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** **

 

** **

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                  | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                   |                                                                                               |
| **For the quarterly period ended June 30,  2010** |
| ** **                                             |
| **or**                                                 |
|                                                   |                                                                                               |
| **o******                                              | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                   to                   **

 

**COMMISSION FILE NUMBER 333-151108**

 

**WASTE2ENERGY HOLDINGS, INC.**

(ExactName of Registrant as Specified in its Charter)

 

| **Delaware**

(State  or Other Jurisdiction of

Incorporation  or Organization)                      | ** ** | **26-2255797**

(IRS  Employer

Identification  Number) |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|
| ** **                                                                                           | ** ** | ** **                                              |
| **1  Chick Springs Road, Suite 218, Greenville, SC**

(Address  of Principal Executive Offices) | ** ** | **29609**

(Zip  Code)                                  |

 

Registrant’s telephone number including area code: **(864)679-1625**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x   Noo

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or such shorter period that the registrant was required to submit andpost such files.  Yes o   Noo

 

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

 

| Large  accelerated filer o |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller  reporting company x |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o   Nox

 

**Applicable Only to Corporate Issuers:**

The number of shares of the Registrant’s Common Stock outstanding as ofthe last practicable date:

 
| **Class**                        | ** ** | **Outstanding as of August 16, 2010** |
|----------------------------------|------------|--------------------------------------------|
| Common  Stock, $0.0001 par value |       | 50,702,742                                 |

 

 

 

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**WASTE2ENERGY HOLDINGS, INC.**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                               | **Page** |
|----------------------------------------------------------------------------------------------------------|----------|
| **PART I - FINANCIAL INFORMATION**                                                                  |
|                                                                                                     |     |
| Item 1. Financial Statements                                                                             | 3        |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 25       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                      | 28       |
| Item 4T. Controls and Procedures                                                                         | 28       |
| **PART II -  OTHER INFORMATION**                                                                    |
|                                                                                                     |     |
| Item  1. Legal Proceedings                                                                               | 30       |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                     | 30       |
| Item 3. Defaults Upon Senior Securities                                                                  | 30       |
| Item  4. Removed and Reserved                                                                            | 31       |
| Item  5. Other Information                                                                               | 31       |
| Item 6.  Exhibits                                                                                        | 31       |
| **SIGNATURES**                                                                                           | 32       |

 

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**PART IFinancial Information**

 

**ITEM1  FINANCIAL STATEMENTS.**

 

**WASTE2ENERGY HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**JUNE 30, 2010 AND MARCH 31, 2010**

 
| ** **                                                                                                                                                                             | ** ** | **June 30,** | ** ** | ** **         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2010**          | ** ** | **March 31,** | ** ** |
| ** **                                                                                                                                                                             | ** ** | **(Unaudited)**   | ** ** | **2010**           | ** ** |
| ASSETS                                                                                                                                                                                 |       |              |       |               |       |
| CURRENT  ASSETS:                                                                                                                                                                       |       |              |       |               |       |
| Cash                                                                                                                                                                                   |       | $                 | 31,638     |               | $          | 138,945 |   |
| Contracts  Receivable                                                                                                                                                                  |       | 9,892             |       | —             |       |
| Deferred  job costs                                                                                                                                                                    |       | 419,220           |       | 396,692            |       |
| Deferred  financing costs                                                                                                                                                              |       | 2,173,143         |       | 2,486,382          |       |
| VAT  recoverable                                                                                                                                                                       |       | 159,143           |       | 109,818            |       |
| Other  current assets                                                                                                                                                                  |       | 91,211            |       | 136,396            |       |
| Current  assets from discontinued operations                                                                                                                                           |       | 3,025             |       | 22                 |       |
| Total  current assets                                                                                                                                                                  |       | 2,887,272         |       | 3,268,255          |       |
| Equipment,  net                                                                                                                                                                        |       | 78,128            |       | 30,478             |       |
| Intangibles,  net                                                                                                                                                                      |       | 100,045           |       | 91,459             |       |
| Cash-restricted  in escrow                                                                                                                                                             |       | 324,759           |       | 285,946            |       |
| Security  deposits                                                                                                                                                                     |       | 4,337             |       | 3,489              |       |
| **TOTAL ASSETS**                                                                                                                                                                       |       | $                 | 3,394,541  |               | $          | 3,679,627 |   |
|                                                                                                                                                                                   |       |              |       |               |       |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                                                                                                            |       |              |       |               |       |
| CURRENT  LIABILITIES:                                                                                                                                                                  |       |              |       |               |       |
| Notes  payable, net                                                                                                                                                                    |       | $                 | 5,263,116  |               | $          | 2,770,448 |   |
| Accounts  payable                                                                                                                                                                      |       | 1,427,602         |       | 1,332,040          |       |
| Accrued  expenses                                                                                                                                                                      |       | 1,087,418         |       | 1,030,559          |       |
| Deferred  revenue                                                                                                                                                                      |       | 505,032           |       | 511,250            |       |
| Due  to related parties                                                                                                                                                                |       | 787,140           |       | 808,808            |       |
| Other  current liabilities                                                                                                                                                             |       | —            |       | 115,000            |       |
| Derivative  liability                                                                                                                                                                  |       | 2,373,476         |       | 3,084,077          |       |
| Current  liabilities from discontinued operations                                                                                                                                      |       | 238,328           |       | 250,893            |       |
| Total  current liabilities                                                                                                                                                             |       | 11,682,112        |       | 9,903,075          |       |
| **TOTAL LIABILITIES**                                                                                                                                                                  |       | 11,682,112        |       | 9,903,075          |       |
|                                                                                                                                                                                   |       |              |       |               |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                         |       |              |       |               |       |
|                                                                                                                                                                                   |       |              |       |               |       |
| STOCKHOLDERS’  DEFICIT:                                                                                                                                                           |       |              |       |               |       |
| Common  stock, $0.0001 par value, 200,000,000 shares authorized, 50,702,742 and  50,544,893 shares issued and outstanding at June 30, 2010 and  March 31, 2010, respectively |       | 5,071             |       | 5,055              |       |
| Additional  paid in capital                                                                                                                                                            |       | 26,105,250        |       | 24,145,924         |       |
| Foreign  currency translation adjustment                                                                                                                                               |       | 60,894            |       | 54,317             |       |
| Accumulated  deficit                                                                                                                                                                   |       | (34,458,786       | )          | (30,428,744        | )          |
| **TOTAL STOCKHOLDERS’ DEFICIT**                                                                                                                                                   |       | (8,287,571        | )          | (6,223,448         | )          |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                   |       | $                 | 3,394,541  |               | $          | 3,679,627 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**WASTE2ENERGY HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **June 30,**      | ** ** |
| ** **                                                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                                       |       |                   |       |   |   |
| Contract  revenues                                         |       | $                      | 14,834     |   | $ | 770,388 |   |
| Contract  costs                                            |       | 157,885                |       | 770,550 |   |
| **GROSS LOSS**                                             |       | (143,051               | )          | (162 | ) |
| Operating  Expenses                                        |       | 2,121,547              |       | 1,859,146 |   |
| **OPERATING LOSS**                                         |       | (2,264,598             | )          | (1,859,308 | ) |
| **OTHER INCOME (EXPENSE):**                                |       |                   |       |   |   |
| Interest  expense                                          |       | (4,465,492             | )          | (426,395 | ) |
| Interest  income                                           |       | —                 |       | 132 |   |
| Loss  on deemed extinguishment of debt                     |       | (31,201                | )          | (669,082 | ) |
| Loss  on extinguishment of debt                            |       | (57,074                | )          | — |   |
| Foreign  currency exchange gain                            |       | 1,059                  |       | 36,576 |   |
| Gain  on legal settlement                                  |       | —                 |       | 1,510,995 |   |
| Gain  on change in fair value of derivative liability      |       | 2,799,944              |       | — |   |
| **TOTAL OTHER INCOME (EXPENSE), NET**                      |       | (1,752,764             | )          | 452,226 |   |
| Loss  from continuing operations before income tax benefit |       | (4,017,362             | )          | (1,407,082 | ) |
| Income  tax benefit                                        |       | —                 |       | — |   |
| **LOSS FROM CONTINUING OPERATIONS**                        |       | (4,017,362             | )          | (1,407,082 | ) |
| **LOSS FROM DISCONTINUED OPERATIONS**                      |       | (12,680                | )          | (24 | ) |
| **NET LOSS**                                               |       | (4,030,042             | )          | (1,407,106 | ) |
| Foreign  currency translation adjustment                   |       | 6,577                  |       | (118,370 | ) |
| **COMPREHENSIVE LOSS**                                     |       | $                      | (4,023,465 | ) | $ | (1,525,476 | ) |
|                                                       |       |                   |       |   |   |
| Weighted  Average Common Shares Outstanding:               |       |                   |       |   |   |
| Basic                                                      |       | 52,757,421             |       | 46,754,294 |   |
| Diluted                                                    |       | 52,757,421             |       | 46,754,294 |   |
| **LOSS PER COMMON SHARE (Basic and Diluted):**             |       |                   |       |   |   |
| Continuing  operations                                     |       | $                      | (0.08      | ) | $ | (0.03 | ) |
| Discontinued  operations                                   |       | —                 |       | — |   |
| **NET LOSS PER COMMON SHARE**                              |       | $                      | (0.08      | ) | $ | (0.03 | ) |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**WASTE2ENERGY HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009**

**(Unaudited)**

 
| ** **                                                                                                 | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Operating activities:**                                                                                  |       |       |       |       |       |
| **Loss from continuing operations**                                                                        |       | $          | (4,017,362 | )          | $          | (1,407,082 | ) |
| Adjustments  to reconcile loss from continuing operations to net cash used in operating  activities:       |       |       |       |       |       |
| Foreign  currency exchange gains                                                                           |       | (1,059     | )          | (36,576    | )          |
| Provision  for loss on contract in progress                                                                |       | (43,809    | )          | —     |       |
| Depreciation  and amortization                                                                             |       | 5,634      |       | —     |       |
| Amortization  of discount on notes payable                                                                 |       | 2,544,517  |       | 120,951    |       |
| Amortization  of deferred financing costs                                                                  |       | 1,141,614  |       | 149,069    |       |
| Loss  on deemed extinguishment of debt                                                                     |       | 31,201     |       | 669,082    |       |
| Loss  on extinguishment of debt                                                                            |       | 57,074     |       | —     |       |
| Additional  interest expense in connection with excess of value of embedded derivative  over notes payable |       | 505,895    |       | —     |       |
| Change  in fair value of derivative liability                                                              |       | (2,799,944 | )          | —     |       |
| Warrants  issued for consulting services                                                                   |       | 546,500    |       | 57,104     |       |
| Warrants  issued for compensation                                                                          |       | 73,550     |       | —     |       |
| Common  stock issued for consulting services                                                               |       | 53,077     |       | 585,000    |       |
| Accrued  and unpaid interest expense                                                                       |       | (11,114    | )          | —     |       |
| Gain  on legal settlement                                                                                  |       | —     |       | (1,510,995 | )          |
| **Changes in assets and liabilities:**                                                                     |       |       |       |       |       |
| Contracts  Receivable                                                                                      |       | (8,487     | )          | 64,472     |       |
| Unbilled  amounts due on uncompleted contracts                                                             |       | —     |       | (154,051   | )          |
| Deferred  job costs                                                                                        |       | (44,436    | )          | (137,018   | )          |
| Other  assets                                                                                              |       | (8,555     | )          | (133,796   | )          |
| Accounts  payable                                                                                          |       | 94,667     |       | 534,018    |       |
| Accrued  expenses                                                                                          |       | 139,828    |       | (60,520    | )          |
| Deferred  revenue                                                                                          |       | (7,460     | )          | —     |       |
| VAT  payable / recoverable                                                                                 |       | (48,834    | )          | 194        |       |
| Due  to related parties                                                                                    |       | (21,667    | )          | 22,470     |       |
| **Net cash used in operating activities**                                                                  |       | (1,819,170 | )          | (1,237,678 | )          |
| Investing  activities:                                                                                     |       |       |       |       |       |
| Purchase  of equipment                                                                                     |       | (52,790    | )          | (19,962    | )          |
| Cost  of applying for patents                                                                              |       | (8,506     | )          | —     |       |
| **Net cash used in investing activities**                                                                  |       | (61,296    | )          | (19,962    | )          |
| Financing  activities:                                                                                     |       |       |       |       |       |
| Proceeds  from notes payable, net of financing costs                                                       |       | 1,931,350  |       | 1,104,000  |       |
| Principal  payments on note payable                                                                        |       | (100,000   | )          | (500,000   | )          |
| Consideration  for cancellation and return of common stock                                                 |       | —     |       | (20,000    | )          |
| Increase  in restricted cash held for note payable interest repayments                                     |       | (38,813    | )          | —     |       |
| Issuance  of common stock in private placement, net of financing costs                                     |       | —     |       | 825,610    |       |
| Other  financing costs                                                                                     |       | —     |       | (210,000   | )          |
| **Net cash provided by financing activities**                                                              |       | 1,792,537  |       | 1,199,610  |       |
| Discontinued  operations:                                                                                  |       |       |       |       |       |
| Operating  cash flows                                                                                      |       | (28,237    | )          | (10,000    | )          |
| **Net cash used in discontinued operations**                                                               |       | (28,237    | )          | (10,000    | )          |
| Effect  of exchange rate changes on cash                                                                   |       | 8,859      |       | 95,213     |       |
| **Net increase (decrease) in cash**                                                                        |       | (107,307   | )          | 27,183     |       |
| Cash  — beginning                                                                                     |       | 138,945    |       | 27,360     |       |
| **CASH — Ending**                                                                                     |       | $          | 31,638     |       | $          | 54,543 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1:                THE COMPANY**

 

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

 

**Organization**

 

We are a “cleantech”technology company that designs, builds, installs and sells waste to energyplants that generate “Renewable Green Power” converting biomass or other solidwaste streams traditionally destined for landfills into clean renewableenergy.   We target waste to energytechnologies that generate “green power” converting waste streams,traditionally destined for landfill, into clean, renewableenergy.  The Company seeks small footprint, simple, cost effectivetechnologies that are scalable, modular, environmentally friendly and robustenough to operate in harsh and remote environments.  The Company isforging strategic alliances for the regional fabrication and manufacturing ofits BOSTM systems, specialized heat recovery steamgeneration, control housing panels, green power electricity production and thedevelopment of sales and distribution channels.

 

On January 22, 2010,the Company received notice from the Financial Industry Regulatory Authority(FINRA) that shares of the Company’s common stock were no longer eligible fortrading on the OTC Bulletin Board (“OTCBB”), as a result of the Company’sdelayed filing of its quarterly report on Form 10-Q for the quarter ended June 30,2009.  The Company’s common stock iscurrently traded on the OTC “Pink Sheets” under the symbol “WTEZ.PK”.   A market maker has submitted an applicationfor the Company to become eligible to resume trading on the OTCBB, howeverthere can be no assurance that the request will be granted.

 

***Basis of Presentation***

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordance withUnited States generally accepted accounting principles (“GAAP”) and with theinstructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not include all information and footnotesrequired by GAAP for a complete set of financial statements.  In theopinion of management, all adjustments, (including normal recurring accruals)considered necessary for a fair presentation have been included in thefinancial statements.  Operating results for the interim period arenot necessarily indicative of the results that may be expected for the fiscalyear ended March 31, 2011.  This Form 10-Q should be readin conjunction with the Audited Consolidated Financial Statements andaccompanying Notes to the Consolidated Financial Statements in our Form 10-Kfor the year ended March 31, 2010.

 

All significant intercompanyaccounts and transactions have been eliminated inconsolidation.  Significant events which occurred subsequent to June 30,2010, and prior to our filing date, have been disclosed in Note 10, SubsequentEvents.

 

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** **

**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

 The Company incurred a net loss fromcontinuing operations of $4,017,362 and used $1,819,170 of cash in continuingoperations for the three months ended June 30, 2010.  At June 30,2010, the Company had a working capital deficit of $8,794,840** **and a $34,458,786 accumulateddeficit. These conditions raise substantial doubt about the Company’s abilityto continue as a going concern. These unaudited interim condensed consolidatedfinancial statements do not include any adjustments relating to the recovery ofassets or the classification of liabilities should the Company be unable tocontinue as a going concern.

 

The Company has principallyfinanced its operations for the last nine months using proceeds from short termborrowings primarily from the sale of its 12% Senior Convertible Debentures ina series of private placement transactions (see Note 6). The first tranche ofDebentures having an aggregate principal balance of $2,573,000 mature October1, 2010. If the Company is unable to repay this debt when due, the Company willbe in default under the debt and the holders may seek to enforce any and all oftheir rights under applicable laws, which may have a material adverse effect onour business and ability to continue operations.

 

Management believes theCompany’s ability to continue operations is dependent on its ability tocontinue to raise capital. At the present time, we have no commitments for anyadditional financing. If the Company is unable to raise additional capital orencounters unforeseen circumstances, it may be required to take additionalmeasures to conserve liquidity, which could include, but not necessarily belimited to, curtailing its operations, suspending the pursuit of its businessplan, and controlling overhead expenses.  The Company cannot provideany assurance that it will raise additional capital as necessary nor can itprovide any assurance that new financing will be available to it oncommercially acceptable terms, if at all. Management believes that theability to raise additional capital could be negatively impacted as a result ofits securities not being traded on an active trading market.

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 3:               SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Use of Estimates***

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statements andthe reported amounts of income and expenses during the reportedperiod.  The Company evaluates all of its estimates on an on-goingbasis. Significant estimates and assumptions include the valuation of acquiredassets including the establishment of a deferred tax liability, the usefullives of acquired intangible assets, the fair value of derivative liabilitiesand the valuation of equity instruments.  In addition, the Company’sbusiness involves making significant estimates and assumptions in the normal courseof business relating to its contracts and the long-term duration of a contractcycle. The most significant estimates with regard to its contracts relate tothe estimating of total forecasted construction contract revenues, costs andprofits in accordance with accounting for long-term contracts, as well asestimating the allowance for doubtful accounts with respect to contractsreceivable.

 

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

 

***Concentrations of Credit Risk***

 

 Financial instruments that potentially exposethe Company to credit risk include cash. At times, our cash may be in uninsuredor in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”)insurance limit. At June 30, 2010, the Company did not have any cash with anyfinancial institution that exceeded the FDIC insurance limits.

 

The Company places its cashwith various financial institutions and has not experienced any losses on theseaccounts.

 

***Deferred Financing Costs***

 

Costs relating to the debtportion of private placement offerings and notes are capitalized and amortizedover the term of the related debt using the straight-line method whichapproximates the interest method.  When a loan is paid in full, anyunamortized financing costs are removed from the related accounts and chargedto operations.  During the three months ended June 30, 2010, theCompany incurred $828,375 in private placement fees (including the non-cashvalue of warrants to be issued to the placement agent) in connection with theprivate placement of debt. Amortization of deferred financing costs is acomponent of interest expense in the condensed consolidated statements ofoperations (See Note 6).

 

***Fair value of Financial Instruments***

 

The Company’s carryingamount reported in the condensed consolidated balance sheet for cash, contractsreceivable, accounts payable and notes payable approximates fair value due tothe immediate or short-term maturity of these financial instruments. The fairvalue of derivative liabilities is estimated using a Black-Scholes valuationmodel. See “Fair Value Measurements” and “Notes Payable” footnotes to thecondensed consolidated financial statements below.

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

***Net Loss Per Share***

 

TheCompany computes net loss per share in accordance with The Accounting StandardsCodification (“ASC”) 260 Earnings per Share (“ASC 260”). Under ASC 260, basicnet loss per share is computed by dividing net loss per share available tocommon stockholders by the weighted average number of shares outstanding forthe period and excludes the effects of any potentially dilutive securities.Diluted earnings per share, if presented, would include the dilution that wouldoccur upon the exercise or conversion of all potentially dilutive securitiesinto common stock using the “treasury stock” and/or “if converted” methods asapplicable. The computation of basic loss per share for the three months endedJune 30, 2010 and 2009 excludes potentially dilutive securities because theirinclusion would be anti-dilutive. Of the total outstanding warrants to purchase34,624,293 shares of common stock at June 30, 2010, 32,213,032 were excludedfrom the computation of basic and diluted net loss per share; however theremaining 2,411,261 warrants exercisable at $0.01 per share and issuable to theplacement agent as additional consideration for each 12% Convertible Debentureclosing (see Note 6), are included in the weighted average shares outstanding(basic and diluted), as they are deemed to be outstanding stock for purposes ofthis calculation due to the $0.01 exercise price. Warrants to purchase 20,425,750shares of common stock at June 30, 2009 were excluded from the computation ofbasic and diluted net loss per share.

 

***Fair value measurements***

 

TheCompany carries various assets and liabilities at fair value in theaccompanying condensed consolidated balance sheets. Fair value is defined asthe amount that would be received for an asset or paid to transfer a liability(i.e., an exit price) in the principal or most advantageous market for the assetor liability in an orderly transaction between market participants on themeasurement date. The Company maximizes the use of observable inputs andminimizes the use of unobservable inputs when measuring fair value. Threelevels of inputs that may be used to measure fair value are as follows:

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

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

Thetable below summarizes the fair values of our financial liabilities as of June30, 2010:

 
| ** **           | ** ** | **Fair value at** | ** ** | **Fair value measurement using** | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|
| ** **           | ** ** | **June 30, 2010** | ** ** | **Level 1**                                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| ** **           | ** ** | ** **                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivative liability |       | $                           | 2,373,476  |                                            | $          | — |   | $ | — |   | $ | 2,373,476 |   |
|                      |            |                             |            |                                                 |            |  |  |  |  |  |  |  |  |

 

Thefollowing table sets forth a summary of the changes in the fair value of ourLevel 3 financial liabilities that are measured at fair value on a recurringbasis:

 
| ** **                                           | ** ** | **Three Months Ended**      | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **June 30, 2010** | ** ** |
|                                                 |       |                        |       |
| Beginning balance                                    |       | $                           | 3,084,077  |   |
| Additions                                            |       | 2,089,343                   |       |
| Gain on change in fair value of derivative liability |       | (2,799,944                  | )          |
| Ending Balance                                       |       | $                           | 2,373,476  |   |

 

Thefollowing is a description of the valuation methodologies used for these items,as well as the general classification of such items:

 

*Derivative liability* — these instrumentsare embedded within the Company’s 12% Senior Convertible Debentures. Theseinstruments were valued using pricing models which incorporate the Company’sstock price, credit risk, volatility, U.S. risk free rate, transactiondetails such as contractual terms, maturity and amount of future cash inflows,as well as assumptions about probability and the timing of certain eventstaking place in the future. These embedded derivatives are included in thederivative liability in the accompanying condensed consolidated balance sheetat June 30, 2010. See Note 6 for additional disclosure.

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 3:               SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES (CONTINUED)**

 

***Recently Adopted Accounting Pronouncements***

 

The Company adopted ASC 810,formerly SFAS 167, “Amendments to FASB Interpretation No. 46(R)” (ASC 810) onApril 1, 2010. ASC 810 eliminates Interpretation 46(R)’s exceptions toconsolidating qualifying special-purpose entities, contains new criteria fordetermining the primary beneficiary, and increases the frequency of requiredreassessments to determine whether a company is the primary beneficiary of avariable interest entity. ASC 810 also contains a new requirement that anyterm, transaction, or arrangement that does not have a substantive effect on anentity’s status as a variable interest entity, a company’s power over avariable interest entity, or a company’s obligation to absorb losses or itsright to receive benefits of an entity must be disregarded in applyingInterpretation 46(R)’s provisions. The elimination of the qualifyingspecial-purpose entity concept and its consolidation exceptions means moreentities will be subject to consolidation assessments and reassessments. Theadoption of this pronouncement did not have a material impact on the Company’sconsolidated financial position and results of operations.

 

The Company adopted ASC 860,formerly SFAS 166, “Accounting for Transfers of financial Assets — an amendmentof FASB Statement No. 140” (ASC 860) on April 1, 2010. ASC 860 eliminates theconcept of a qualifying special-purpose entity, creates more stringentconditions for reporting a transfer of a portion of a financial asset as asale, clarifies other sale-accounting criteria, and changes the initialmeasurement of a transferor’s interest in transferred financial assets. Theadoption of this pronouncement did not have a material impact on the Company’sconsolidated financial position and results of operations.

 

Accounting standards thathave been issued or proposed by the FASB or other standards-setting bodies thatdo not require adoption until a future date are not expected to have a materialimpact on our consolidated financial position and results of operations uponadoption.

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 4:               CONTRACTS IN PROGRESS**

 

Thefollowing is a summary of the one contract in progress accounted for under thepercentage-of-completion method at June 30, 2010 and March 31, 2010:

 
| ** **                                    | ** ** | **June 30, 2010** | ** ** | **March 31, 2010** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                                          |       |                        |       |                         |       |
| Costs incurred on uncompleted contract        |       | $                           | 5,310,792  |                         | $          | 5,195,800 |   |
| Estimated loss on contract                    |       | (978,584                    | )          | (863,592                     | )          |
|                                          |       | 4,332,208                   |       | 4,332,208                    |       |
| Less:  Billings to date                       |       | (3,788,323                  | )          | (3,788,323                   | )          |
|                                          |       | 543,885                     |       | 543,885                      |       |
| Provision  for uncollectible unbilled amounts |       | (543,885                    | )          | (543,885                     | )          |
|                                          |       | $                           | —     |                         | $          | — |   |

 

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

 

All other contracts havebeen accounted for under the completed contract method. Total deferred jobcosts accounted for under the completed contract method at June 30, 2010 andMarch 31, 2010 were approximately $419,000 and $397,000, respectively.

 

Estimated future losses onall contracts in progress which are included in accrued expenses in theaccompanying condensed consolidated balance sheet amounted to approximately,$51,000 and $178,000 at June 30, 2010 and March 31, 2010, respectively.

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 5:               DISCONTINUED OPERATIONS**

 

A summary of assets andliabilities from discontinued operations as of June 30, 2010 and March 31,2010, and results of discontinued operations for the three months ended June30, 2010 and 2009 are as follows:

 
| ** **                                        | ** ** | **June 30, 2010** | ** ** | **March 31, 2010** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|--------------------|------------|
|                                              |       |              |       |               |       |
| Assets  from discontinued operations              |       |              |       |               |       |
| Cash                                              |       | $                 | 3,025      |               | $          | 22 |   |
| Current  assets from discontinued operations      |       | $                 | 3,025      |               | $          | 22 |   |
|                                              |       |              |       |               |       |
| Liabilities  from discontinued operations         |       |              |       |               |       |
| Accounts  payable and accrued expenses            |       | $                 | 111,776    |               | $          | 124,341 |   |
| Income  taxes payable                             |       | 126,552           |       | 126,552            |       |
| Current  liabilities from discontinued operations |       | $                 | 238,328    |               | $          | 250,893 |   |

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **June 30, 2010**      | ** ** | **June 30, 2009** | ** ** |
| Results  of discontinued operations |       |                   |       |   |   |
| Net  revenue                        |       | $                      | —     |   | $ | — |   |
| Cost  of revenue                    |       | —                 |       | — |   |
| Operating  expenses                 |       | (12,680                | )          | (25 | ) |
| Interest  income, net               |       | —                 |       | 1 |   |
| Other  income                       |       | —                 |       | — |   |
| Provision  for income taxes         |       | —                 |       | — |   |
| Loss  from discontinued operations  |       | $                      | (12,680    | ) | $ | (24 | ) |

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6:               NOTES PAYABLE**

 

A summary of the notespayable as of June 30, 2010 and March 31, 2010 is as follows:

 
| ** **                                        | ** ** | **June 30, 2010** | ** ** | **March 31, 2010** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|--------------------|------------|
|                                              |       |              |       |               |       |
| Promissory Notes                                  |       | $                 | 126,053    |               | $          | 126,053 |   |
| Promissory Notes-Private Placement Offering       |       | 679,000           |       | 774,000            |       |
| Convertible Notes                                 |       | 50,000            |       | 100,000            |       |
| 12% Convertible Debentures                        |       | 9,538,114         |       | 7,133,847          |       |
| Bridge Loans                                      |       |              |       | 25,000             |       |
| Subtotal                                          |       | 10,393,167        |       | 8,158,900          |       |
| Unamortized Discounts                             |       | (5,130,051        | )          | (5,388,452         | )          |
| Total Notes Payable, net of unamortized discounts |       | $                 | 5,263,116  |               | $          | 2,770,448 |   |

 

Theprincipal amounts above for the debt components other than the 12% ConvertibleDebentures totaling $855,053 are currently past due and in default.

 

Theactivity associated with the capitalization and amortization of deferredfinancing costs and discounts on notes payable for three months ended June 30,2010 and 2009 is as follows:

 
| Discount  on Notes Payable             |   |       |      |
|----------------------------------------|--------|------------|-----------|
|                                   |   |       |      |
| Balance,  April 1, 2010                |   | 5,388,452  |      |
| Additions                              |   | 2,286,116  |      |
| Amortization                           |   | (2,544,517 | )         |
| Balance,  June 30, 2010                |   | $          | 5,130,051 |   |
|                                   |   |       |      |
| Balance,  April 1, 2009                |   | 54,070     |      |
| Additions                              |   | 370,412    |      |
| Amortization                           |   | (120,951   | )         |
| Balance,  June 30, 2009                |   | $          | 303,531   |   |
|                                   |   |       |      |
| Deferred  Financing Costs              |   |       |      |
|                                   |   |       |      |
| Balance,  April 1, 2010                |   | 2,486,382  |      |
| Additions                              |   | 828,375    |      |
| Amortization                           |   | (1,141,614 | )         |
| Balance,  June 30, 2010                |   | $          | 2,173,143 |   |
|                                   |   |       |      |
| Balance,  April 1, 2009                |   | 107,300    |      |
| Additions                              |   | 829,770    |      |
| Amortization                           |   | (149,069   | )         |
| Loss  on deemed extinguishment of debt |   | (669,082   | )         |
| Balance,  June 30, 2009                |   | $          | 118,919   |   |

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6:               NOTES PAYABLE (CONTINUED)**

 

12% SeniorConvertible Debentures

 

Duringthe quarter ended June 30, 2010, the Company issued Senior ConvertibleDebentures in the aggregate amount of $2,355,300 in a private placement. Thenotes bear interest at a rate of 12% per annum and are due one year from dateof issue. Approximately $283,000 was placed into an escrow account at closingwhich represents the 12% interest to be paid on the notes  The notes are convertible into one share ofcommon stock with a conversion price of $0.50. Also, for each dollar invested,a warrant was issued which entitles the note holder to purchase one share ofcommon stock for an exercise price of $1.00 per share. An additional $48,966 ofSenior Convertible Debentures was issued in conjunction with an exchangetransaction discussed below; no compensation was due to the placement agent forthis note. An additional approximately $6,000 of interest was placed intoescrow. Under the terms of the Debenture, if, at any time while the Debentureis outstanding, the Company, sells or grants any option to purchase or sells orgrants or any right to reprice, or otherwise disposes of or issues (orannounces any sale, grant or any option to purchase or other disposition), anycommon stock or common stock equivalents entitling any person to acquire sharesof common stock at an effective price per share that is lower than the thenconversion price as defined, then the conversion price is reduced to equal thelower price (“Diluted Issuance Provision”).

 

TheCompany evaluated the conversion feature embedded in the notes to determine ifsuch conversion feature should be bifurcated from its host instrument andaccounted for as a freestanding derivative. Due to the note not meeting thedefinition of a conventional debt instrument because it contained a DilutedIssuance Provision, the convertible note was accounted for in accordance withASC 815. According to ASC 815, the derivatives associated with the debtinstrument were recognized as a discount to the debt instrument and thediscount is being amortized over the life of the note and any excess of thederivative value over the note payable value is recognized as additionalinterest expense at issuance date. The Company recognized an initial derivativeliability at the time of each note issuance, at fair value totaling $2,089,343,during the three months ended June 30, 2010 in connection with the issuance ofthe aggregate of $2,404,266 in notes. The fair value was determined using theBlack-Scholes option pricing model ranging from $0.13 to $1.14: expectedvolatility ranging from 169.96% to 225.46%, risk free interest rate rangingfrom 0.30% % to 0.46%, expected term of one year and a market price rangingfrom $0.21 to $1.45. Also, $1,583,448 was recorded as a discount to the notesand $505,895 was recognized immediately in the condensed consolidated statementof operations as interest expense.

 

Further,and in accordance with ASC 815, the embedded derivatives are revalued at eachbalance sheet date and marked to fair value with the corresponding adjustmentas a “gain or loss on derivatives” in the condensed consolidated statements ofoperations. As of June 30, 2010, the fair value of the embedded derivativesincluded on the accompanying condensed consolidated balance sheet was$2,373,476. During the three months ended June 30, 2010, the Company recognizeda gain on change in fair value of derivative liability totaling $2,799,944.

 

TheCompany also issued an aggregate of 2,355,300 warrants at an exercise price of$1.00 per share in conjunction with those Senior Convertible Debentures. TheCompany estimated the fair value of these warrants issued using theBlack-Scholes option pricing model ranging from $0.14 to $1.17 per warrantutilizing the following assumptions: expected volatility ranging from 136.14%to 156.27%, risk free interest rate ranging from 1.03% to 1.68%, expected termof three years and a market price ranging from $0.21 to $1.45. The warrantsexpire three years from the date of issuance and contain a provision allowingfor a cashless exercise. Accordingly, the Company allocated a portion of theproceeds from the note to the warrant based on the relative fair value of thenote and warrants. The relative fair value of these warrants, which amounted to$702,667, was recorded as a discount to the note and a corresponding increaseto additional paid in capital. This discount is being accreted to interestexpense

 

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**WASTE2ENERGY HOLDINGS,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6:               NOTES PAYABLE (CONTINUED)**

 

overthe contracted term of the note. An additional 48,966 warrants were issued inconjunction with an exchange transaction discussed below. The Company estimatedthe fair value of these warrants issued using the Black-Scholes option pricingmodel of approximately $0.64 per warrant utilizing the following assumptions:expected volatility of 136.60%, risk free interest rate of 1.62%, expected termof three years and a market price of $0.85.

 

Inconnection with the aggregate issuances of $2,355,300 of notes subject toplacement fees, the Company paid a placement agent approximately $235,530 (10%of the amount of the notes issued) and a non-accountable expense allowanceequal to approximately $70,659 (3% of the amount of the notes issued) and aninvestment banking fee of approximately $117,765 (5% of the amount of notesissued) was paid to the placement agent. Additionally, the Company will issue awarrant to its placement agent to purchase up to 4.5% of the fully dilutedoutstanding shares of the Company’s common stock (as defined) proportionate tothe amount of Debentures sold with an exercise price of $0.01 per share. Duringthe three months ended June 30, 2010, the placement agent earned 669,408warrants pursuant to the agreement. The fair value of the warrants amounted to$404,425 using the Black-Scholes option pricing model ranging from $0.20 to$1.44 per warrant utilizing the following assumptions: expected volatilityranging from 136.14% to 156.27%, risk free interest rate ranging from 1.03% to1.68%, expected term of three years and a market price ranging from $0.21 to$1.45. The warrants expire three years from the date of issuance and contain aprovision allowing for a cashless exercise and the fair value of the warrantsissued is being amortized over the related notes.

 

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

 

***Promissory Note — Private Placement Offering***

 

OnAugust 4, 2009, the Company issued notes in the aggregate amount of $1,571,000.The notes bear interest at a rate of 10% per annum. Principal, plus all accruedand unpaid interest thereon, was due on November 4, 2009. The Company hasrepaid $1,101,000 of the notes, plus interest using proceeds from a privatedebt placement. Additionally, $20,000 of the notes plus interest of $1,146 wereexchanged for common stock and warrants in connection with an exchangeagreement entered into between the note holders and the Company. Theconsideration given to the note holders on the exchange exceeded the principaland interest owed by $10,573. Accordingly, the Company recorded a loss onsettlement of debt for the excess consideration in the consolidated statementof operations during the year ended March 31, 2010. During the quarter endedJune 30, 2010, the Company obtained additional extension agreements on theremaining $450,000 of notes through July 1, 2010. There was no additionalconsideration given for the July 1, 2010 extensions. These notes areexpected to be repaid using proceeds from future capital raises and/oroperations.  The Company did not repay the outstanding note onJuly 1, 2010 and is in default on the notes, although we have not receiveda formal notice of default from the noteholders.

 

OnJune 25, 2009, the Company issued notes in the aggregate amount of$804,000.  The notes bore interest at a rate of 10% per annum. Principal,plus all accrued and unpaid interest thereon, was due on September 25, 2009. Duringthe year ended March 31, 2010, the Company repaid in full $655,000 of thenotes using proceeds from a private debt placement of 12% Senior ConvertibleDebentures.  During the year ended March 31, 2010, the Company obtainedextension agreements on $104,000 of the notes initially throughFebruary 18, 2010, then April 1, 2010 and further obtained extensionsthrough July 1, 2010.  As consideration for the February 18,2010, extension the Company granted 26,003 warrants to the payees.  TheCompany estimated the fair value of the warrants issued using the Black-Scholesoption pricing model at $0.75 per warrant utilizing the followingassumptions: expected

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6:                NOTES PAYABLE (CONTINUED)**

 

volatilityof 131.66%; risk free interest rate of 1.24%; expected term of three years anda market price of $1.00.  In accordance with ASC 470, the Company recordedthe additional consideration, valued at $19,521, as a loss on deemedextinguishment of debt.  There was no additional consideration given forthe April 1, 2010 and July 1, 2010 extensions.  In April 2010, $45,000 of the notes plusaccrued interest in the aggregate amount of $48,966 was exchanged for anequivalent amount of the Company’s Senior Convertible Debentures and warrants,with a term of one year from date of issue and with the same terms as theSenior Convertible Debentures and warrants discussed above.  The Company evaluated the exchange todetermine if it resulted in the issuance of a substantially different debt instrumentunder the provisions of ASC 470.  TheCompany determined that the exchanged debt instruments were substantiallydifferent, which resulted in a constructive extinguishment of the original debtinstrument.  Accordingly, the Companyrecorded a loss on the deemed extinguishment of debt in the amount of $31,201,equal to the fair value of the warrants, for the three months endedJune 30, 2010.  The remaining notesare expected to be repaid using proceeds from future capital raises and/oroperations.  The Company did not repay the $104,000 of outstandingnotes on July 1, 2010 and is in default on the notes, although we have notreceived a formal notice of default from the noteholders.

 

OnJuly 17, 2009, the Company issued a note payable in the aggregate amountof $125,000.  The note bears interest at a rate of 10% perannum.  Principal, plus all accrued andunpaid interest thereon, was due on October 17, 2009.  During the quarter ended June 30, 2010,the Company obtained an extension agreement through July 1, 2010.  There was no additional consideration givenfor the July 1, 2010 extension.  TheCompany did not repay the outstanding note on July 1, 2010 and is in defaulton the note, although we have not received a formal notice of default from thenoteholder.

 

***Bridge Loans***

 

During September 2008,the Company issued a one year note payable in the amount of $25,000   The note bears interest at 10% perannum.  During the year endedMarch 31, 2010, the note was extended four times and was dueJuly 2010.  In connection with one extension, the Company issued6,250 warrants to the debt holder, valued at $4,692.  In accordance with ASC 470, the Companyrecorded the additional consideration given as a modification of the debt whichwas amortized over the extension period during the year endedMarch 31, 2010.  On April 15,2010, the Company entered into an exchange agreement with the noteholderwhereby in exchange for the cancellation of the note payable plus accruedinterest totaling $28,925 the Company agreed to issue 57,849 shares of commonstock and a warrant to purchase 57,849 shares of common stock at an exerciseprice of $1.00 per share.  The warrantagreement has a term of three years from date of issue.  The common stock was valued at $0.85 pershare based on the closing market price on the date of issuance, for a totalfair market value of $49,172.  TheCompany estimated the fair value of the warrants issued using the Black-Scholesoption pricing model at approximately $0.64 per warrant utilizing the followingassumptions: expected volatility of 136.40%; risk free interest rate of1.62%; expected term of three years and a market price of $0.85, for total fairvalue of $36,827.  Total considerationgiven to the note holder on the exchange of $85,999 exceeded the principle andinterest owed by $57,074.  Accordingly, the Company recorded a loss onextinguishment of debt for the excess consideration for the three months endedJune 30, 2010.

 

***Convertible Note***

 

OnApril 6, 2009, the Company issued a convertible note in the amount of$200,000.  The note bears interest at a rate of 10% per annum.  Principal, plus all accrued and unpaidinterest thereon, was due on October 6, 2009.  The note is convertible at the option of thepayee into shares of the Company’s common stock at a conversion price of $0.50per share.  On March 1, 2010,$100,000 of the note plus interest of $9,014 was exchanged for common stock andwarrants in connection with an exchange agreement entered into between the noteholder and the

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6:                NOTES PAYABLE (CONTINUED)**

 

Company. The consideration given to the note holder on the exchange exceeded theprinciple and interest owed by $54,507.  Accordingly, the Company recordeda loss on extinguishment of debt for the excess consideration during the yearended March 31, 2010.  The remaining balance of $100,000 on the notewas later extended until April 1, 2010 and then until June 1, 2010,and is expected to be repaid using proceeds from future capital raises and/oroperations.  There was no additional consideration given for theApril 1, 2010 and June 1, 2010 extensions.  The Company repaid $50,000 during June 2010  The Company did not repay the remainingoutstanding note balance of $50,000 and is in default on the balance of thenote, although we have not received a formal notice of default from thenoteholder.

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 7:                STOCKHOLDER’S EQUITY**

 

***Common Stock***

 

In April 2010, theCompany issued 57,849 shares of common stock in connection with a debt forequity exchange agreement entered into on April 15th, 2010 with a value of $0.85per share. (See Note 6)

 

In April 2010, theCompany issued 100,000 shares of common stock to a consultant as required by anagreement entered into in August 2009 valued at $1.15 per share.

 

***Common Stock Purchase Warrants***

 

Warrant activity for theperiod from April 1, 2010 to June 30, 2010 is as follows:

 
| ** **                                                                            | ** ** | **Number  of  Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| Outstanding  at March 31, 2010                                                   |       | 30,242,770               |       | $                                      | 0.67       |   |
| Granted                                                                               |       | 4,381,523                |       | 0.71                                   |       |
| Exercised                                                                             |       | —                   |       | —                                 |       |
| Forfeited                                                                             |       | —                   |       | —                                 |       |
| Outstanding  at June 30, 2010                                                    |       | 34,624,293               |       | 0.68                                   |       |
|                                                                                  |       |                     |       |                                   |       |
| Weighted  average fair value granted during the three months ended June 30, 2010 |       |                     |       | $                                      | 0.48       |   |

 

***Warrants issued to Non-Employees***

 

OnApril 1, 2010, the Company entered into a consulting agreement forservices to be rendered over a one year period. In exchange for services to be provided the Company issued warrants topurchase 500,000 shares of common stock at an exercise price of $0.50 andcontain a provision allowing for a cashless exercise.  The warrants expire on April 1,2013.  The fair value of the warrantsissued, amounting to $218,600, was determined using the Black-Scholes optionpricing model at $0.44 per warrant utilizing the following assumptions:  expected volatility of 118.24%, risk freeinterest rate of 1.63%, expected term of three years and a market price of$0.60.  These warrants were fully vestedand non-forfeitable and as such the fair value of the warrants was charged toexpense during the three months ended June 30, 2010.

 

OnApril 1, 2010, the Company entered into a consulting agreement forservices to be rendered over a one year period. In exchange for services to be provided the Company issued warrants topurchase 750,000 shares of common stock at an exercise price of $0.50.  The warrants expire on April 1,2013.  The fair value of the warrantsissued, amounting to $327,900, was determined using the Black-Scholes optionpricing model at $0.44 per warrant utilizing the following assumptions:  expected volatility of 118.24%, risk freeinterest rate of 1.63%, expected term of three years and a market price of$0.60.  These warrants were fully vestedand non-forfeitable and as such the fair value of the warrants was charged toexpense during the three months ended June 30, 2010.

 

The Company recorded$546,500 and $57,104 of consulting expense during the three months ended June 30,2010 and 2009, respectively, relating to warrants awarded.

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 7:                STOCKHOLDER’S EQUITY (CONTINUED)**

 

***Warrants issued inconnection with debt exchange agreements***

 

In April 2010, theCompany issued 48,966 warrants to purchase shares of common stock at anexercise price of $1.00 in connection with a debt for debt exchange agreemententered into on April 20th, 2010 (See Note 6).

 

In April 2010, theCompany issued 57,849 warrants to purchase shares of common stock at anexercise price of $1.00 in connection with a debt for equity exchange agreemententered into on April 15th, 2010 (See Note 6).

 

***Warrants issued in connection with October 2009Private Placement Offering***

 

In connection with the October 2009Private Placement Offering (see Note 6), during the three months ended June 30,2010 the Company issued warrants to purchase 2,355,300 shares of common stockat an exercise price of $1.00.  Allwarrants issued expire three years from issuance.

 

In connection with thePrivate Placement (See Note 6), the Company agreed to pay the placement agentin addition to fees paid out of closing, warrants to purchase up to 4.5% of thefully diluted outstanding shares of the Company’s common stock proportionate tothe amount of Debentures sold with an exercise price of $0.01 per share.  During the three months ended June 30,2010, the placement agent earned 669,408 warrants pursuant to the agreement.Further, upon each exercise of the Warrants issued to investors, the Placementagent will receive a ten percent (10%) commission and a three percent (3%)non-accountable expense allowance, and will also be issued a three-yearcashless warrant at an exercise price of $1.00, equal to 4.5% of the number ofshares of common stock that such investor warrant was exercisable into.

 

The Company recorded $73,550and $0 of compensation expense during the three months ended June 30, 2010and 2009, respectively, relating to warrants awarded.

 

Detailsof common shares issued and outstanding as of June 30, 2010 is as follows:

 
| ** **                                                       | ** ** | **Shares** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|
|                                                             |       |       |       |
| Common  shares outstanding, April 1, 2010                   |       | 50,544,893 |       |
| Issuance  of shares in connection with surrender of note payable |       | 57,849     |       |
| Issuance  of shares in connection with consulting agreement      |       | 100,000    |       |
| Common  shares outstanding, June 30, 2010                   |       | 50,702,742 |       |

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 8:                COMMITMENTS AND CONTINGENCIES**

 

***Income Tax Liabilities***

 

At June 30, 2010 and March 31,  2010,the Company has included in income taxes payable an accrual of approximately$127,000,  inclusive of interest and penalties of approximately$25,000, that relate to EWI for the period prior to itsacquisition.  Such amounts are included in current liabilities fromdiscontinued operations in the accompanying condensed consolidated balancesheets.

 

***Litigation***

 

InDecember 2009, the Company was named in a Complaint filed in the State ofNew York by a former consultant to the Company. The Complaint alleges Breach of Contract, Breach of the Covenant of GoodFaith and Fair Dealing and Promissory Estoppel related to a consulting agreemententered into between the Company and the Claimant.  The complaint initially sought damages of$500,000 plus punitive damages. The Company denies the allegation contained inthe Complaint and intends to vigorously defend the matter and otherwise enforceits rights with respect to the matter. The Company has retained counsel and has responded to theComplaint.  Both parties have now agreedto arbitrate the matter, and the filings to commence the arbitration processhave been made by both parties.  The damageclaim has been modified to a range of $150,000 to $300,000 based on jointarbitration filings.  There can be noassurance of the outcome of this matter.

 

***Employment Agreements***

 

AtJune 30, 2010, the Company has unpaid fees totaling $169,583 to its currentCEO, related to unpaid compensation under the CEO’s employment agreement andunpaid fees totaling $572,500 to its former CEO and current chairman of theboard, related to unpaid compensation and severance pay. The unpaid fees areincluded in due to related parties in the condensed consolidated balancesheets.

 

***Dargavel Contract Cost Dispute***

 

Duringthe course of the construction of the Dargavel plant, the Company and itscustomer encountered a number of significant issues that have resulted indelays and cost increases to the project.  These issues include theIcelandic economy collapse, project scoping changes, and changes required byengineers hired by the customer and the Scottish Environment Protection Agency(“SEPA”).  These issues have resulted in substantial increases to thecosts to complete this project.  The customer had made claims againstthe Company for damages and counterclaims were made against the customer.  In April 2010, both parties reached asettlement agreement whereby neither party is obligated to pay the other anyfurther amounts related to this contract. The Company is committed to bringing the project to final completion perthe specifications of the original agreement (see Note 4).

 

Additionally,in May 2010, the Company entered into a supply agreement with AscotEnvironmental, providing a framework for supply of components to Ascot forfuture waste to energy projects, including software, services andequipment.  The term of the supply agreementis fifteen years unless terminated earlier by mutual agreement of both parties.

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9:                INCOME TAXES**

 

TheCompany recognized a deferred tax asset of approximately $9,976,000 as of June 30,2010, primarily relating to net operating loss carry forwards of approximately$18,961,000 available to offset future taxable income through 2031. Due tochanges in ownership, these federal net operating loss carryforwards aresubject to annual limitations in their use in accordance with Internal RevenueCode Section 382.  Accordingly, the extent to which the loss carryforwards can be used to offset future taxable income may be limited.  Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible. The Company considers projected future taxable income andtax planning strategies in making this assessment. At present, the Company doesnot have a sufficient history of income to conclude that it is more likely thannot that the Company will be able to realize all of its tax benefits in thenear future and therefore a valuation allowance was established for the fullvalue of the deferred tax asset.

 

Avaluation allowance will be maintained until sufficient positive evidenceexists to support the reversal of any portion or all of the valuation allowancenet of appropriate reserves. Should the Company then continue to be profitablein future periods with supportable trends, the valuation allowance will bereversed accordingly.

 

Subsidiariesoperate in different countries and are subject to taxation in separatejurisdictions. Therefore, we are required to calculate and provide for incometaxes in each of the separate jurisdictions on a global basis and the netoperating losses of unprofitable entities cannot be used to offset the incomeof more profitable entities. This involves making judgments regarding therecoverability of deferred tax assets which can affect the overall effectivetax rate. In addition, changes in the geographic mix or estimated level of incomecan affect the overall effective tax rate.

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 10:              SUBSEQUENT EVENTS**

 

The Company evaluates events that have occurredafter the balance sheet date but before the financial statements areissued.  Based upon the review, otherthan the items outlined below, the Company did not identify any recognized ornon-recognized subsequent events that would have required adjustment ordisclosure in the consolidated financial statements.

 

***Senior Convertible Debentures***

 

On various dates between July 1,2010 and August 16, 2010, the Company issued Senior Convertible Debenturesin the aggregate amount of $519,900 in a private placement.  Thenotes bear interest at a rate of 12% per annum and are due one year from dateof issue. The notes are convertible into one share of common stock with aconversion price of $0.50.  Also, foreach dollar invested, a warrant was issued which entitles the note holder topurchase one share of common stock for an exercise price of $1.00 pershare.  In connection with the issuance, the Company paid a placementagent $51,990 (10% of the amount of the notes issued), a non-accountableexpense allowance equal to $15,597 (3% of the amount of the notes issued), andan investment banking fee of $25,995 (5%).  An amount of $62,388 was placed into an escrow account at closingwhich represents the 12% interest to be paid on the notes.

 

***Unsecured Promissory Note***

 

On August 16, 2010, the Company entered into anote payable for approximately $305,000 with a vendor for previously providedservices that had been included in accounts payable.  The note bears interest at 10% per annum andis due in ninety days.  This note isunsecured and expressly subordinate to the 12% Senior Convertible Debentures.

 

***Manufacturing Agreement***

 

In May 2010,Waste2Energy Group Holdings PLC, Waste2Energy Engineering Limited, Waste2EnergyTechnologies International Limited, each of which are subsidiaries ofWaste2Energy Holdings, Inc., entered into a Manufacturing Agreement withSHBV (Hong Kong) LTD (“SHBV”), dated May 19,  2010 (the “Manufacturing Agreement”).   The term of the Manufacturing Agreement isfor ten years (from May 19, 2010), unless it is extended by the Companyfor an additional five years or it is terminated sooner pursuant to itsterms.  Pursuant to the ManufacturingAgreement the Company agreed that for the term of the Agreement it would grantSHBV an irrevocable and non-transferable license to manufacture components ofW2E’s cBOS and sBOS products (the “W2E Products”) exclusively for W2E for usein all countries except Italy, Brazil, Canada and any other mutually agreed toexceptions (the “Territory”).

 

The agreement provides forcertain payments to be made by SHBV to the Company as consideration for theexclusive right to manufacture products for sale in the territories definedabove.  It also provides for minimumorder quantities to be placed by the Company to SHBV annually and in theaggregate over a ten year period.

 

The first two payments of$1,000,000 each were scheduled to be paid by June 17 and July 17 inaccordance with the terms of the agreement. The payments have not been received to date by the Company.  The Company was recently notified by SHBVthat its’ ability to perform under the contract is uncertain until certaininternal management and control issues are resolved within their organization.Due to the uncertainty surrounding the validity of this contract, the Companyhas not recorded any receivable, deferred revenue or income or expense relatedto this contract during the three months ended June 30, 2010.

 

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**WASTE2ENERGY HOLDINGS, INC.AND SUBSIDIARIES**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11:              SUPPLEMENTAL CASH FLOW INFORMATION**

** **
| ** **                                                                                                        | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                        | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| Cash  paid for:                                                                                                   |       |                   |       |                   |       |
| Interest                                                                                                          |       | $                      | 284,342    |                   | $          | 260,667 |   |
|                                                                                                              |       |                   |       |                   |       |
| Non-cash  investing and financing activities:                                                                     |       |                   |       |                   |       |
| Common  stock issued in connection with consulting agreement                                                      |       | $                      | 115,000    |                   | $          | — |   |
| Common  stock issued in connection with notes payable                                                             |       | —                 |       | 423,212                |       |
| Common  stock issued in connection with satisfaction of note payable                                              |       | 49,172                 |       | 686,250                |       |
| Common  stock outstanding from share exchange transaction                                                         |       | —                 |       | 100                    |       |
| Cancellation  and return of common stock                                                                          |       | —                 |       | 3,003                  |       |
| Warrants  issued in connection with satisfaction and exchange of notes payable                                    |       | 68,028                 |       | —                 |       |
| Warrants  issued in connection with issuance of notes payable                                                     |       | 702,667                |       | —                 |       |
| Embedded  derivative in connection with issuance of notes payable                                                 |       | 2,089,343              |       | —                 |       |
| Exchange  of note payable and accrued interest for issuance of common stock and  warrants as satisfaction of debt |       | 28,925                 |       | —                 |       |
| Warrants  due to placement agent in connection with 12% Debentures                                                |       | 404,425                |       | —                 |       |
|                                                                                                              |       |                   |       |                   |       |
| Non-cash  operating and financing activities:                                                                     |       |                   |       |                   |       |
| Warrants  issued previously granted and included in accrued expenses payable                                      |       | —                 |       | 2,112,870              |       |
| Conversion  of accrued expenses to notes payable                                                                  |       | $                      | —     |                   | $          | 265,000 |   |

 

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**ITEM 2.MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

***Forward-Looking Statements and Associated Risks.***

 

*Thefollowing discussion should be read in conjunction with the condensedconsolidated financial statements and the notes to those statements includedelsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Qcontains certain statements that are forward-looking within the meaning of thePrivate Securities Litigation Reform Act of 1995. Certain statements containedin the MD&A are forward-looking statements that involve risks anduncertainties. The forward-looking statements are not historical facts, butrather are based on current expectations, estimates, assumptions andprojections about our industry, business and future financial results. Ouractual results could differ materially from the results contemplated by theseforward-looking statements due to a number of factors, including thosediscussed in other sections of this Quarterly Report on Form 10-Q.*

 

**Plan ofOperation**

 

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

 

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

 

To date we have financed ouractivities and acquisitions through private placements of our securities.  To date we have generated limited revenues, have substantialoperating losses and an accumulated deficit since our inception in April 2007.

 

**Results of Operations**

 

*For the three months ended June 30,2010 compared to June 30, 2009*

 

For the three months ended June 30,2010, contract revenue was $14,834 compared to $770,388 in the prior yearperiod.  The decrease was due to the factthat the prior year included revenue from the Dargavel contract, for which wecontinue to complete work but will not bill additional amounts to the customer.  The current year includes revenue fromengineering studies for customers who are considering entering into largercontracts for waste to energy projects.

 

For the three months ended June 30,2010, contract costs totaled $157,885 compared to $770,550 in the prior yearperiod.  Project costs include all costs incurred to date as well asestimated future costs on the contract.   The prior year costs wereassociated with the Dargavel project and the current year costs included costrelated to that project and certain costs related to engineering studies for customers.

 

For the three months ended June 30,2010, gross loss on contracts totaled $143,051 compared to a loss of $162 inthe prior year period.  The loss in thecurrent year is due to ongoing costs the Company has incurred with the Dargavelproject to prepare the plant for handover. The Company will have no further billings to the customer under thecontract for Dargavel.

 

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General and administrativeexpenses for the three months ended June 30, 2010, were $2,121,547compared to $1,859,146 for the three months ended June 30,2009.  The increase in general and administrative costs is primarilydue to an increase in professional fees, primarily legal and accounting fees,and travel expenses compared to the prior year quarter.  This was partially offset by lowercompensation and consulting expenses as well as lower rent expense.

 

Other income/expenses forthe three months ended June 30, 2010 were net other expense of $1,752,764compared to net other income of $452,226 for the three months ended June 30,2009.  The current year period included interest expense of$4,465,492 compared with interest expense of $426,395 in the prior yearperiod.  The significant increase ininterest expense was primarily due to the issuance of the Company’s 12% SeniorConvertible Debentures starting in October 2009, as well as theamortization of discounts and write off of deferred financing costs associatedwith the debentures, all of which is included in interest expense.  The Company also recognized a gain on thechange in fair value of derivatives tied to the conversion option of itsdebentures of $2,799,944 during the current year period.  The prior year period included a loss onextinguishment of debt of $669,082 and a gain related to cancellation of debtin a legal settlement of $1,510,995.

 

The Company did not recordan income tax benefit for the pre-tax loss from continuing operations for thethree months ended June 30, 2010 or 2009 because the deferred tax assetthat is associated with this benefit is totally reserved for as the Companydoes not have a sufficient history of income to conclude that it is more likelythan not that the Company will be able to realize all of its tax benefits inthe near future, and therefore a valuation allowance was established in thefull value of the deferred tax asset.

 

**Liquidityand Capital Resources**

 

We have incurred operatinglosses since inception. As of June 30, 2010, we had $31,638 in cashcompared to $138,945 at March 31, 2010.  As of June 30,2010, we had a working capital deficiency of $8,794,840, compared to a workingcapital deficiency of $6,634,820 as of March 31, 2010.

 

Net cash used in operatingactivities for the three months ended June 30, 2010 was $1,819,170,compared with net cash used of $1,237,678 for the prior yearperiod.    Net cash used inoperating activities was comprised of loss from continuing operations adjustedfor non-cash items of $(1,914,226) and $(1,373,447) for the three months ended June 30,2010 and 2009, respectively, and changes in assets and liabilities of $95,056and $135,769 for the three months ended June 30, 2010 and 2009,respectively.

 

Net cash used in investingactivities for the three months ended June 30, 2010 was $61,296, comparedto net cash used in investing activities in the prior period of $19,962.  Net cash provided by financing activities forthe three months ended June 30, 2010 was $1,792,537, compared to net cashprovided by financing activities in the prior period of $1,199,610.

 

The Company has financed itsoperations to date principally through the sale of securities in privateplacement transactions and through the issuance of short term debt.  As of June 30, 2010, the Company hastotal current notes payable of $10,393,167 outstanding, including $9,538,114 ofits 12% Senior Convertible Debentures and $855,053 of other short-termdebt.  The short term debt is currently indefault.  The 12% Senior Convertible Debenturesmature on various dates in 2010 and 2011, with the first maturity scheduled forOctober 1, 2010.

 

The Company must raiseadditional funds on an immediate basis in order to fund our continuedoperations.  We may not be successful in our efforts to raiseadditional funds. Even if we are able to raise additional funds through thesale of our securities or through the issuance of debt securities, our cashneeds could be greater than anticipated in which case we could be forced toraise additional capital. At the present time, we have no commitments for anyadditional financing, and there can be no assurance that, if needed, additionalcapital will be available to us on commercially acceptable terms or at all.These conditions raise substantial doubts as to our ability to continue as agoing concern, which may make it more difficult for us to raise additionalcapital when needed.

 

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Our significant financingand investing activities for the three months ended June 30, 2010 consisted ofthe following:

 

On various dates betweenApril 9, 2010 and June 28, 2010, the Company sold $2,355,300 of its 12% SeniorSubordinated Convertible Debentures in a private placement.  In connection with the offerings, the Companypaid its placement agent commissions of $235,530 (10%) and a non-accountableexpense allowance of $70,659 (3%). Additionally an investment banking fee was paid of $117,765 (5%).  The interest associated with the Debenturestotaling $282,636 has been put into escrow which represents the 12% interest tobe paid on the notes.

 

On April 20, 2010, theCompany issued a 12% Senior Convertible Debenture with principal amount of$48,966 to an investor in exchange for cancellation of an existing short-termnote plus the accrued interest on the note. The Company did not pay any fees or commissions to a placement agent inconnection with this issuance.  TheCompany did fund the escrow account as required with $5,876 for the futureinterest payments on the note.

 

During the quarter, theCompany repaid short term notes totaling $100,000.

 

In the second and thirdfiscal quarters of fiscal 2011, management anticipates new order intake whichwill start to provide funding for operational expenses on an on-going basis.

 

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

 

Our material capitalexpenditure requirements for the remaining period of the year ending March 31,2011 will be approximately $175,000 to procure office equipment, furniture andIT equipment.

 

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

 

**RecentAccounting Pronouncements**

 

See Note 3 to the CondensedConsolidated Financial Statements.

 

**Off BalanceSheet Arrangements**

 

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

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Not Applicable

 

**ITEM 4T.CONTROLS AND PROCEDURES.**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our management isresponsible for establishing and maintaining a system of disclosure controlsand procedures (as defined in Rule 13a-15(e) under the Exchange Act) that isdesigned to ensure that information required to be disclosed by the Company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time specified in the Commission’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by an issuer in the reports that it files or submitsunder the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, isaccumulated and communicated to the issuer’s management, including itsprincipal executive officer or officers and principal financial officer orofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

Pursuant to Rule 13a-15(b)under the Exchange Act, the Company carried out an evaluation with theparticipation of the Company’s management, including Peter Bohan, the Company’sChief Executive Officer, and Craig Brown, the Company’s Chief FinancialOfficer, of the effectiveness of the Company’s disclosure controls andprocedures (as defined under Rule 13a-15(e) under the Exchange Act) as of June30, 2010.  Based upon that evaluation, the Company’s Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were not effective.Furthermore, certain matters involving our internal control over financialreporting constitute a material weakness under standards established by thePublic Company Accounting Oversight Board (“PCAOB”).  The Company’sdisclosure controls and procedures were not effective due to a lack of internalresources to account for the completeness of transactions to ensure thatinformation required to be disclosed by the Company in the reports that theCompany files or submits under the Exchange Act, is recorded, processed,summarized and reported, within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to theCompany’s management, including the Company’s CEO, as appropriate, to allowtimely decisions regarding required disclosure. The Company is evaluatingits structure and processes and procedures so that it can begin to implementcorrective action where necessary to ensure that the appropriate resources arein place throughout the company to ensure the Company’s disclosure controls andprocedures are effective.  Certain enhancements to the control systemincluding the addition of personnel is dependent upon the Company’s ability toobtain new customer orders and increase the Company’s available cash position.

 

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Our management, includingour Chief Executive Officer and Chief Financial Officer, believes that anydisclosure controls and procedures or internal controls and procedures, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of a control system must consider the benefits of controls relativeto their costs. Inherent limitations within a control system include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by unauthorized override of the control. While the design ofany system of controls is to provide reasonable assurance of the effectivenessof disclosure controls, such design is also based in part upon certainassumptions about the likelihood of future events, and such assumptions, whilereasonable, may not take into account all potential future conditions.Accordingly, because of the inherent limitations in a cost effective controlsystem, misstatements due to error or fraud may occur and may not be preventedor detected.

 

**Changes ininternal controls**

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officerperformed an evaluation as to whether any change in our internal controls overfinancial reporting occurred during the quarter ended June 30, 2010.  We have concluded that there were no changesduring the quarter ended June 30, 2010 in the Company’s internal controls overfinancial reporting that have materially affected, or are likely to materiallyaffect internal control over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**ITEM 1 -LEGAL PROCEEDINGS**

 

None.

 

**ITEM 2 -UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

Not applicable.

 

**ITEM 3 -DEFAULTS UPON SENIOR SECURITIES**

 

Asof the date of this filing the Company is in default on the repayment ofcertain debt instruments that have not been cured within thirty (30) days.  The following table summarizes the defaultstatus by instrument and includes the principal amount, interest rate, currentaccrued interest payable, and the number of days in default as of the filingdate of this Quarterly Report on Form 10Q:

 
| **Instrument** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Accrued**  | ** ** | ** ** | ** ** | **Days in** | ** ** |
|----------------|------------|------------|------------|--------------|------------|--------------|------------|------------|------------|-------------|------------|
| **Principal**  | ** ** | **Issued** | ** ** | **Rate**     | ** ** | **Interest** | ** ** | **Due**    | ** ** | **Arrears** | ** ** |
|           |       |       |       |         |       |         |       |       |       |        |       |
| 104,000        |       | 6/25/2009  |       | 10           | %          | 12,081       |       | 7/1/2010   |       | 53          |       |
| 125,000        |       | 7/17/2009  |       | 10           | %          | 3,082        | (a)        | 7/1/2010   |       | 53          |       |
| 200,000        |       | 8/4/2009   |       | 10           | %          | 21,041       |       | 7/1/2010   |       | 53          |       |
| 250,000        |       | 8/4/2009   |       | 10           | %          | 6,164        | (b)        | 7/1/2010   |       | 53          |       |
| 50,000         |       | 4/6/2009   |       | 10           | %          | 6,904        |       | 6/1/2010   |       | 83          |       |
| 126,053        |       | 7/1/2009   |       | 10           | %          | 26,967       | (c)        | 10/1/2009  |       | 326         |       |

 

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(a) Net ofinterest paid in May 2010 totaling $10,685

(b) Net ofinterest paid in May 2010 totaling $20,137

(c) Includes unpaidinterest on principal balances that were previously repaid

 

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**ITEM 4 -REMOVED AND RESERVED**

 

**ITEM 5 -OTHER INFORMATION**

 

None.

 

**ITEM 6.**- **EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                  |
|---------------------|------------|----------------------------------------------------------------------------------|
|                |       |                                                                             |
| 31.1                |       | Certification by Chief  Executive Officer pursuant to Sarbanes Oxley Section 302 |
| 31.2                |       | Certification by Chief  Financial Officer pursuant to Sarbanes Oxley Section 302 |
| 32.1                |       | Certification by Chief  Executive Officer pursuant to 18 U.S.C. Section 1350     |
| 32.  2              |       | Certification by Chief  Financial Officer pursuant to 18 U.S.C. Section 1350     |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                               | **WASTE2ENERGY  HOLDINGS, INC.** |
|------------------------------------|----------------------------------|
|                               |                             |   |
| Date: August 23,  2010   | By:                              | /s/ Peter Bohan |
|                               |                             | Peter Bohan  Chief Executive Officer  (Principal Executive Officer) |
|                               |                             |   |
|                               |                             |   |
|                               | By:                              | /s/ Craig L. Brown |
|                               |                             | Craig L. Brown  Chief Financial Officer  (Principal Financial Officer) |

 

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