UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended December 31, 2010.





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





Commission File Number: 000-254888





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(formerly RG Global Lifestyles, Inc.)





(Exact Name of issuer as specified in its charter)





California

33-0230641(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





2377 W Foothill, Suite 18, Upland, CA

91786(Address of principal executive offices)

(Zip Code)





Issuer’s telephone number: (435) 608-1344





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 (§232.405 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 oNo 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  o

Accelerated filer  oNon-accelerated filer   o
(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





As of February 14, 2011, there were 218,824,436 shares of the Registrant’s common stock issued and outstanding.








INDEX


PagePART I - FINANCIAL INFORMATIONItem 1.
Financial StatementsConsolidated Balance Sheets –December 31, 2010 and March 31, 2010
F-1Consolidated Statements of Operations For the Three and Nine Months ended December 31, 2010 and the Period from October 1, 2009 (Inception) to December 31, 2009
F-2Consolidated Statement of Stockholders’ Equity (Deficit) for the Nine Months ended December 31, 2010
F-3Consolidated Statements of Cash Flows For the Nine Months ended December 31, 2010 and the Period from October 1, 2009 (Inception) to December 31, 2009
F-4Notes to Consolidated Financial Statements
F-5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2Item 3.
Quantitative and Qualitative Disclosures About Market Risk
6Item 4.
Controls and Procedures
6PART II – OTHER INFORMATIONItem 1.
Legal Proceedings
23Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23Item 3.
Defaults Upon Senior Securities
23Item 4.
[Removed and Reserved]
23Item 5.
Other Information
23Item 6.
Exhibits
23SIGNATURES

24







PART I — FINANCIAL INFORMATION


Item 1. Financial Statements





SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(formerly RG Global Lifestyles, Inc.)


CONSOLIDATED BALANCE SHEETS





As ofDecember 31,2010


As ofMarch 31,

2010Assets (Note 1)

(unaudited)Current assets:Cash and cash equivalents

$
80,309


$
281,310Accounts receivable, net


348,575



213,780Prepaids and other current assets


49,708



7,395Current assets of discontinued operations


3,503



-Total current assets


482,095



502,485Property and equipment, net


2,004,367



1,128,327Other assets


40,231



-Investment, at cost


376,440



-Intangible assets, net


166,160



187,600Goodwill


66,188



66,188Total Assets

$
3,135,481


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

$
724,632


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


385,597



14,324Accrued liabilities


451,947



23,585State income taxes payable


76,112



-Convertible note payable, net discount of $17,340


322,104



-Notes payable


574,904



3,166Current liabilities of discontinued operations


228,422



-Total current liabilities


2,763,718



173,183Convertible notes payable, long-term, net discount of $336,327


1,424,229



-Note payable, long-term


83,481



-Warrant liability


251,690



-Asset retirement obligation


9,900



9,900Total liabilities


4,533,018



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


-



-Common stock, $0.001 par value, 300,000,000 shares authorized; at December 31, 2010 and March 31, 2010, 214,914,436 and 33,333,333 issued; 214,599,436 and 33,333,333 outstanding, respectively


214,599



33,333Additional paid-in capital


2,961,648



1,696,667Accumulated deficit


(4,573,784
)


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


(1,397,537
)


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

$
3,135,481


$
1,884,600




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


F-1


SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(formerly RG Global Lifestyles, Inc.)


CONSOLIDATED STATEMENTS OF OPERATIONS


(unaudited)


Three Months

Ended

December

31,2010


Three Months

Ended

December

31,2009


Nine Months

Ended

December

31,2010


October 1, 2009

(Inception) to

December

31,2009Revenues:Water processing

$
597,117


$
192,264


$
1,689,591


$
192,264Reclaimed oil


76,870



42,818



76,870



42,818Total revenues


673,987



235,082



1,766,461



235,082Cost of revenues:Water processing


102,751



71,772



433,569



71,772Reclaimed oil


116,595



113,575



116,595



113,575Total cost of revenues


219,346



185,347



550,164



185,347Gross profit


454,641



49,735



1,216,297



49,735Operating expenses:General and administrative


432,732



100,201



1,005,039



100,201Research and development


53,782



-



53,782



-Total operating expenses


486,514



100,201



1,058,821



100,201Operating income (loss)


(31,873
)


(50,466
)


157,476



(50,466
)Other income (expense):Interest income


15



-



47



-Interest expense


(241,864
)


(110
)


(662,635
)


(110
)Change in fair value of derivative liability


(1,909
)


-



(106,990
)


-Gain on settlement of payables and accrued liabilities


10,167



-



14,234



-Total other expense


(233,591
)


(110
)


(755,344
)


(110
)Net loss before provision for income taxes


(265,464
)


(50,576
)


(597,868
)


(50,576
)Provision for income taxes


(33,689
)


-



(33,689
)


-Net loss from continuing operations


(299,153
)


(50,576
)


(631,557
)


(50,576
)Net loss from discontinued operations


(30,000
)


-



(30,369
)


-Net loss

$
(329,153
)

$
(50,576
)

$
(661,926
)

$
(50,576
)Net loss per share:Basic - continuing operations

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)Basic - discontinued operations

$
(0.00
)

$
-


$
(0.00
)

$
-Diluted - continuing operations

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)Diluted - discontinued operations

$
(0.00
)

$
-


$
(0.00
)

$
-Weighted average shares - basic


195,102,967



33,333,333



146,845,453



33,333,333Weighted average shares - diluted


195,102,967



33,333,333



146,845,453



33,333,333




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


F-2


SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(formerly RG Global Lifestyles, Inc.)


CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)


(unaudited)





Series A Preferred Stock


Common Stock


Additional Paid-in


Accumulated


Total Stockholders'EquityShares


Amount


Shares


Amount


Capital


Deficit


(Deficit)Balances - March 31, 2010 as adjusted (Note 1)


-


$
-



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
)Stock issued for conversion of convertible notes payable


-



-



31,000,000



31,000



794,000



-



825,000Reverse acquisition of SETCORP


-



-



106,982,899



106,983



-



(3,883,375
)


(3,776,392
)Stock issued for cash


-



-



6,320,000



6,320



184,180



-



190,500Common stock issued to related parties for accrued wages and consulting fees


-



-



33,192,500



33,192



862,573



-



895,765Common stock issued for services


-



-



595,704



596



12,449



-



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


-



-



2,000,000



2,000



98,000



-



100,000FMV of warrants issued in connection with asset acquisition/cost basis investment


-



-



-



-



233,599



-



233,599Common stock issued for settlement of accounts payable and accrued liabilities


-



-



1,175,000



1,175



437,600



-



438,775Stock-based compensation


-



-



-



-



92,580



-



92,580Net loss


-



-



-



-



-



(661,926
)


(661,926
)Balances – December 31, 2010


-


$
-



214,599,436


$
214,599


$
2,961,648


$
(4,573,784
)

$
(1,397,537
)





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


F-3


SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(formerly RG Global Lifestyles, Inc.)


CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)


For the Nine Months Ended

December 31, 2010


For the Period from

October 1, 2009 (Inception)

to December 31, 2009Cash flows from operating activities:Net loss

$
(661,926
)

$
(50,576
)Adjustments to reconcile net loss to net cash used in operating activities:Amortization of debt discounts related to beneficial conversion features and warrants


584,951



-Loss on divestiture of asset held for sale


30,000



-Settlement of accounts payable and accrued liabilities treated as contributed capital


400,000



-Change in fair value of derivative liabilities


106,990



-Depreciation and amortization


63,047



20,388Stock-based compensation


92,580



-Change in operating assets and liabilities:Accounts receivable


(134,122
)


(84,842
)Prepaid expenses


(63,158
)


(4,380
)Accounts payable


(110,716
)


179,530Accrued liabilities


70,016



14,870Income taxes payable


(1,110
)


-Net cash provided by operating activities


376,552



74,990Cash flows from investing activities:Purchase of fixed assets


(826,945
)


(253,308
)Cash provided by reverse acquisition


36,040



-Net cash used in investing activities


(790,905
)


(253,308
)Cash flows from financing activities:Proceeds from sale of common stock


190,500



-Contributed capital


150,000



435,000Payments on related party convertible note payable


(100,000
)


-Payments on notes payable


(26,738
)


-Net cash provided by financing activities


213,762



435,000Net increase (decrease) in cash


(200,591
)


256,682Cash of discontinued operations


(410
)


-Cash - beginning of period


281,310



-Cash - ending of period

$
80,309


$
256,682SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONNon-cash investing and financing activities:Asset retirement obligation

$
-


$
9,900Assets contributed by member

$
-


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

$
1,347,585


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

$
2,000,000


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

$
376,440


$
-Issuance of common stock in connection with convertible debt and 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


$
-




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




F-4




SUSTAINABLE ENVIRONMENTAL TECHNOLOGIES CORPORATION


(formerly RG Global Lifestyles, Inc.)


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





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





Organization and History





SET Corp.




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.





Current and future services include, and are expected to include, and are expected to include, innovative technologies, water and produced water engineering, construction and construction management, operation and maintenance services, and equipment manufacturing for industrial and municipal sectors; all of which limit their customer’ environmental impact while conserving valuable and diminishing resources that are essential to future generations. Areas of expertise include sustainable technologies specializing in water treatment and distribution, wastewater collection, treatment, and disposal/reclamation associated with coal-bed mining (CBM) and other energy producing industries, including petroleum and natural gas. With strategic partnerships, through prominent global manufacturers and distributors, SET Corp has access to a worldwide sales and distribution network.(See below for the acquisition of Pro WaterLLC (“Pro Water”) on July 7, 2010”)













On July 7, 2010 (the “Effective Date”), Sustainable Environmental Technologies Corporation (the “Company” or “SETCORP”) 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, which recommenced operations 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 will become 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 SETCORP. 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. See Note 8 for additional information regarding the note.





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 SETCORP on a diluted basis.  In addition, in connection with the acquisition certain members of management were required to sign voting agreements whereby the control group of Pro Water was allowed to determine how the votes held by these individuals would be cast. With these agreements in place, the control group of Pro Water controlled approximately 11% and 58% of the common stock of the Company on a diluted basis before and after the acquisition, respectively. The control group of Pro Water has the ability to 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 has significant influence on the organization as they have provided funding for operations of SETCORP 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 $1,880,000, in which additional influence can be subjected. In addition, Pro Water is significantly larger than SETCORP 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.




F-5





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 SETCORP filings as a change in reporting entity.  The assets and liabilities of SETCORP 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 SETCORP were reported at their carrying values, which approximated fair value, and no goodwill was recorded. The results of SETCORP have been included in the accompanying consolidated financial statements from the Effective Date. The following is a schedule of SETCORP’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 recommenced 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.





The following unaudited pro forma information was prepared as if the acquisition had taken place at the beginning of the period for the nine month periods ended December 31, 2010 and 2009:


CombinedRevenue


$
1,766,461


$
235,082Net loss from continuing operations



(1,036,608
)


(948,428
)Net loss


$
(1,064,102
)

$
(874,258
)Net per share:Basic - continuing operations


$
(0.01
)

$
(0.01
)Diluted - continuing operations


$
(0.01
)

$
(0.01
)





Note 2 – Accounting Policies and Basis of Presentation





The consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.





These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these consolidated interim financial statements be read in conjunction with the consolidated financial statements and notes thereto for SETCORP for the year ended March 31, 2010 included in SETCORP's annual report on Form 10-K and the Pro Water audited financial statements included on Form 8-K filed on November 22, 2010. The Company follows the same accounting policies in the preparation of interim reports.  The financial statements for the three and nine months ended December 31, 2010, are not necessarily indicative of the results expected for the full year.




F-6





In addition, no the prior comparable periods of operations are limited due to the commencement of Pro Water on Inception and due to the change in reporting entity.





Consolidation


The consolidated financial statements include the accounts 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 wastewater treatment plant are classified as discontinued operations.





Estimates


The preparation of financial statements in conformity with 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


Effective October 1, 2009, the Company adopted ASC Fair Value Measurements and Disclosures, except as it applies to the nonfinancial assets and nonfinancial liabilities subject to ASC 825. ASC 825 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 825 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring 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.





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 December 31, 2010 and March 31, 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 December 31, 2010:




Level 1


Level 2


Level 3


TotalAssetsCash and cash equivalents

$
80,309


$
-


$
-


$
80,309Total assets measured at fair value

$
80,309


$
-


$
-


$
80,309LiabilitiesDerivative instruments

$
-


$
251,690


$
-


$
251,690Total liabilities measured at fair value

$
-


$
251,690


$
-


$
251,690
  F-7




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


During the nine months ended December 31, 2010, the Company had one (1) customer that accounted for approximately 90% of its revenue and 91% of its accounts receivable at December 31, 2010. During the period from October 1, 2009 (Inception) to December 31, 2009, the Company had three (3) customers that accounted for approximately 87% of its revenue. The loss of these customers would have a significant impact on the Company’s financial results.





Cash Equivalents


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





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
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 December 31, 2010, the Company has not recognized any impairment of long-lived assets.





Investment


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 December 31, 2010 was $376,440, representing a 12% ownership in WES. The Company reviews the carrying value of this investment at each balance sheet date. During the three and nine months ended December 31, 2010, the Company has not recognized any losses related to our cost-method investment in World Environmental Solutions Pty. At December 31, 2010, the Company determined that the fair value of the World Environmental Solutions Pty 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-8





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 December 31, 2010, the Company has determined that the fair value of the Pro Water segment is substantially in excess of the carrying value.





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 three and nine months ended December 31, 2010:


Three Months Ended

December 31, 2010

Nine Months Ended

December 31, 2010Common stock options


2,250,000


1,409,836Common stock warrants


-


-Convertible notes


23,371,429


23,371,42925,621,429


24,781,265




"Exhibit B" There were no dilutive securities outstanding for the period from October 1, 2009 (Inception) to December 31, 2009.





F-9




Note 3 - Going Concern Considerations





The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, during the quarter ended December 31, 2010, the Company incurred an operating loss from continuing operations before income taxes of $265,464. As of December 31, 2010, the Company had a working capital deficit of $2,281,623. These conditions raise substantial doubt about the Company's ability to continue as a going concern.   With the acquisition of the DIW, management plans to address this ongoing concern by raising additional capital for the operation of the Company and settlement of liabilities through positive cash flows from the Pro Water segment and raising additional capital through either debt or equity transaction. In addition, subsequent to December 31, 2010, management re-negotiated the payment terms of the note payable to Pro Water, see Note 8 for additional information. The refinancing of DIW will allow management to utilize current cash flow to effectively pay down other debts and provide the necessary capital for future growth.





The future of the Company is dependent upon its ability to obtain equity and/or debt financing and ultimately achieving profitable operations from the development of its business segments. During the quarter ended December 31, 2010, the Company funded operations through cash flows from Pro Water’s operations and sales of equity instruments. Currently, the Company does not have any commitments or assurances for additional capital. The Company is currently attempting to settle debts and payables outstanding through negotiations. During the nine months ended December 31, 2010, the Company settled payables and accrued liabilities of approximately $1,385,000. Subsequent to quarter end the Company, settled payables and accrued liabilities of approximately $47,000. There can be no assurance that the revenue from future expected contracts or operations from current business will be sufficient enough for the Company to achieve profitability in its operations, and it is possible that additional equity or debt financing may be required to for the Company to continue as a going concern.





Note 4 – Acquisitions





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 Effective Date. The goodwill is not subject to amortization. During the nine months ended December 31, 2010, the Company recorded amortization expense related to the customer relationships of $21,440. 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 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 three months ended December 31, 2010 and 2009, and the nine months ended December 31, 2010 are as follows:


Three Months Ended December 31, 2010


Three Months Ended December 31, 2009


Nine Months Ended December 31, 2010


October 1, 2009 (Inception to December 31, 2009)Revenue

$
673,987


$
235,082


$
1,766,461


$
235,082Gross profit

$
454,641


$
49,735


$
1,216,297


$
49,735





F-10





Comparable financial information is not available for the nine months ended December 31, 2009 due to commencement of operations on October 1, 2009. In addition, all revenues presented within these financial statements were generated from the DIW.





Investment, at Cost





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.





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 8 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%





As of December 31, 2010, the Company has accounted for the transaction as a cost investment in WES on the accompanying balance sheet. The Company is currently evaluating how the purchase price should be allocated between the elements of the transaction including but not limited to their investment in WES and the patents purchased, if any. The adjustment, if any, will not have a significant impact on the Company’s financial statements as all elements are expected to be considered long term assets. In addition, since the transaction is being accounted for as an investment/asset acquisition the contingent compensation will be accounted for when triggered.





F-11





Note 5 – Property and Equipment





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





December 31,2010


March 31,2010(unaudited)Injection well

$
613,976


$
613,976Machinery and equipment


1,373,004



482,945Buildings


7,500



7,500Land


51,000



51,000Office equipment, computer software, and furniture and fixtures


27,588



-Accumulated depreciation


(68,701
)


(27,094
)Total

$
2,004,367


$
1,128,327





During the nine months ended December 31, 2010 and the period from October 1, 2009 (Inception) to December 31, 2009, the Company recorded depreciation expense of $41,607 and $13,188, respectively.





Note 6 – Discontinued Operations





The financial results of the Company discontinued operations which consist of OC Energy and the wastewater plant from the period of acquisition through December 31, 2010 are as follows:





Nine MonthsEnded

December 31,2010


Three MonthsEndedDecember 31,2010(unaudited)


(unaudited)Product sales

$
-


$
-Water treatment royalties


-



-Income taxes


-



-Loss from discontinued operations after income taxes

$
(30,369
)

$
(30,000
)





The following is the combined condensed balance sheets of OC Energy and the wastewater treatment plant as of December 31, 2010:





December 31,2010Assets

(unaudited)Current assets:Cash and cash equivalents

$
410Other current assets


3,093Total current assets

$
3,503LiabilitiesCurrent liabilities:Accounts payable

$
29,585Accrued expenses


198,837Total liabilities

$
228,422





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




F-12





Note 7 – Certain Balance Sheet Elements





Accrued Liabilities





At December 31, 2010 and March 31, 2010, the Company had accrued liabilities as follows:





December 31,2010


March 31,2010(unaudited)Accrued interest

$
228,949


$
-Royalty payable


44,054



16,548Other


178,944



7,037Total

$
451,947


$
23,585





Note 8 – 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 $158,667 at December 31, 2010.





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 SETCORPS’ discontinued water treatment plant.   The note bears interest at 10% with a default rate of 18%.   As of December 31, 2010, 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. During the nine months ended December 31, 2010, the Company recorded interest expense of $3,429 and the note had an unamortized discount of $153,667. See Note 4 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 December 31, 2010, the amount due on this loan was $29,463.





F-13


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 is approximately $200,000.
 
 As of September 30, 2010, the Company had not accounted for the beneficial conversion feature on the note and related amortization. The following is a schedule detailing the differences as of September 30, 2010 and for the three and six month period then ended if the beneficial conversion feature had been accounted for. There was no impact on the loss per share for both periods presented.
 
 As Filed

Difference

If AdjustedSeptember 30, 2010




September 30, 2010




September 30, 2010Convertible notes payable




$
2,000,000




$
(300,000
)



$
1,700,000Additional paid-in capital




$
1,977,318




$
400,000




$
2,377,318
  As Filed Three months ended September 30, 2010

Adjustment

If Adjusted Three months ended September 30, 2010

As Filed Six months ended September 30, 2010

Adjustment

If Adjusted Six months ended September 30, 2010Interest expense

$
(420,107
)
$
(100,000
)
$
(520,107
)
$
(420,107
)
$
(100,000
)
$
(520,107
)Net loss

$
(499,726
)
$
(100,000
)
$
(599,726
)
$
(332,774
)
$
(100,000
)
$
(432,774
)
 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 is currently determining the accounting impact for the change in the terms of the note. However, the Company expects to account for the change in terms of the debt as an extinguishment of the debt due to the significant change in the repayment period. Thus, the existing discount will be removed and a new discount, assuming a beneficial conversion feature exists, will be recorded. In addition, due to the extension of the payment terms, the Company has reflected $1,540,556 as long term on the accompany financial statements which represents amounts due in excess of one year per the payment schedule from the December 31, 2010 balance sheet date. In addition, at December 31, 2010, the $200,000 discount in which was present at December 31, 2010 on the note was allocated between short and long term based on the pro-rata balances of the gross principle amount of which $17,340 has been allocated to short term with the remaining $182,660 allocated to long term.
 
 Note Payable to Vendor for Settlement of Accrued Liability
 
 See Note 11 for note payable to vendor for settlement of accrued liability.
 
 Note 9 – Stockholders’ 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.
  F-14
 
 Common Stock Issued For Cash
 
 During the nine months ended December 31, 2010, the Company received proceeds totaling $190,500 resulting in the issuance of 6,320,000 shares of common stock.
 
 Common Stock to be Issued
 
 As of December 31, 2010, 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
 
 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.
 
 On October 26, 2010, the Company reached a settlement with Catalyx Fluid Solutions, Inc. and all its partners, including Juzer Jangbarwala, the Company’s formerly a company director. Accrued liabilities and accounts payable of 478,407 were settled for 50,000 in cash payments and 875,000 shares of common stock valued at $28,875 on the date of issuance. The Company accounted for the excess amount forgiven of $400,000 as contributed capital recorded within additional paid-in capital due to the related party nature of the transaction.
 
 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.
 
 Common Stock Issued to Settle Notes Payable
 
 See Note 8for Convertible Notes Payable converted in to common stock.
 
 Agreement with Grant King
 
 On December 31, 2010, the Company entered into a twenty-four (24) month agreement with Grant King, former Chief Executive 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.
 
 F-15
 
 Note 10 – Options and Warrants
 
 Options
 
 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. On the Effective Date, the Company’s Board of Directors adopted the 2010 Incentive and Non-statutory Stock Option Plan (“2010 Plan”) which allows for the issuance of 20,000,000 shares.
 
 On the Effective Date, 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 nine months ended December 31, 2010 was $92,580 and is included in general and administrative expense on the accompanying statement of operations. As of December 31, 2010, future compensation expense is approximately $92,580 and will be expensed over approximately 0.5 years.
 
 These stock options do not trade in an active securities market, and as such, we estimate the fair value of these options using the Black-Scholes option pricing model using the following assumptions:
 
 Annual dividend yieldExpected life in years


3.0Risk-free interest rate


0.64%Expected volatility


248%
 
 The following is a summary of activity of outstanding stock option activity for the nine months ended December 31, 2010:
 
 Numberof SharesBalance, March 31, 2010


-Options granted


9,603,955Options exercised


-Options cancelled or forfeited


(300,000
)Balance, December 31, 2010


9,303,955
 
 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 warrants 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.
 
 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 nine months ended December 31, 2010, the Company recorded an expense of $1,909 for the change in fair value of the warrant liability. As of December 31, 2010, the warrant liability was $251,690.


F-16


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:
 
 December 31,2010Annual dividend yield


-Expected life in years


2.42Risk-free interest rate


0.82%Expected volatility


277%
 
 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 nine months ended December 31, 2010:
 
 NumberOf SharesBalance, March 31, 2010


-Warrants granted


21,846,464Warrants exercised


-Warrants cancelled or forfeited


(1,313,939
)Balance, December 31, 2010


20,532,525
 
 Note 11 – Commitments and Contingencies
 
 Water Treatment Contract
 
 Yates Petroleum Corporation (“YPC”) was named as a co-defendant in connection with a lawsuit filed by a vendor, of the predecessor entity. In connection with this suit, YPC filed a cross-claim against the predecessor entity. YPC claims that the predecessor entity violated the contract and has damaged YPC. Specific liabilities mentioned relate to the non-payment of credits and reimbursed expenditures totaling $236,306. The cross-claim requested that the court order the predecessor entity to provide a plan for the removal of the water treatment system and reimburse YPC for legal fees in connection with the lawsuit filed against them. YPC moved to receive a summary judgment, in August 2010 the motion was denied and was assigned to mediation.
  On November 30, 2010, the Company reached an agreement, via mutually agreed upon arbitration, regarding its lawsuit with YPC. The Company reached an agreement whereby it will soley be responsible for the removal of the effluent pond and has also agreed to pay $175,000 of the original $236,306 over 24 months with an interest rate of 10% per annum. The initial payment of $8,000 was due in and paid in December 2010, with 23 monthly payments of $8,009 thereafter. The accrued liability recorded at $236,306 will be reduced when the Company completes the terms of the agreement and is relieved of the liability. The $236,306 was money YPC paid out during the original construction of the plant and was to be repaid to them at the completion of construction. In addition to these monies SET was responsible for the complete removal and remediation of the ponds, buildings and remediate the land to its original condition, prior to the plant construction. This is currently estimated to be $200,000 and is recorded in the accompanying balance sheet within discontinued operations. The company is currently obtains additionals quotes regardings the removal of the effinent po  and does not expect th lability to be material by different then the amount recorded. The influent pond and all of the remaining structures and related remediation will now be the responsibility of YPC. The plant was classified as assets held for sale in the balance sheet of discontinued operations in the amount of $30,000. No gain will be recorded until the Company completes the terms of the agreement and is relieved of the liabilities. The Company is current on the payments and terms of the agreement.
  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 SETCORP 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 December 31, 2010, 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.
  F-17


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 required by ASC 280-10-50:


Three Months Ended December 31, 2010


Three Months Ended December 31, 2009Pro Water


SETCORP


Total


Pro Water


SETCORP


TotalRevenues

$
673,987


$
-


$
673,987


$
235,082


$
-


$
235,082Cost of revenues


219,346



-



219,346



185,347



-



185,347Gross profit


454,641



-



454,641



49,735



-



49,735Operating expenses:General and administrative


119,914



312,818



432,732



100,201



-



100,201Research and development


-



53,782



53,782



-



-



-Total operating expenses


119,914



366,600



486,514



100,201



-



100,201Operating income (loss)


334,727



(366,600
)


(31,873
)


(50,466
)


-



(50,466
)Other income (expense):Interest income


15



-



15



-



-



-Interest expense


(225,641
)


(16,223
)


(241,864
)


(110
)


-



(110
)Change in fair value of derivative liability


-



(1,909
)


(1,909
)


-



-



-Gain on settlement of payables and accrued liabilities


-



10,167



10,167



-



-



-Total other expense


(225,626
)


(7,965
)


(233,591
)


(110
)


-



(110
)Net income (loss) before provision for income taxes


109,101



(374,565
)


(265,464
)


(50,576
)


-



(50,576
)Provision for income taxes


(33,689
)


-



(33,689
)


-



-



-Net income (loss) from continuing operations


75,412



(374,565
)


(299,153
)


(50,576
)


-



(50,576
)Net loss from discontinued operations










(30,000
)










-Net loss









$
(329,153
)









$
(50,576
)
 
 Nine Months Ended December 31, 2010


October 1, 2009 (Inception) to December 31, 2009Pro Water


SETCORP


Total


Pro Water


SETCORP


TotalRevenues

$
1,766,461


$
-


$
1,766,461


$
235,082


$
-


$
235,082Cost of revenues


550,164



-



550,164



185,347



-



185,347Gross profit


1,216,297



-



1,216,297



49,735



-



49,735Operating expenses:General and administrative


340,471



664,568



1,005,039



100,201



-



100,201Research and development


-



53,782



53,782



-



-



-Total operating expenses


340,471



718,350



1,058,821



100,201



-



100,201Operating income (loss)


875,826



(718,350
)


157,476



(50,466
)


-



(50,466
)Other income (expense):Interest income


30



17



47



-



-



-Interest expense


(252,124
)


(410,511
)


(662,635
)


(110
)


-



(110
)Change in fair value of derivative liability


-



(106,990
)


(106,990
)


-



-



-Gain on settlement of payables and accrued liabilities


-



14,234



14,234



-



-



-Total other expense


(252,094
)


(503,250
)


(755,344
)


(110
)


-



(110
)-



-



-Net income (loss) before provision for income taxes


623,732



(1,221,600
)


(597,868
)


(50,576
)


-



(50,576
)Provision for income taxes


(33,689
)


-



(33,689
)


-



-



--



-



-Net income (loss) from continuing operations


590,043



(1,221,600
)


(631,557
)


(50,576
)


-



(50,576
)Net loss from discontinued operations










(30,369
)










-Net loss









$
(661,926
)









$
(50,576
)


F-18





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 the nine months ended December 31, 2010, the Company had one (1) customer that accounted for approximately 90% of its revenue and 91% of its accounts receivable. During the period from October 1, 2009 (Inception) to December 31, 2009, the Company had three (3) customers that accounted for approximately 87% of its revenue and four (4) customers accounted for 89% of its accounts receivable.  The loss of these customers would have a significant impact on the Company’s financial results.




As of December 31, 2010, primarily all of the assets, with the exception of the SETCORP’s cost investment in WES of $376,440 and assets of discontinued operations of $3,503, were within the Pro Water segment. All assets were located with the United States.


Note 13 – Subsequent Events





On January 5, 2011, the Company’s issued 2,000,000 shares of common stock to Grant King in accordance with Consulting Agreement as outlined in Note 9.





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.





See Note 8 for amendment regarding amendment of Convertible Note Payable to the former member of Pro Water.




F-19


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION





This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.





Forward-looking statements may include the words "may," "could," "estimate," "intend," "continue," "believe," "optimistic," "plan," "aim," "will," "likely," "expect" or "anticipate" or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement.





Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to:





Increased competitive pressures from existing competitors and new entrants;Deterioration in general or regional economic conditions;Adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;Ability to grow business in DynIX wastewater treatment technology, and meet or exceed its return on shareholders’ equity target, which will depend on the Company’s ability to manage its capital needs and the effect of business and/or acquisitions;If acquisitions are made, the costs and successful integration of acquisitions;Barriers in trade with foreign countries or tariff regulations and other United States and foreign laws;Loss of customers or sales weakness;Effect of environmental regulations in the field of wastewater treatment associated with coal bed methane mining;Inability to achieve future sales levels or other operating results;Ability to locate suitable new products for distribution within our business sector, and retain licensing rights to such new products on acceptable terms;The continuation of favorable trends, including the drop in affordable potable water globally;Outcomes and costs associated with litigation and potential compliance matters;Inadequacies in the Company’s internal control over financial reporting, which could result in inaccurate or incomplete financial reporting;Dilution to Shareholders from convertible debt or equity financings;Loss of key management or other unanticipated personnel changes;The unavailability of funds for capital expenditures; andOperational inefficiencies in distribution or other systems.





The following discussion should be read in conjunction with the historical financial statements and related notes thereto of Sustainable Environmental Technologies Corporation including Form 10-K as of March 31, 2010 and the Pro Water, LLC audited and reviewed financial statements included on Form 8-K/A filed with the SEC on November 22, 2010.





F-20





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations





You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Financial Data" and our financial statements and related notes appearing elsewhere in this quarterly report.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under "Risk Factors" in our prior SEC filings and elsewhere in this quarterly report.





With the acquisition of Pro Water, by SET Corp, management plans on utilizing the positive cash flow in addition to raising capital for the operation of the Company and settlement of liabilities. This additional capital will be raised through either debt or equity transactions. Management is currently working to complete stage three of the DIW redesign, which is expected to increase revenue by allowing Pro Water to resale frack water back to customers.





On January 14, 2011, the terms of the convertible note were amended. As of the date of the amendment, the parties agreed the unpaid amount including accrued interest was $1,880,000. The amended terms recognize $1,880,000 as the principal and increased the term from one year to five years. The Company is to make 60 monthly payments of $35,478 commencing January 2011? The Company is currently determining the accounting treatment for the amendment.





Sustainable Environmental Technologies Corporation





On July 29, 2010, the Company changed its name to Sustainable Environmental Technologies Corporation (“SET Corp”).





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.





Current and future services include, and are expected to include, innovative technologies, water and produced water engineering, construction and construction management, operation and maintenance services, and equipment manufacturing for industrial and municipal sectors; all of which limit their customer’s environmental impact while conserving valuable and diminishing resources that are essential to future generations. Areas of expertise include sustainable technologies specializing in water treatment and distribution, wastewater collection, treatment, and disposal/reclamation associated with coal-bed mining (CBM) and other energy producing industries, including petroleum and natural gas. With strategic partnerships, through prominent global manufacturers and distributors, SET Corp has access to a worldwide sales and distribution network. (See below for the acquisition of Pro Water LLC (“Pro Water”) on July 7, 2010)





Pro Water Injection Well





On July 7, 2010, the Company acquired Pro Water LLC and its Blue bench Deep Injection Well "DIW". 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.




F-21





DynIXTM Technology





The Company, under the name SET Corp, 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.





In April of 2008, we constructed and successfully tested its first plant in Wyoming in connection with an agreement with Yates Petroleum, Inc. This agreement is 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.





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





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 systems offer considerable financial and environmental benefits resulting from unique water generation and superior energy saving capabilities. Consequently, a significant reduction of a facility’s carbon footprint is achieved increasing green ratings, asset values, and providing a buffer to the imminent emissions trading scheme.  This technology is unique as it makes water, it is cleaner and more efficient than competing solutions, and has applications in new and existing office buildings and complexes, supermarkets, data centers, telecommunications facilities, hospitals, schools, cluster housing such as retirement villages, tourist resorts, mining camps, agricultural meat production and remote communities.  Basically anywhere there is a requirement for many functions emanating from a single reliable, efficient and clean power source. MultiGen fuel can be natural gas, biogas, propane etc.





F-22





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.





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.





RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 2010 AND 2009





Due to the Company commencing operations on October 1, 2009 (Inception), the results for the period from October 1, 2009 (Inception) to December 31, 2009 are the same as the results of operations for the three months ended December 31, 2009.





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





Three Months Ended

December 31, 2010


Three Months Ended

December 31, 2009


Nine Months Ended

December 31, 2010


October 1, 2009 (Inception)

to December 31, 2009Combined Statement of Operations Data:Revenue

$
673,987


$
235,082


$
1,766,461


$
235,082Cost of revenue


219,346



185,347



550,164



185,347Operating expenses


486,514



100,201



1,058,821



100,201Operating income (loss)


(31,873
)


(50,466
)


157,476



(50,466
)Other expense


(233,591
)


(110
)


(755,344
)


(110
)Loss from continuing operations


(299,153
)


(50,576
)


(631,557
)


(50,576
)Net loss

$
(329,153
)

$
(50,576
)

$
(661,926
)

$
(50,576
)Net loss per weighted average common share

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)





Revenues increased $438,905 or 187%, for the three months ended December 31, 2010 compared to the corresponding period of the prior year. This increase resulted from a 34% increase in revenue from its major customer that accounted for 90% of revenue compared to 56% for the corresponding prior period. 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 comparable period, 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 $33,999 or 18%, for the three months ended December 31, 2010 compared to the corresponding period of the prior year. As a percentage of revenues, cost of revenue was 33% compared to 79% in the prior year period. 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.




F-23




Total operating expenses increased $386,313 or 386% for the three months ended December 31, 2010 compared to the corresponding period of the prior year 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 46,000 for stock based compensation, $74,000 in professional fees, 55,000 in salaries and wages, 86,000 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 $53,000 in 2010 represented costs incurred in our development of MultiGen system.




Total other expense increased $233,481 or 212,255% for the three months ended December 31, 2010 compared to the corresponding prior period 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 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.







LIQUIDITY AND CAPITAL RESOURCES




The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities and other commitments in the normal course of business. The report of our independent auditors contains an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern as a result of recurring losses and negative cash flows. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary if we are unable to continue as a going concern.  With the acquisition of the DIW, management plans to address this ongoing concern by raising additional capital for the operation of the Company and settlement of liabilities through positive cash flows from Pro Water and raising additional capital through either debt or equity transaction. In addition, subsequent to quarter end management refinanced the DIW for an increased period of five years. The refinancing of DIW will allow management to utilize current cash flow to effectively pay down existing debt and provide the necessary capital for future growth.





As shown in the accompanying financial statements, during the quarter ended December 31, 2010, the Company incurred an operating loss from continuing operations before income taxes of $265,464. As of December 31, 2010, the Company had a working capital deficit of $2,281,623. These conditions raise substantial doubt about the Company's ability to continue as a going concern.





The Company’s principal sources of liquidity consist of cash and cash equivalents and the issuance of equity and/or debt securities. In addition to funding operations, the Company’s principal short-term and long-term liquidity needs have been, and are expected to be, the debt service requirements of its notes payable, capital expenditures and general corporate expense expenses. Due to the acquisition of Pro Water by SETCORP, management plans on raising additional capital for the operation of Pro Water and settlement of SETCORP liabilities through positive cash flows from the Company and raising additional capital through either debt or equity transaction. Management is currently working to complete stage three of the DIW redesign in which is expected to increase revenue by allowing Pro Water to resale frack water back to customers. In addition, management refinanced the DIW from one year to an increased period of five years.  The refinancing of DIW will allow management to utilize current cash flow to effectively pay down existing debt and provide the necessary capital for future growth. There is no assurance that the proceeds from future financings will be sufficient to generate required cash flows. As of December 31, 2010, the Company had cash and cash equivalents of $80,309 and liabilities outstanding of $4,533,018.





The Company believes that its existing sources of liquidity, along with cash expected to be generated from the issuance of debt and equity securities, will be sufficient to fund its operations, anticipated capital expenditures, working capital and other financing requirements through March 31, 2011. The future of the Company is dependent upon its ability to obtain equity and/or debt financing and ultimately achieving profitable operations from the development of its business segments. During the quarter ended December 31, 2010, the Company funded operations through the operations of the DIW, and through equity and debt offerings. Currently, the Company does not have any commitments or assurances for additional capital.  In order to fund capital expenditures or increase working capital above the current plan, or complete any acquisitions, the Company may seek to obtain additional debt or equity financing. However, 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.





OPERATING ACTIVITIES





Cash provided by operating activities during the nine months ended December 31, 2010 and 2009 were $376,552 and $74,990, respectively.  In 2010, this was the result of a net loss of $661,926 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 $1,277,568 and net usage of current assets and liabilities of $239,090. In 2010, 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 2009, the increase in cash is directly related to the Company extending payments on accounts payable to preserve capital.




F-24





INVESTING ACTIVITIES





Cash used in investing activities during the nine months ended December 31, 2010 and 2009 were $790,905 and $253,308, respectively. In 2010 and 2009, the primary investing activity was purchase of fixed assets related to the injection well of $826,945 and $235,308, offset by cash provided by the reverse acquisition of $36,040 in 2010. Significant expenditures were made by the Company to automate, winterize and add additional stations to the injection well for increased production.





FINANCING ACTIVITIES





Financing cash flows during the nine months ended December 31, 2010, amounted to $213,762 and consisted $190,500 of proceeds from sale of common stock, $150,000 of contributed capital, payment on a related party convertible note payable of $100,000, and payment note payables of $26,738. 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 comparable 2009 period, financing cash flows consisted of capital contributions of $435,000. 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 a significant impact on the results we report in our financial statements. The 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 relate to the fair value of warrant liabilities.  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. For additional information see Note 2, “Summary of Significant Accounting Policies” in the notes to our reviewed financial statements appearing elsewhere in this quarterly report and our annual audited financial statements appearing on Form 10-K and Pro Water, LLC audit filed on Form 8-K/A on November 22, 2010. 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.





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 3. Quantitative and Qualitative Disclosures About Market Risk – N/A





Item 4T. 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.  In the course of this evaluation, our chief executive officer and principal accounting  officer concluded that our disclosure controls and procedures were not effective in ensuring that material information relating to the Company required to be disclosed by the Company in 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 and that such information is accumulated and communicated to management, including the chief executive officer and the Principal Accounting officer, as appropriate, to allow timely decisions regarding required disclosure.





F-25





Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.





Changes in Internal Control Over Financial Reporting





Pursuant to Rule 13a-15(d) or Rule 15d-15(d) of the Exchange Act, our management, with participation with the Company’s Chief Executive and Principal Accounting Officers, is responsible for evaluating any change in the company's internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act), that occurred during each of the issuer's fiscal quarters that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.





Based on the foregoing evaluation, the Company has concluded that there was no change in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  The Company continues to have material weaknesses in its internal control over financial reporting.





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PART II — OTHER INFORMATION





Item 1. 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 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.





Other than the foregoing, the Company is not aware of any litigation, either pending or threatened.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item 3. Defaults Upon Senior Securities





None.





Item 4. [Removed and Reserved]





None.





Item 5. Other Information





Compensatory Arrangements of Certain Officers





On July 7, 2010, the Board of Directors granted to Grant King, our Chief Executive Officer and interim Chief Financial Officer, a restricted stock bonus award of 3,480,000 shares of our common stock.





Item 6. Exhibits.





The following Exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q:





ExhibitNumber

Description of Document31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act





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SIGNATURES





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, thereunto duly authorized.





Sustainable Environmental Technologies Corporation





Signature

Title
Date/s/ Robert GlaserRobert Glaser

Chief Executive Officer
February 14, 2011/s/ Cynthia GlaserCynthia Glaser

Principal Accounting Officer
February 14, 2011





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