,275 on the date of issuance. The Company accounted for the excess amount forgiven of $445,364 as contributed capital recorded within additional paid-in capital due to the related party nature of the transaction.





Common Stock Issued to Settle Notes Payable





See Note 7for Convertible Notes Payable converted in to common stock.





Note 10 – Options and Warrants





Options





Plans





On July 7, 2010, a majority of the Company’s shareholders, in the form of a written consent authorized: the amendment of the Company’s Amended and Restated Articles of Incorporation approved the adoption of the Company’s 2010 Incentive and Nonstatutory Stock Option Plan (“2010 Plan”), which reserves twenty million (20,000,000) shares of the Company’s common stock for issuance as stock options and grants to qualified recipients.As of March 31, 2011, 12,970,673 grants were available for issuance under the 2010 Plan.





On the Effective Date, the Company assumed an Incentive and Non-statutory Stock Option Plan adopted by the predecessor entity for issuance of stock options to employees and others. Those plans consisted of the 2006 Incentive and Non-statutory Stock Option Plan (“2006 Plan”) and 2007 Incentive and Non-statutory Stock Option Plan (“2007 Plan”) for issuances of stock options to employees and others. Under the 2006 Plan and 2007 Plan, the Company reserved 10,000,000 and 6,000,000 shares for issuance, respectively. As of March 31, 2011, no grants were available for issuance under the 2006 Plan and 2007 Plan.





Issuances





On July 7, 2010, the Company granted 6,000,000 stock options to various employees and consultants with an exercise price of $0.025 per share. The options vest over one year. Compensation expense for this issuance recorded during the year ended March 31, 2011 was $96,396 and is included in general and administrative expense on the accompanying statement of operations. As of March 31, 2011, future compensation expense, including Grant King’s consulting agreement disclosed in Note 9 above, is approximately $194,507. Future amortization is expected to be as follows for the years ending March 31: $294,507 and $150,000 in 2012 and 2013, respectively.




F-20




Although management believes its estimate regarding the fair value of the services to be reasonable, there can be no assurance that all of the subjective assumptions will remain constant, and therefore the valuation of the services may not be a reliable measure of the fair value of stock compensation or stock based payments for consulting services. Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the remaining life of the options. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these options. We currently have no reason to believe future volatility over the expected remaining life of these options is likely to differ materially from historical volatility. The expected life is based on the remaining term of the options. The risk-free interest rate is based on U.S. Treasury securities.





The following is a summary of activity of outstanding stock options:





Number of

Shares

Weighted

Average

Exercise

Price

Average

Remaining

Contractual Term

(Years)

Aggregate

Intrinsic

ValueOutstanding at March 31, 2010
-

$
-Options granted
10,728,955


0.09Options exercised
-


-Options cancelled
(1,700,000)


0.04Outstanding at March 31, 2011
9,028,955

$
0.10

2.72

$
122,500Exercisable at March 31, 2011
6,588,339

$
0.12

1.57

$
89,610





Exercisable

Unexercisable

TotalStock Options
Number of

Shares

Weighted

Average

Exercise Price

Number of

Shares

Weighted

Average

Exercise Price

Number of

Shares

Weighted

Average

Exercise PriceAbove $0.05
3,003,955

$
0.24

1,125,000

$
0.05

4,128,955

$
0.19Below $0.05
3,584,384


0.03

1,315,616


0.03

4,900,000


0.03Total Outstanding
6,588,339

$
0.12

2,440,616

$
0.04

9,028,955

$
0.10





Warrants





On the Effective Date, the Company assumed 5,641,024 of the predecessor entity’s issued and outstanding common stock purchase warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. Currently, these warrants have an exercise price of $0.78 and expire in May of 2013; however, these warrants have exercise price reset features in the event the Company issues common stock below the exercise price of the warrants.  During the year ended March 31, 2011, the Company recorded an expense of $102,584 for the change in fair value of the warrant liability. As of March 31, 2011, the warrant liability was $274,284.





F-21




All future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:





July 7,2010

March 31,2011Annual dividend yield
-


-Expected life in years
2.92


2.17Risk-free interest rate
1.00%


0.80%Expected volatility
246%


284%





Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the remaining life of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities.





The following is a summary of activity of outstanding common stock warrants for the year ended March 31, 2011:





Number

of Shares


Weighted

Average

Exercise

PriceBalance, March 31, 2010


-


$
-Warrants granted


21,846,464



0. 46Warrants exercised



-


-Warrants cancelled


(1,413,939
)


0.23Balance, March 31, 2011


20,412,525


$
0.48Exercisable, March 31, 2011


20,412,525


$
0.48





Note 11 – Commitments and Contingencies





Operating Leases





In September 2010, the Company entered into an agreement with Koll Business Park for the lease of 1850 square feet of office space at the current Upland address. Rent expense for the fiscal year ended March 31, 2011 and period from October 1, 2009 (Inception) to March 31, 2010 was $15,968 and $0, respectively.The following is the expected minimum payments for the remaining period of the lease for the years ending March 31: $29,378, $30,266, and $18,019 in 2012, 2013, and 2014, respectively.





Legal Proceedings





In connection with cross complaint brought by Yates Petroleum ("Yates") against the Company in the District Court of Johnson County, Wyoming (Case no. CV-2008-0102), as discussed in the Company's prior SEC filings, including its Annual Report on Form 10-K for the fiscal year ended March 31, 2010, on August 2, 2010, Yates' motion to continue hearing on summary judgment was denied, and the Company's motion for alternative dispute resolution was granted.   As of November 30, 2010 an agreement, via arbitration, was reached.  The $236,306 was money YPC paid during the original construction of the plant that was to be repaid to them at the completion of construction. In addition to these monies SET Corp was responsible for the complete removal and remediation of the ponds, buildings and land to its original condition prior to the plant construction.  The agreement dated November 30, 2010 requires that SET Corp pay $175,000 at 10% interest for a 24 month period and remove and remediate the effluent pond. The influent pond and all of the remaining structures and their remediation will be the responsibility of YPC. The asset had a carrying cost of $30,000 that was recorded in discontinued operations.The accrued liability recorded at $236,306 was reduced by the monthly payments. No gain will be recorded until the Company completes the terms of the agreement. The Company is current on the payments and terms of the agreement. In addition, based on current remediation quotes, the asset retirement obligation was reduced from $200,000 to $99,307 resulting in the difference of $100,693 credited to discontinued operations.




Employment Agreements




On November 1, 2010, our Board of Directors approved employment agreements effective November 1, 2010 with various employees. According to the terms of the agreements (1) annual base salaries are:: Mr. Glaser $120,000, Mr. Morlock $120,000, and Mrs. Glaser $76,000; (2) have the opportunity for base salary increases, annual cash and stock option bonuses based on Company performance metrics; and (3) will receive certain expense reimbursement. If any of the officers are terminated without cause, as defined in the agreements, such officer shall be entitled to a payment of eight months of the current base salary (six months for Mrs. Glaser) and will receive acceleration of vesting of outstanding stock options issued pursuant to the agreements. See Note 13 for discussion regarding amendments to Robert Glaser and Keith Morlock.





F-22





Note 12 – Segment Information





The Company reports information about operating segments, as well as disclosures about products and services and major customers. Operating segments are defined as revenue-producing components of the enterprise, which are generally used internally for evaluating segment performance. Management has determined that the water disposal operations of DIW (“Pro Water”) and the operations of SET Corp (“SET CORP”) should be disclosed separately as management reviews financial statements for these entities separately and makes decisions independently of the other entities included within the Company’s financial statements. All intercompany transactions between the reportable segments are eliminated upon consolidation of the Company. At March 31, 2011, the Pro Water segment is the only revenue producing segment, see revenue recognition policy for how revenues are recorded. The Company operates in one geographic area.





The Company evaluates the performance of its segments based on net income (loss) from continuing operations. Certain income and charges are not allocated to segments in the Company’s management reports because they are not considered in evaluating the segments’ operating performance. The following is a summary of information about profit or loss and assets by segment:


For the Year Ended

March 31, 2011


Period from October 31, 2009 (Inception) to

March 31, 2010Pro Water


SETCORP


Total


Pro Water


SETCORP


TotalRevenues

$
2,617,400


$
-


$
2,617,400


$
507,313


$
-


$
507,313Cost of revenues


1,020,205



-



1,020,205



337,973



-



337,973Gross profit


1,597,195



-



1,597,195



169,340



-



169,340Operating expenses:General and administrative


364,642



933,473



1,298,115



197,549



-



197,549Selling and marketing


-



-



-



-



-



-Research and development


-



53,782



53,782



-



-



-Total operating expenses


364,642



987,255



1,351,897



197,549



-



197,549Operating income (loss)


1,232,553



(987,255
)


245,298



(28,209
)


-



(28,209
)Other income (expense):Interest income


38



37



75



-



-



-Interest expense


(229,311
)


(510,410
)


(739,721
)


(274
)


-



(274
)Change in fair value of derivative liability


-



(102,584
)


(102,584
)


-



-



-Gain on settlement of payables and accrued liabilities


-



167,592



167,592



-



-



-Total other expense


(229,273
)


(445,365
)


(674,638
)


(274
)


-



(274
)Net income (loss) before provision for income taxes


1,003,280



(1,432,620
)


(429,340
)


(28,483
)


-



(28,483
)Provision for income taxes


800



-



800



-



-



-Net income (loss) from continuing operations


1,002,480



(1,432,620
)


(430,140
)


(28,483
)


-



(28,483
)Net income from discontinued operations







74,701











-Net loss









$
(355,439
)









$
(28,483
)


The geographic location of the injection well is a direct factor with relation to the radius of customer’s wells that can be economically serviced. While there are several key factors to obtaining new business, the ratio of available business per customer is based solely on the number of wells the customer has within the serviceable radius of the injection well.  As new gas wells are developed within the serviceable radius of the well, the ratio of customers to percentage of business will decrease.  Until new wells are developed the expected customer to business ratio are not expected to change. All revenue and receivable concentrations disclosed in Note 2 related to the Pro Water segment.





As of March 31, 2011, primarily all of the assets, with the exception of the Set Corp’s cost investment in WES of $91,466, pending patents of $275,475 and assets of discontinued operations of $410, were within the Pro Water segment. All assets were located with the United States.





F-23





Note 13 – Related Party Transactions




Horst Geicke





See Note 1, 7 and 9 for transactions with Horst Geicke, a significant shareholder of the Company and former member of Pro Water.





Robert Glaser





On the Effective Date, the Company granted 1,100,000 stock options to Robert Glaser with an exercise price of $0.025 per share. The options vest over one year. On January 13, 2011, the Company’s Board of Directors approved the issuance of 500,000 shares of common stock valued at $22,500 to Robert Glaser as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan. On March 31, 2011 the Company granted500,000 stock options to Robert Glaser with an exercise price of $0.05 per share according to his employment contract. The options vest over one year.





See Note 14 for disclosures regarding an amendment to Robert Glaser’s employment contract.





Cynthia Glaser





On January 13, 2011, the Company’s Board of Directors approved the issuance of 150,000 shares of common stock valued at $6,750 to Cynthia Glaser as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan. On March 31, 2011 the Company granted125,000 stock options to Cynthia Glaser with an exercise price of $0.05 per share according to her employment contract. The options vest over one year.





At March 31, 2011, the Company owes an entity controlled by Cynthia and Robert Glaser $24,085 for management services previously provided under a consulting contract. Payments to this entity during the year ended March 31, 2011 were $54,500.





Keith Morlock





On the Effective Date, the Company granted 1,100,000 stock options to Keith Morlock with an exercise price of $0.025 per share. The options vest over one year. On January 13, 2011, the Company’s Board of Directors approved the issuance of 500,000 shares of common stock valued at $22,500 to Keith Morlock as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan. On March 31, 2011 the Company granted500,000 stock options to Keith Morlock with an exercise price of $0.05 per share according to his employment contract. The options vest over one year.





At March 31, 2011, the Company owes an entity controlled by Keith Morlock $35,411 for management services previously provided under a consulting contract. Payments to this entity during the year ended March 31, 2011 were $16,500. See Note 14 for disclosures regarding an amendment to Keith Morlock’s employment contract.





Grant King





On July 7, 2010, the Company issued 14,000,000 shares of its common stock to Grant King, the Company’s Chief Executive Officer and Director in exchange for the conversion of $357,000 of unpaid, accrued and other compensations due to Mr. King. On the Effective Date, the Company granted 1,100,000 stock options to Grant King with an exercise price of $0.025 per share. The options vest over one year.





On January 13, 2011, the Company’s Board of Directors approved the issuance of 300,000 shares of common stock valued at $13,500 to Grant King as discretionary compensation bonuses. Compensation bonuses for stock came from the equity bonus plan.




See Note 9 for discussion regarding a consulting contract with Grant King.





Note 14 – Subsequent Events





On April 3, 2011, our Board of Directors approved amended employment agreements with Bob Glaser and Keith Morlock effective April 7, 2011. According to the terms of the new agreements, the foregoing officers (1) annual base salaries are: Mr. Glaser $144,000 and Mr. Morlock $144,000 (2) have the opportunity for base salary increases, annual cash and stock option bonuses based on Company performance metrics; and (3) will receive certain expense reimbursement. If any of the officers are terminated without cause, as defined in the agreements, such officer shall be entitled to a payment of eight months of the current base salary and will receive acceleration of vesting of outstanding stock options issued pursuant to the agreements.





On April 4, 2011, the Company granted 3,000,000 stock options to directors of the Company with an exercise price of $0.05 per share. The options vest over one year. Compensation bonuses for stock came from the 2010 Plan.