Table of Contents

 

 

 

**UNITEDSTATES 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 December 31, 2009** |
| ** **                                                 |
| **or**                                                     |
| ** **                                                 | ** **                                                                                                 |
| **o**                                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)********OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Forthe transition period from                  to                   **

 

**COMMISSION FILE NUMBER 333-151108**

 

**WASTE2ENERGYHOLDINGS, INC.**

(Exact Name of Registrantas Specified in its Charter)

 

| **Delaware**                                                   | ** ** | **26-2255797**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State  or Other Jurisdiction ofIncorporation or Organization) |       | (IRS  EmployerIdentification Number) |
|                                                           |       |                                 |
| **1 Chick Springs Road,  Suite 218, Greenville, SC**      | ** ** | **29609**                            |
| (Address  of Principal Executive Offices)                      |       | (Zip  Code)                          |

 

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

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or such shorter period thatthe registrant was required to submit and post such files.  Yes o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 

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

 

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

 

**ApplicableOnly to Corporate Issuers:**

The number ofshares of the Registrant’s Common Stock outstanding as of the last practicabledate:

 

| **Class**                       | ** ** | **Outstanding as of February 5, 2009** |
|---------------------------------|------------|-----------------------------------------------------------------|
| Common Stock,  $.0001 par value |       | 50,284,576                                                      |

 

 

 

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Table of Contents

 

**WASTE2ENERGYHOLDINGS, INC.**

 

**TABLEOF 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 | 33       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                      | 37       |
| Item 4T. Controls and Procedures                                                                         | 37       |
| **PART II -  OTHER INFORMATION**                                                                    |     |
|                                                                                                     |     |
| Item  1. Legal Proceedings                                                                               | 38       |
| Item 1A. Risk Factors                                                                                    |     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                     | 39       |
| Item 3. Defaults Upon Senior Securities                                                                  | 39       |
| Item 4. Submission of Matters to a Vote of Security  Holders                                             | 39       |
| Item  5. Other Information                                                                               | 39       |
| Item 6. Exhibits                                                                                         | 40       |
| **SIGNATURES**                                                                                           | 41       |

 

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Table of Contents

 

**PART I Financial Information**

 

**ITEM 1 CONSOLIDATED FINANCIALSTATEMENTS AND NOTES TOTHE FINANCIAL STATEMENTS.**

 

**WASTE2ENERGYHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**DECEMBER31, 2009 AND MARCH 31, 2009**

 
| ** **                                                                                                                                                                               | ** ** | **December 31,** | ** ** | ** **         | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2009**              | ** ** | **March 31,** | ** ** |
| ** **                                                                                                                                                                               | ** ** | **(Unaudited)**       | ** ** | **2009**           | ** ** |
| ASSETS                                                                                                                                                                                   |       |                  |       |               |       |
| CURRENT ASSETS:                                                                                                                                                                          |       |                  |       |               |       |
| Cash                                                                                                                                                                                     |       | $                     | 140,059    |               | $          | 27,360 |   |
| Contracts Receivable                                                                                                                                                                     |       | —                |       | 53,250             |       |
| Unbilled amounts due on  uncompleted contracts                                                                                                                                           |       | —                |       | 118,123            |       |
| Deferred job costs                                                                                                                                                                       |       | 295,350               |       | —             |       |
| Deferred financing  costs                                                                                                                                                                |       | 895,185               |       | 107,300            |       |
| VAT recoverable                                                                                                                                                                          |       | 63,286                |       | —             |       |
| Other current assets                                                                                                                                                                     |       | 110,998               |       | 60,135             |       |
| Current assets from  discontinued operations                                                                                                                                             |       | 3,264                 |       | 1,413              |       |
| Total current assets                                                                                                                                                                     |       | 1,508,142             |       | 367,581            |       |
| Equipment, net                                                                                                                                                                           |       | 29,804                |       | —             |       |
| Investment in Enerwaste  Europe, Ltd.                                                                                                                                                    |       | —                |       | —             |       |
| Intangibles, net                                                                                                                                                                         |       | 96,653                |       | —             |       |
| Cash-restricted in  escrow                                                                                                                                                               |       | 298,672               |       | —             |       |
| Security deposits                                                                                                                                                                        |       | 3,269                 |       | 2,971              |       |
| **TOTAL  ASSETS**                                                                                                                                                                        |       | $                     | 1,936,540  |               | $          | 370,552 |   |
|                                                                                                                                                                                     |       |                  |       |               |       |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                                              |       |                  |       |               |       |
| CURRENT LIABILITIES:                                                                                                                                                                     |       |                  |       |               |       |
| Notes payable, net                                                                                                                                                                       |       | $                     | 2,466,963  |               | $          | 2,279,828 |   |
| Accounts payable                                                                                                                                                                         |       | 1,336,635             |       | 659,156            |       |
| Accrued expenses                                                                                                                                                                         |       | 966,731               |       | 2,948,931          |       |
| Deferred revenue                                                                                                                                                                         |       | 325,032               |       | 41,250             |       |
| VAT payable                                                                                                                                                                              |       | —                |       | 8,354              |       |
| Due to related parties                                                                                                                                                                   |       | 653,958               |       | 388,368            |       |
| Other current  liabilities                                                                                                                                                               |       | —                |       | 53,005             |       |
| Derivative liabilities                                                                                                                                                                   |       | 1,223,867             |       | —             |       |
| Current liabilities  from discontinued operations                                                                                                                                        |       | 246,478               |       | 297,271            |       |
| Total current  liabilities                                                                                                                                                               |       | 7,219,664             |       | 6,676,163          |       |
| **TOTAL  LIABILITIES**                                                                                                                                                                   |       | 7,219,664             |       | 6,676,163          |       |
|                                                                                                                                                                                     |       |                  |       |               |       |
| COMMITMENTS AND  CONTINGENCIES (Note 6 and 9)                                                                                                                                            |       |                  |       |               |       |
|                                                                                                                                                                                     |       |                  |       |               |       |
| STOCKHOLDERS’ DEFICIT:                                                                                                                                                              |       |                  |       |               |       |
| Common stock, $.0001  par value, 80,000,000 shares authorized, 50,284,576 and 41,152,100 shares  issued and outstanding at December 31, 2009 and March 31, 2009,  respectively |       | 5,030                 |       | 4,115              |       |
| Additional paid in  capital                                                                                                                                                              |       | 20,831,724            |       | 12,514,724         |       |
| Foreign currency  translation adjustment                                                                                                                                                 |       | (20,942               | )          | (92,101            | )          |
| Accumulated deficit                                                                                                                                                                      |       | (26,098,936           | )          | (18,732,349        | )          |
| **TOTAL  STOCKHOLDERS’ DEFICIT**                                                                                                                                                    |       | (5,283,124            | )          | (6,305,611         | )          |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                                                    |       | $                     | 1,936,540  |               | $          | 370,552 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**WASTE2ENERGYHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENT OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| ** **                                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Contract  revenues                                         |       | $                      | 67,872     |                  | $          | 976,131 |   | $ | 1,247,089 |   | $ | 2,678,556 |   |
| Contract  costs                                            |       | 171,003                |       | 885,778               |       | 1,672,122 |   | 2,453,121 |   |
| **GROSS (LOSS) PROFIT**                                    |       | (103,131               | )          | 90,353                |       | (425,033 | ) | 225,435 |   |
| Operating  Expenses                                        |       | 2,228,456              |       | 1,331,410             |       | 5,993,146 |   | 5,040,601 |   |
| **OPERATING LOSS**                                         |       | (2,331,587             | )          | (1,241,057            | )          | (6,418,179 | ) | (4,815,166 | ) |
| **OTHER INCOME (EXPENSE):**                                |       |                   |       |                  |       |   |   |   |   |
| Interest  expense                                          |       | (2,111,411             | )          | (433,337              | )          | (3,807,735 | ) | (543,116 | ) |
| Interest  income                                           |       | 11                     |       | 3,077                 |       | 150 |   | 3,077 |   |
| Loss  on deemed extinguishment of debt                     |       | —                 |       | —                |       | (669,082 | ) | — |   |
| Gain  on change in fair value of derivative liability      |       | 2,010,586              |       | —                |       | 2,010,586 |   | — |   |
| Foreign  currency exchange (loss) gain                     |       | 211                    |       | 153,508               |       | (1,913 | ) | 325,108 |   |
| Loss  on equity method investment                          |       | —                 |       | —                |       | — |   | (506,757 | ) |
| Gain  on legal settlement                                  |       | —                 |       | —                |       | 1,510,995 |   | — |   |
| Other  income (expense)                                    |       | (25                    | )          | (2,162                | )          | — |   | 11,672 |   |
| **TOTAL OTHER INCOME (EXPENSE), NET**                      |       | (100,628               | )          | (278,914              | )          | (956,999 | ) | (710,016 | ) |
| Loss  from continuing operations before income tax benefit |       | (2,432,215             | )          | (1,519,971            | )          | (7,375,178 | ) | (5,525,183 | ) |
| Income  tax benefit                                        |       | —                 |       | 51,926                |       | — |   | 1,579,152 |   |
| **LOSS FROM CONTINUING OPERATIONS**                        |       | (2,432,215             | )          | (1,468,045            | )          | (7,375,178 | ) | (3,946,030 | ) |
| **INCOME (LOSS) FROM DISCONTINUED OPERATIONS**             |       | 8,660                  |       | (35,399               | )          | 8,591 |   | (64,818 | ) |
| **NET LOSS**                                               |       | (2,423,555             | )          | (1,503,444            | )          | (7,366,587 | ) | (4,010,848 | ) |
| Foreign  currency translation adjustment                   |       | (59,700                | )          | (1,142,538            | )          | 71,159 |   | (1,871,287 | ) |
| **COMPREHENSIVE LOSS**                                     |       | $                      | (2,483,255 | )                     | $          | (2,645,982 | ) | $ | (7,295,428 | ) | $ | (5,882,135 | ) |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Weighted  Average Common Shares Outstanding:               |       |                   |       |                  |       |   |   |   |   |
| Basic                                                      |       | 50,259,207             |       | 40,045,369            |       | 48,886,571 |   | 37,551,694 |   |
| Diluted                                                    |       | 50,259,207             |       | 40,045,369            |       | 48,886,571 |   | 37,551,694 |   |
| **LOSS PER COMMON SHARE (Basic and Diluted):**             |       |                   |       |                  |       |   |   |   |   |
| Continuing  operations                                     |       | $                      | (0.05      | )                     | $          | (0.04 | ) | $ | (0.15 | ) | $ | (0.11 | ) |
| Discontinued  operations                                   |       | —                 |       | —                |       | — |   | — |   |
| **NET LOSS PER COMMON SHARE**                              |       | $                      | (0.05      | )                     | $          | (0.04 | ) | $ | (0.15 | ) | $ | (0.11 | ) |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**WASTE2ENERGYHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THENINE MONTHS ENDED DECEMBER 31, 2009 AND 2008**

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Operating  activities:**                                                                           |       |       |       |       |       |
| **Loss  from continuing operations**                                                                 |       | $          | (7,375,178 | )          | $          | (3,946,030 | ) |
| Adjustments to  reconcile loss from continuing operations to net cash used in operating  activities: |       |       |       |       |       |
| Foreign currency  exchange gains                                                                     |       | 1,913      |       | —     |       |
| Equity in loss on  investment in EnerWaste Europe, Ltd                                               |       | —     |       | 506,757    |       |
| Depreciation and  amortization                                                                       |       | 3,263      |       | 443,126    |       |
| Provision for loss on  contract in progress                                                          |       | 38,000     |       | —     |       |
| Provision for doubtful  collections on unbilled contracts                                            |       | 556,297    |       | —     |       |
| Amortization of discount  on notes payable                                                           |       | 2,523,376  |       | 104,076    |       |
| Amortization of  deferred financing costs                                                            |       | 866,153    |       | —     |       |
| Loss on deemed  extinguishment of debt                                                               |       | 669,082    |       | —     |       |
| Additional interest  expense in connection with excess value of derivative over notes payable        |       | 15,067     |       | —     |       |
| Change in fair value of  derivative liability                                                        |       | (2,010,587 | )          | —     |       |
| Warrants issued for  consulting services                                                             |       | 86,028     |       | 909,389    |       |
| Warrants issued for  compensation                                                                    |       | 256,090    |       | 1,287,443  |       |
| Common stock issued for  consulting services                                                         |       | 745,000    |       | 351,250    |       |
| Deferred taxes                                                                                       |       | —     |       | (1,579,152 | )          |
| Gain on legal  settlement                                                                            |       | (1,510,995 | )          | —     |       |
| **Changes  in assets and liabilities:**                                                              |       |       |       |       |       |
| Due from escrow agent                                                                                |       | —     |       | 373,582    |       |
| Contracts Receivable                                                                                 |       | 53,250     |       | (137,690   | )          |
| Unbilled amounts due on  uncompleted contracts                                                       |       | (422,632   | )          | (1,927,420 | )          |
| Deferred job costs                                                                                   |       | (295,350   | )          | —     |       |
| Other assets                                                                                         |       | (55,677    | )          | (30,486    | )          |
| Accounts payable                                                                                     |       | 1,017,972  |       | 1,313,921  |       |
| Accrued expenses                                                                                     |       | 412,527    |       | 533,213    |       |
| Deferred revenue                                                                                     |       | 283,782    |       | 47,250     |       |
| VAT payable/recoverable                                                                              |       | (73,340    | )          | 136,560    |       |
| Due to related parties                                                                               |       | 249,612    |       | (100,430   | )          |
| Other current  liabilities                                                                           |       | 4          |       | —     |       |
| **Net  cash used in operating activities**                                                           |       | (3,966,343 | )          | (1,714,641 | )          |
| Investing activities:                                                                                |       |       |       |       |       |
| Purchase of equipment                                                                                |       | (33,194    | )          | —     |       |
| Cost of applying for  patents                                                                        |       | (97,562    | )          |       |       |
| Cash acquired in  acquisition                                                                        |       | —     |       | 718        |       |
| **Net  cash (used in) provided by investing activities**                                             |       | (130,756   | )          | 718        |       |
| Financing activities:                                                                                |       |       |       |       |       |
| Proceeds from lines of  credit, net                                                                  |       | —     |       | 827,317    |       |
| Proceeds from notes  payable, net of financing costs                                                 |       | 8,499,447  |       | 455,435    |       |
| Payment of fees in  connection with issuing debt                                                     |       | (1,572,264 | )          | —     |       |
| Principal payments on  note payable                                                                  |       | (3,013,330 | )          | (64,492    | )          |
| Consideration for  cancellation and return of common stock                                           |       | (20,000    | )          | —     |       |
| Issuance of common  stock in private placement                                                       |       | —     |       | 56,364     |       |
| Fees in connection with  acquisition of public shell                                                 |       | (210,050   | )          | —     |       |
| Increase in restricted  cash held for note payable interest payments                                 |       | (298,672   | )          | —     |       |
| Issuance of common  stock in private placement, net of financing costs                               |       | 899,210    |       | —     |       |
| **Net  cash provided by financing activities**                                                       |       | 4,284,341  |       | 1,274,624  |       |
| Discontinued  operations:                                                                            |       |       |       |       |       |
| Operating cash flows                                                                                 |       | (44,051    | )          | (165,606   | )          |
| **Net  cash (used in) discontinued operations**                                                      |       | (44,051    | )          | (165,606   | )          |
| Effect of exchange rate  changes on cash                                                             |       | (30,492    | )          | (90,579    | )          |
| **Net increase  (decrease) in cash**                                                                 |       | 112,699    |       | (695,484   | )          |
| Cash — beginning                                                                                |       | 27,360     |       | 723,655    |       |
| **CASH —  Ending**                                                                              |       | $          | 140,059    |       | $          | 28,171 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 1.**                **THE COMPANY**

 

The terms “we,” “ours,” “us,” and “Company” refer toWaste2Energy Holdings, Inc. and its subsidiaries.

 

**Organization**

 

We are a “cleantech” acquisition and technologycompany. We target waste to energy technologies that generate “green power”converting waste streams, traditionally destined for landfill, into clean,renewable energy.  The Company seekssmall footprint, simple, cost effective technologies that are scalable,modular, environmentally friendly and robust enough to operate in harsh andremote environments.  The Company isforging strategic alliances for the regional fabrication and manufacturing ofits BOSTM systems and the development of sales anddistribution channels.

 

On May 6, 2009, the Company entered into an Agreementand Plan of Merger (the “Merger Agreement”) with Waste2Energy Acquisition Co.,a Delaware corporation and wholly owned subsidiary of the Company (the“Subsidiary”) and Waste2Energy, Inc. (“W2E”). On May 28 2009, the Company, Subsidiary and W2E entered into Amendment No.1 to the Merger Agreement (“Amendment No. 1.”). Pursuant to Amendment No. 1, the definition of Acquisition Shares wasrevised to mean 45,981,770 shares of W2E and Section 5.19(e) of the MergerAgreement was revised to note that the issued and outstanding share capital ofW2E consists of 45,981,770 issued and outstanding shares.  The Merger Agreement as amended by Amendment No.1 is hereinafter referred to as the “Merger Agreement”. Pursuant to the MergerAgreement, on May 28, 2009 (the “Closing”), the Subsidiary merged with and intoW2E resulting in W2E becoming a wholly-owned subsidiary of the Company (the“Merger”). The Merger was accounted for as a reverse merger andrecapitalization. Pursuant to the Merger Agreement, the Company issued45,981,770 shares of common stock (the “Common Stock”) of the Company (the“Acquisition Shares”) to the shareholders of W2E, representing approximately96% of the issued and outstanding Common Stock following the closing of theMerger and the sale of Units (as defined below) concurrently with the Closing,and warrants to purchase 18,760,000 shares of Common Stock (the “AcquisitionWarrants”) to the warrant holders of W2E at exercise prices ranging from $.10to $.75. Pursuant to the Merger Agreement, the outstanding shares of commonstock and warrants to purchase shares of common stock of W2E were cancelled.  Subsequent to the closing of the Merger, theCompany continued W2E’s operations. In July 2009, the name was changed toWaste2Energy Holdings, Inc.  On theClosing, the Company sold in a private placement 254,500 units (the “Units”) toinvestors (the “Investors”), each Unit consisting of (i) three (3) shares ofCommon Stock and (ii) a three-year warrant (the “Warrants”) to purchase three (3)additional shares of Common Stock at an exercise price of $1.25 per share, at apurchase price of $2.00 per Unit and, as a result, the Company received grossproceeds of approximately $509,000 and issued the Investors an aggregate of763,500 shares of Common Stock and Warrants to purchase 763,500 shares ofCommon Stock (the “Warrant Shares”). The Warrants may not be exercised to theextent such exercise would cause the holder of the Warrant, together with itsaffiliates, to beneficially own a number of shares of Common Stock which wouldexceed 4.99% of the Company’s then outstanding shares of Common Stock followingsuch exercise.

 

The private placement was terminated in September 2009and, including the units sold in May 2009, the Company raised $1,200,465 fromthe offering. In July and August 2009, the Company issued $2,500,000 ofDebentures due 90 days from the date of issuance. This debt bears interest at10% and was used to refinance existing debt and to fund operating expenses.From October 2009 to February 2010, the Company issued $6,348,507 of SeniorConvertible Debentures bearing interest at 12% and due one year from date ofissue.  This debt was used to refinanceexisting debt and to fund operating expenses.

 

On January 22, 2010, the Company received notice fromThe Financial Industry Regulatory Authority (FINRA) that shares of theCompany’s common stock were no longer eligible for trading on the OTC BulletinBoard (“OTCBB”), as a result of the Company’s delayed filing of its’ Form 10Qfor the quarter ended June 30, 2009.  TheCompany’s common stock is currently traded on the “Pink Sheets”.  Several market makers have submittedapplications for the Company to become eligible to resume trading on the OTCBB,however there can be no assurance that the request will be granted.

 

Management believes that the Company’s ability to continueoperations is dependent on its ability to raise capital.  If the Company is unable to raise additionalcapital or encounters unforeseen circumstances, it may be required to take

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

additional measures to conserve liquidity, which couldinclude, but not necessarily be limited to, curtailing its operations,suspending the pursuit of its business plan, and controlling overhead expenses.  The Company cannot provide any assurance thatit will raise additional capital as necessary nor can it provide any assurancethat new financing will be available to it on acceptable terms, if at all.

 

***Basis ofPresentation***

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with United Statesgenerally accepted accounting principles (“GAAP”) and with the instructions to Form10-Q and Article 10 of Regulation S-X.  Accordingly,they do not include all information and footnotes required by GAAP for acomplete set of financial statements.  Inthe opinion of management, all adjustments, (including normal recurringaccruals) considered necessary for a fair presentation have been included inthe financial statements.  Operatingresults for the interim period are not necessarily indicative of the resultsthat may be expected for the fiscal year ended March 31, 2010.  This form 10-Q should be read in conjunctionwith the Audited Consolidated Financial Statements and accompanying Notes tothe Consolidated Financial Statements in our Form 8K-A for the year ended March31, 2009 which was filed on October 1, 2009.

 

All significant intercompany accounts and transactionshave been eliminated in consolidation.  Significantevents which occurred subsequent to December 31, 2009, and prior to our filingdate, have been disclosed in Note 11, Subsequent Events.

 

**NOTE 2.**                **LIQUIDITY, FINANCIAL CONDITION ANDMANAGEMENT’S PLANS**

 

The Company incurred a net loss from continuingoperations of $7,375,178 and used $3,966,343 of cash in continuing operationsfor the nine months ended December 31, 2009. At December 31, 2009, the Company had a working capital deficit of$5,711,522 and a $26,098,936 accumulated deficit. These conditions raisesubstantial doubt about the Company’s ability to continue as a going concern.These unaudited interim consolidated financial statements do not include anyadjustments relating to the recovery of assets or the classification ofliabilities should the Company be unable to continue as a going concern.

 

On May 28, 2009, simultaneous with the Merger, theCompany also initiated a private placement offering (“May Private Placement”)of up to 4,000,000 units (“Units’). Each Unit consists of (i) three shares ofcommon stock, par value $0.0001 per share and (ii) a three-year warrant topurchase three additional shares of common stock at an exercise price of $1.25per share. This offering was terminated in September 2009 and the Companyraised $1,200,465 of capital with this transaction. In July and August 2009,the Company issued $2,500,000 of Debentures due 90 days from the date ofissuance. This debt bears interest at 10% and was used to refinance existingdebt and to fund operating expenses.

 

In the quarter ended December 31, 2009, the Companyissued $5,660,447 of Senior Convertible Debentures bearing interest at 12% anddue one year from date of issue.  Thisdebt was used to refinance existing debt and to fund operating expenses. TheCompany cannot provide any assurance that it will successfully raise any additionalcapital.

 

The Company must raise additional funds on animmediate basis in order to fund our continued operations.  We maynot be successful in our efforts to raise additional funds. Even if we are ableto raise additional funds through the sale of our securities or through the issuanceof debt securities, our cash needs could be greater than anticipated in whichcase we could be forced to raise additional capital. At the present time, wehave no commitments for any additional financing, and there can be no assurancethat, if needed, additional capital will be available to us on commerciallyacceptable terms or at all. These conditions raise substantial doubt as to ourability to continue as a going concern, which may make it more difficult for usto raise additional capital when needed.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 3.**                **SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

The following is a summary of the significantaccounting policies followed in the preparation of the accompanying condensedconsolidated financial statements. On July 1, 2009, the Financial AccountingStandards Board (“FASB”) issued the FASB Accounting Standards Codification(“ASC” or “the Codification”), the single source of authoritative,nongovernmental GAAP, except for rules and interpretive releases of theSecurities and Exchange Commission (“SEC”), which are sources of authoritativeGAAP for SEC registrants. All other non-grandfathered, non-SEC accountingliterature not included in the Codification is non-authoritative. The newguidelines and numbering system prescribed by the Codification are used when referringto GAAP in this Form 10-Q. As the Codification was not intended to change oralter existing GAAP, it will not have any impact on the Company’s condensedconsolidated financial statements.

 

***Use of Estimates***

 

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of income and expenses during the reportedperiod.  The Company evaluates all of itsestimates on an on-going basis. Significant estimates and assumptions includethe valuation of acquired assets including the establishment of a deferred taxliability, the useful lives of acquired intangible assets and the valuation ofequity instruments.  In addition, theCompany’s business involves making significant estimates and assumptions in thenormal course of business relating to its contracts and the long-term durationof a contract cycle. The most significant estimates with regard to itscontracts relate to the estimating of total forecasted construction contractrevenues, costs and profits in accordance with accounting for long-termcontracts, as well as estimating the allowance for doubtful accounts withrespect to contracts receivable and reserves associated with warrantyobligations.

 

Making estimates requires management to exercisesignificant judgment. It is at least reasonably possible that the estimate ofthe effect on the financial statements of a condition, situation or set ofcircumstances that existed at the date of the consolidated financialstatements, which management considered in formulating its estimate couldchange 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 ofCredit Risk***

 

Financial instrumentsthat potentially expose the Company to credit risk include cash. At times, ourcash may be in uninsured or in deposit accounts that exceed the Federal DepositInsurance Corporation (“FDIC”) insurance limit. The Company places its cash with various financial institutions and hasnot experienced any losses on these accounts.

 

For the three and nine months ended December 31, 2009and 2008, substantially all the Company’s revenues were derived from onecontract.  Prior to June 25, 2008, therevenues and results of operations of Enerwaste Europe, Ltd. (“EWE”) wereincluded in the Company’s loss on investment in EWE.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

***Deferred FinancingCosts***

 

Costs relating to obtaining the debt portion ofprivate placement offerings and notes are capitalized and amortized over theterm of the related debt using the straight-line method which approximates theinterest method.  When a loan is paid infull, any unamortized financing costs are removed from the related accounts andcharged to operations.  During the ninemonths ended December 31, 2009, the Company incurred $189,384 in financingcosts paid to third parties, in connection with the extension of outstandingloans and issuance of Notes payable, and $1,382,880 in placement fees incurredin connection with the issuance of Notes payable. Accumulated amortization at December31, 2009 was $505,580. Amortization of deferred financing costs charged tooperations was $397,926 and $866,153 for the three and nine months ended December31, 2009, respectively.

 

***Debt ExtinguishmentAccounting***

 

The Company accounted for amendments to certain debtinstruments to extended maturity dates, in accordance with the guidelinesenumerated in ASC 470 “Debt” (“ASC 470”) (formerly FASB Staff Position EITFIssue No. 96-19 “Debtor’s Accounting for a Modification or Exchange of DebtInstruments.”) ASC 470 provides that a substantial modification of terms in anexisting debt instrument should be accounted for like, and reported in the samemanner as, an extinguishment of debt. ASC 470 further provides that themodification of a debt instrument by a debtor and a creditor in a non-troubleddebt situation is deemed to have been accomplished with debt instruments thatare substantially different if the present value of the cash flows under theterms of the new debt instrument is at least ten percent different from thepresent value of the remaining cash flows under the terms of the originalinstrument at the date of the modification.

 

The Company evaluated its issuance of the noteextensions and the related issuance of equity instruments to determine whetherthe modification for the change in the maturity date and the related issuanceof equity instruments resulted in the issuance of a substantially differentdebt instrument. The Company determined after giving effect to the changes inthe extended due dates and the consideration paid to the debt holders that theCompany had issued substantially different debt instruments, which resulted ina constructive extinguishment of the original debt instrument. Accordingly, theCompany recorded a loss on the extinguishment of debt in the amount of $0 and$669,082 for the three and nine months ended December 31, 2009, respectively,which represented the value of additional equity instruments given to debtholders to extend the maturity.  The debtinstrument charge is included in the accompanying statement of operations forthe nine months ended December 31, 2009 (See Note 6).

 

***Net Loss Per Share***

 

The Company computes net loss per share in accordancewith ASC 260 (formerly SFAS No. 128, “Earnings Per Share.”) Under ASC 260,basic net loss per share is computed by dividing net loss per share availableto common 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 and ninemonths ended December 31, 2009 and 2008 excludes potentially dilutivesecurities because their inclusion would be anti-dilutive.  Excluded from the calculation for the threeand nine months ended December 31, 2009 were 24,966,450 warrants and 5,660,447shares associated with the Company’s 12% Senior Convertible Debentures.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

The Company retrospectively adopted the provisions ofASC 260 “Earnings per Share” (formerly FASB Staff Position EITF 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment TransactionsAre Participating Securities”) on April 1, 2009. Under the new standard ASC 260addresses whether instruments granted in share based payment transactions areparticipating securities prior to vesting and, therefore, need to be includedin the earnings allocation in computing earnings per share (EPS) under the twoclass method described.  This provisionof ASC 260 is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those years. Theadoption of this provision of ASC 260 did not have a material impact on theCompany’s consolidated financial position, results of operations or cash flows.

 

***Non-ControllingInterest***

 

The Company prospectively adopted the provisions ofASC 810 “Noncontrolling Interests in Consolidated Financial Statements”(formerly SFAS No. 160, “Non-controlling Interests in Consolidated FinancialStatements”). ASC 810 establishes accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. This provision of ASC 810 is effective for fiscal years and interimperiods within those fiscal years beginning on or after December 15, 2008.Earlier adoption is prohibited. The adoption of this provision of ASC 810 didnot have a material effect on the Company’s consolidated financial position,results of operations or cash flows.

 

***FinancialInstruments***

 

The Company adopted the provisions of ASC 815-40“Contracts in Entity’s Own Equity” (formerly EITF Issue No. 07-5, “DeterminingWhether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s OwnStock”). ASC 815-40 provides that an entity should use a two step approach toevaluate whether an equity-linked financial instrument, or embedded feature, isindexed to its own stock, including evaluating the instrument’s contingentexercise and settlement provisions. It also clarifies on the impact of foreigncurrency denominated strike prices and market-based employee stock optionvaluations. This provision of ASC 815-40 is effective for fiscal yearsbeginning after December 15, 2008 and interim periods within those fiscalyears.  The adoption of the provisions ofASC 815-40 did not have a material effect on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

***DerivativeInstruments***

 

The Company adopted the provisions of ASC 815-15“Embedded Derivatives”.  Under ASC815-15, the Company is required to bifurcate conversion options from their hostinstruments and account for them as free standing derivative financialinstruments according to certain criteria. The criteria includes circumstancesin which (a) the economic characteristics and risks of the embedded derivativeinstrument are not clearly and closely related to the economic characteristicsand risks of the host contract, (b) the hybrid instrument that embodies boththe embedded derivative instrument and the host contract is not re-measured atfair value under otherwise applicable generally accepted accounting principleswith changes in fair value reported in earnings as they occur and (c) aseparate instrument with the same terms as the embedded derivative instrumentwould be considered a derivative instrument.

 

The Company does not enter into derivative contractsfor purposes of risk management or speculation. However, from time to time, theCompany enters into contracts that are not considered derivative financialinstruments in their entirety but that include embedded derivative features.

 

The Company accounts for its embedded conversionfeatures and freestanding warrants that are settled in a company’s own stock tobe designated as an equity instrument, asset, or a liability.  A contract designated as an asset or aliability is carried at fair value on a Company’s balance sheet, with anychanges in fair value recorded in the results of operations.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

The Company accounts for certain warrants to purchasecommon stock and embedded conversion options as liabilities at fair value andthe unrealized changes in the values of these derivatives are recorded in thestatement of operations as gain or loss on derivatives.  Contingent conversion features that reducethe conversion price of warrants and conversion features are included in thevaluation of the warrants and the conversion features. The recognition of thefair value of derivative liabilities (i.e. warrants and embedded conversionoptions) at the date of issuance is applied first to the debt proceeds.  The excess fair value, if any, over theproceeds from a debt instrument, is recognized immediately in the statement ofoperations as interest expense. The value of warrants or derivatives associatedwith a debt instrument is recognized at inception as a discount to the debt instrument.  This discount is amortized over the life ofthe debt instrument.  A determination ismade upon settlement, exchange, or modification of the debt instruments todetermine if a gain or loss on the extinguishment has been incurred based onthe terms of the settlement, exchange, or modification and on the valueallocated to the debt instrument at such date.

 

The Company uses the Black-Scholes pricing model todetermine fair values of its derivatives. The model uses market-sourced inputssuch as interest rates, exchange rates, and stock volatilities. Selection ofthese inputs involves management’s judgment and may impact net loss. The fairvalue of the derivative liabilities are subject to the changes in the tradingvalue of common stock. As a result, the Company’s financial statements mayfluctuate from quarter-to-quarter based on factors, such as the bid price ofthe stock at the balance sheet date, the amount of shares converted by noteholders and/or exercised by warrant holders, and changes in the determinationof market-sourced inputs. Consequently, the Company’s financial position andresults of operations may vary materially from quarter-to-quarter based onconditions other than its operating revenues and expenses.

 

***Recent AccountingPronouncements***

 

The Company adopted the provisions of ASC 855“Subsequent Events” (formerly SFAS 165 “Subsequent Events”), which establishesgeneral standards of accounting for and disclosure of events that occur afterthe balance sheet date but before financial statements are issued or areavailable to be issued. The provisions of ASC 855 are effective for interim andannual reporting periods ending after June 15, 2009. We adopted the provisionsof ASC 855 during the first quarter of fiscal 2009 and as the pronouncementonly requires additional disclosures, the adoption did not have an impact onour consolidated financial position, results of operations or cash flows. Wehave evaluated subsequent events through February 12, 2010, the date that theseconsolidated financial statements were issued.

 

In June 2009 the FASB issued SFAS 166, “Accounting forTransfers of financial Assets — an amendment of FASB Statement No. 140” (SFAS166). SFAS 166 eliminates the concept of a qualifying special-purpose entity,creates more stringent conditions for reporting a transfer of a portion of afinancial asset as a sale, clarifies other sale-accounting criteria, andchanges the initial measurement of a transferor’s interest in transferredfinancial assets. SFAS 166 will be effective April 1, 2010.  The Company is in the process of evaluatingthe impact of this pronouncement on its consolidated financial position andresults of operations. The adoption of this pronouncement is not expected tohave a material impact on the Company’s consolidated financial position andresults of operations.

 

In June 2009 the FASB issued SFAS 167, “Amendments toFASB Interpretation No. 46(R)” (SFAS 167). SFAS 167 eliminates Interpretation46(R)’s exceptions to consolidating qualifying special-purpose entities,contains new criteria for determining the primary beneficiary, and increasesthe frequency of required reassessments to determine whether a company is theprimary beneficiary of a variable interest entity. SFAS 167 also contains a newrequirement that any term, transaction, or arrangement that does not have asubstantive effect on an entity’s status as a variable interest entity, acompany’s power over a variable interest entity, or a company’s obligation toabsorb losses or its right to receive benefits of an entity must be disregardedin applying Interpretation 46(R)’s provisions. The elimination of thequalifying special-purpose entity concept and its consolidation exceptionsmeans more entities will be subject to consolidation assessments and reassessments.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

SFAS 167 will be effective April 1, 2010.  The adoption of this pronouncement is notexpected to have a material impact on the Company’s consolidated financialposition and results of operations.

 

In August 2009, FASB issued Accounting StandardsUpdate 2009-05 which includes amendments to Subtopic 820-10, Fair ValueMeasurements and Disclosures—Overall. The update provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the techniques provided for in this update. Theamendments in this Update clarify that a reporting entity is not required toinclude a separate input or adjustment to other inputs relating to theexistence of a restriction that prevents the transfer of the liability and alsoclarifies that both a quoted price in an active market for the identicalliability at the measurement date and the quoted price for the identicalliability when traded as an asset in an active market when no adjustments tothe quoted price of the asset are required are Level 1 fair value measurements.The adoption of this standard did not have a material impact on the Company’s consolidatedfinancial position and results of operations.

 

The FASB has published FASB Accounting StandardsUpdate 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable RevenueArrangements which addresses the accounting for multiple-deliverablearrangements to enable vendors to account for products or services(deliverables) separately rather than as a combined unit. Specifically, thisguidance amends the criteria in Subtopic 605-25, RevenueRecognition-Multiple-Element Arrangements, for separating consideration inmultiple-deliverable arrangements. This guidance establishes a selling pricehierarchy for determining the selling price of a deliverable, which is basedon: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates.This guidance also eliminates the residual method of allocation and requiresthat arrangement consideration be allocated at the inception of the arrangementto all deliverables using the relative selling price method and also requiresexpanded disclosures. FASB Accounting Standards Update 2009-13 is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010. Early adoption is permitted.The adoption of this standard is not expected to have a material impact on theCompany’s consolidated financial position and results of operations.

 

In September 2009, the FASB issued ASU No. 2009-14,“Software (Topic 985) — Certain Revenue Arrangements That Include SoftwareElements” (“ASU No. 2009-14”). ASU No. 2009-14 changes the accounting model forrevenue arrangements that include both tangible products and software elementsto allow for alternatives when vendor-specific objective evidence does notexist. Under this guidance, tangible products containing software componentsand non-software components that function together to deliver the tangibleproduct’s essential functionality and hardware components of a tangible productcontaining software components are excluded from the software revenue guidancein Subtopic 985-605, “Software-Revenue Recognition;” thus, these arrangementsare excluded from this update. ASU No. 2009-14 is effective prospectively forrevenue arrangements entered into or materially modified in fiscal yearsbeginning on or after June 15, 2010 with early adoption permitted. The adoptionof this pronouncement is not expected to have a material impact on ourconsolidated financial position or results of operations.

 

The FASB has issued Accounting Standards Update (ASU) No.2010-06, Fair Value Measurements and Disclosures (Topic 820): ImprovingDisclosures about Fair Value Measurements. This ASU requires some newdisclosures and clarifies some existing disclosure requirements about fairvalue measurement as set forth in Codification Subtopic 820-10. ASU 2010-06amends Codification Subtopic 820-10 and now requires a reporting entity to usejudgment in determining the appropriate classes of assets and liabilities andto provide disclosures about the valuation techniques and inputs used tomeasure fair value for both recurring and nonrecurring fair value measurements.ASU 2010-06 is effective for interim and annual reporting periods beginningafter December 15, 2009, As this standard relates specifically to disclosures,the adoption will not have an impact on the Company’s consolidated financialposition and results of operations.

 

Accounting standards that have been issued or proposedby the FASB or other standards-setting bodies that do not require adoptionuntil a future date are not expected to have a material impact on our unauditedinterim consolidated financial statements upon adoption.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 4.**                **CONTRACTS IN PROGRESS**

 

The following is a summary of the contracts inprogress at December 31, 2009:

 
| Costs incurred on  uncompleted contract     |   | $          | 4,895,933 |   |
|---------------------------------------------|--------|------------|-----------|--------|
| Estimated loss on  contract                 |   | (708,050   | )         |
|                                        |   | 4,187,883  |      |
| Less: billings to date                      |   | (3,636,767 | )         |
|                                        |   | 551,116    |      |
| Provision for  uncollected unbilled amounts |   | (551,116   | )         |
|                                        |   | $          | —    |   |

 

Estimated future losses on contracts in progress whichare included in accrued expenses in the accompanying consolidated balance sheetamounted to $9,875 at December 31, 2009. The one contract in progress has incurred cost overruns and other coststhat the customer asserts should be part of the contract.  The Company and its customer intend tonegotiate the settlement of these costs upon final completion of the contract.  Management cannot at this time estimate theultimate outcome of the additional chargebacks by the customer or additionalbillings to be charged to the customer at December 31, 2009 (See Note 9).   The Company has recorded a provision foruncollectible unbilled amounts due under this contract as of December 31, 2009based on the continued dispute over the cost overruns, which managementbelieves will result in no additional billings being collectible under thecontract.

 

**NOTE 5.**                **ACQUISITION OF SUBSIDIARY ANDDISCONTINUED OPERATIONS**

 

On July 10, 2007, the Company entered into a stockpurchase agreement pursuant to which the Company agreed to acquire 95% of theissued and outstanding shares of common stock of EWI.

 

Effective on the date of acquisition, the Companydiscontinued the operational segment of EWI and ceased all operations of EWI.The Company has utilized outsourced manufacturing and services to complete anycontracts secured prior to the date of acquisition.  In addition, the Company has discontinued allof EWI’s product lines and terminated all vendor relationships. Accordingly,the results of activities for EWI are classified as discontinued operations inthe accompanying consolidated financial statements.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 5.**                **ACQUISITION OF SUBSIDIARY ANDDISCONTINUED OPERATIONS (CONTINUED)**

 

A summary of EWI’s assets and liabilities fromdiscontinued operations as of December 31, 2009 and March 31, 2009, and itsresults of discontinued operations for the three and nine months ended December31, 2009 and 2008 are as follows:

 
| ** **                                        | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|---------------|------------|
| ** **                                        | ** ** | **2009**         | ** ** | **2009**      | ** ** |
|                                              |       |             |       |          |       |
| Assets from  discontinued operations              |       |             |       |          |       |
| Cash                                              |       | $                | 3,264      |          | $          | 1,413 |   |
| Current assets from  discontinued operations      |       | $                | 3,264      |          | $          | 1,413 |   |
|                                              |       |             |       |          |       |
| Liabilities from  discontinued operations         |       |             |       |          |       |
| Accounts payable and  accrued expenses            |       | $                | 119,926    |          | $          | 170,719 |   |
| Income taxes payable                              |       | 126,552          |       | 126,552       |       |
| Current liabilities  from discontinued operations |       | $                | 246,478    |          | $          | 297,271 |   |

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **December 31, 2009**  | ** ** | **December 31, 2008** | ** ** |
| Results of discontinued  operations |       |                   |       |   |   |
| Net revenue                         |       | $                      | —     |   | $ | — |   |
| Cost of revenue                     |       | —                 |       | (36,802 | ) |
| Operating expenses                  |       | 8,660                  |       | (12,931 | ) |
| Interest income, net                |       | —                 |       | 1,143 |   |
| Benefit from income  taxes          |       | —                 |       | 13,191 |   |
| Loss from discontinued  operations  |       | $                      | 8,660      |   | $ | (35,399 | ) |

 
| ** **                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| Results of discontinued  operations |       |                  |       |   |   |
| Net revenue                         |       | $                     | —     |   | $ | 518,003 |   |
| Cost of revenue                     |       | —                |       | (440,930 | ) |
| Operating expenses                  |       | 8,590                 |       | (177,622 | ) |
| Interest income, net                |       | 1                     |       | 1,357 |   |
| Other income                        |       | —                |       | 984 |   |
| Benefit from income  taxes          |       | —                |       | 33,390 |   |
| Loss from discontinued  operations  |       | $                     | 8,591      |   | $ | (64,818 | ) |

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 6.**                **NOTES PAYABLE**

 

A summary of the notes payable as of December 31, 2009and March 31, 2009 is as follows:

 
| ** **                                         | ** ** | **December  31, 2009** | ** ** | **March  31, 2009** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|---------------------|------------|
|                                               |       |                   |       |                |       |
| Promissory Notes                                   |       | $                      | 126,053    |                | $          | 1,508,898 |   |
| Promissory  Notes-Private Placement Offering (a)   |       | —                 |       | 500,000             |       |
| Promissory  Notes-Private Placement Offering (b)   |       | 809,000                |       | —              |       |
| Convertible Notes                                  |       | 200,000                |       | 100,000             |       |
| 12% Convertible  Debentures                        |       | 5,660,447              |       | —              |       |
| Bridge Loans                                       |       | 25,000                 |       | 200,000             |       |
| Bridge Loans-Related  Parties                      |       | —                 |       | 25,000              |       |
| Subtotal                                           |       | 6,820,500              |       | 2,333,898           |       |
| Unamortized Discounts                              |       | (4,353,537             | )          | (54,070             | )          |
| Total Notes Payable,  net of unamortized discounts |       | $                      | 2,466,963  |                | $          | 2,279,828 |   |

 

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(a)  Notes issued in connection with December 2008private placement

(b)  Notes issued in connection with July 2009private placement

 

The activity associated with the capitalization andamortization of deferred financing costs and discounts on notes payable for theperiod from April 1, 2009 to December 31, 2009 is as follows:

 

**Discount on Notes Payable**

 
| Balance, April 1, 2009       |   | $          | 54,070    |   |
|------------------------------|--------|------------|-----------|--------|
| Additions                    |   | 370,412    |      |
| Amortization                 |   | (120,951   | )         |
| Balance, June 30, 2009       |   | 303,531    |      |
| Additions                    |   | 898,933    |      |
| Amortization                 |   | (876,099   | )         |
| Balance, September 30,  2009 |   | 326,365    |      |
| Additions                    |   | 5,553,498  |      |
| Amortization                 |   | (1,526,326 | )         |
| Balance, December 31,  2009  |   | $          | 4,353,537 |   |

 

**Deferred Financing Costs**

 
| 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   |    |
| Additions                              |   | 313,065   |    |
| Amortization                           |   | (319,158  | )       |
| Balance, September 30,  2009           |   | 112,826   |    |
| Additions                              |   | 1,180,285 |    |
| Amortization                           |   | (397,926  | )       |
| Balance, December 31,  2009            |   | $         | 895,185 |   |

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 6.                NOTESPAYABLE (continued)**

 

***Promissory Notes***

 

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

 

In April 2009, the Company entered into a promissorynote for $265,000 with a vendor for previously provided services that had beenincluded in accounts payable and accrued expenses.  The note was due in ninety days bearinginterest at 10% per annum.  Also, in July2009, the Company entered into a second promissory note with the same vendor for$119,384 for previously provided services. The second note also was due in ninety days bearing interest at 10% perannum.  In September 2009 the due date ofthe notes was extended through an amendment. The due date of the notes wasamended and repayment is now expected to be repaid using proceeds from futurecapital raises and/or operations.  Duringthe quarter ended December 31, 2009, the Company repaid $258,330 of the balancedue on the promissory notes using proceeds from a private debt placement of 12%Convertible Debentures as discussed below.

 

***PromissoryNotes—Private Placement Offering (December 2008)***

 

In January 2009, in connection with its December 2008PPM, the Company sold ten units and, accordingly, issued promissory notestotaling $500,000 and issued 100,000 shares of common stock.  The notes bore interest of $150,000.Principal, plus all accrued and unpaid interest thereon, were due in April,2009. The maturity dates on the promissory notes in the aggregate amount of$500,000 scheduled to mature in April 2009 were extended to October 2009. Inconnection with the extension of the maturity dates, the Company issued1,000,000 shares of common stock to the debt holders, valued at $450,000. Inaccordance with ASC 470, the Company recorded a loss on the deemedextinguishments of debt in the amount of $450,000 which represented the valueof additional equity instruments given to debt holders to extend thematurity.  The debt instrument charge isincluded in the accompanying condensed consolidated statement of operations forthe nine months ended December 31, 2009. These notes were repaid in full on July 31, 2009.

 

***P******romissoryNotes — Private Placement Offering (July 2009)***

 

On June 25, 2009, the Company issued notes in theaggregate amount of $804,000.  The notesbear interest at a rate of 10% per annum. Principal, plus all accrued andunpaid interest thereon, were due on September 25, 2009.  The notes are automatically due and payable,including accrued interest thereon, upon the initial closing of an equityfinancing of the Company in the minimum amount of $5,000,000. The Companyissued 804,000 shares of its common stock to the payees.  The Company allocated a portion of theproceeds from the note to the common stock based on the relative fair value ofthe notes and common stock.  The relativefair value of the common stock, which amounted to $249,517, was recorded as adiscount to the notes. This amount is being accreted to interest expense overthe contracted term of the notes.  Duringthe quarter ended December 31, 2009, the Company repaid in full $650,000 of thenotes using proceeds from a private debt placement of 12% ConvertibleDebentures as discussed below.  In January2010, another $5,000 of notes was repaid. The remaining $149,000 of notes has not been repaid.  The Company has obtained extensions on notestotaling $104,000 which are now due on February 18, 2010.  As consideration for the extension theCompany granted 26,003 warrants to the payees. The Company estimated the fair value of the warrants issued using theBlack-Scholes option pricing model at $0.75 per warrant utilizing the followingassumptions:  expected volatility of131.66%; risk free interest reate of 1.24%; expected term of three years and amarket price of $1.00  This amount isbeing accreted to interest expense over the contracted term of the noteextension.  The remaining notes areexpected to be repaid using proceeds from future capital raises and/oroperations.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 6.**                **NOTES PAYABLE (Continued)**

 

On July 17, 2009, the Company issued a note payable inthe aggregate amount of $125,000.  Thenote bears interest at a rate of 10% per annum. Principal, plus all accrued andunpaid interest thereon, was due on October 17, 2009. The notes areautomatically due and payable, including accrued interest thereon, upon theinitial closing of an equity financing of the Company in the minimum amount of$5,000,000. The Company issued 125,000 shares of its common stock to the payee.  The Company allocated a portion of theproceeds from the note to the common stock based on the relative fair value ofthe notes and common stock.  The relativefair value of the common stock, which amounted to $38,793, was recorded as adiscount to the notes. This amount was being accreted to interest expense overthe contracted term of the notes. In connection with issuance, the Company paida placement agent $12,500 (10% of the amount of the notes issued) and anon-accountable expense allowance equal to $3,750 (3% of the amount of thenotes issued).  The Company did not repaythis note at maturity.  The note isexpected to be repaid using proceeds from future capital raises and/oroperations.

 

On August 4, 2009, the Company issued notes in theaggregate amount of $1,571,000.  Thenotes bear interest at a rate of 10% per annum. Principal, plus all accrued andunpaid interest thereon, was due on November 4, 2009. The notes areautomatically due and payable, including accrued interest thereon, upon theinitial closing of an equity financing of the Company in the minimum amount of$5,000,000. The Company issued 1,571,000 shares of its common stock to thepayees.  The Company allocated a portionof the proceeds from the notes to the common stock based on the relative fairvalue of the notes and common stock.  Therelative fair value of the common stock, which amounted to $860,140, wasrecorded as a discount to the notes. This amount was being accreted to interestexpense over the contracted term of the notes. In connection with issuance, theCompany paid a placement agent $157,100 (10% of the amount of the notes issued)and a non-accountable expense allowance equal to $47,130 (3% of the amount ofthe notes issued).  During the quarterended December 31, 2009, the Company repaid $1,041,000 of the notes usingproceeds from a private debt placement as discussed below.  The remaining $530,000 of notes have not beenrepaid.  The Company has obtainedextensions on $230,000 of the notes until February 20, 2010.  As consideration for the extension theCompany granted 57,500 warrants to the payees. The Company estimated the fair value of the warrants issued using theBlack-Scholes option pricing model at $0.75 per warrant utilizing the followingassumptions:  expected volatility of131.66%; risk free interest rate of 1.24%; expected term of three years and amarket price of $1.00.  This amount isbeing accreted to interest expense over the contracted term of the noteextension.  The remainder of the noteshave not been repaid.  These notes areexpected to be repaid using proceeds from future capital raises and/oroperations.

 

***Convertible Note***

 

On March 17, 2009, the Company issued a convertiblenote in the amount of $100,000. The note bore interest at a rate of 10% perannum. Principal, plus all accrued and unpaid interest thereon, was due on June17, 2009. The note was automatically due and payable, including accruedinterest thereon, upon the initial closing of an equity financing of theCompany in the minimum amount of $2,000,000. The note was convertible at theoption of the payee into shares of the Company’s common stock at a conversionprice of $0.50 per share. In addition, the Company issued 150,000 shares of itscommon stock to the payee on April 1, 2009. The Company allocated a portion ofthe proceeds from the note to the common stock based on the relative fair valueof the notes and common stock.  Therelative fair value of the common stock, which amounted to $40,299, wasrecorded as a discount to the notes. This amount was accreted to interestexpense over the contracted term of the notes. The Company did not make the final payment on the promissory note on June17, 2009, but obtained an extension of the note through November 4, 2009.  On October 1, 2009, the note was repaid infull.

 

On April 6, 2009, the Company issued a convertiblenote in the amount of $200,000.  The notebears interest at a rate of 10% per annum. Principal, plus all accrued andunpaid interest thereon, was due on October 6, 2009. The note is automaticallydue and payable, including accrued interest thereon, upon the initial closingof an equity financing of the Company in the minimum amount of $2,000,000. Thenote is convertible at the option of the payee into shares of the Company’scommon stock at a conversion price of $0.50 per share. In addition, the Companyissued 300,000 shares of its common stock to the payee.   TheCompany evaluated the conversion feature embedded in the note to determine ifsuch

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

conversion feature should be bifurcated from its hostinstrument and accounted for as a freestanding derivative. We determined thatthe note met the definition of a conventional debt instrument since itcontained only standard anti-dilution provisions and the holders of these notescould only realize the benefit of the conversion option by exercising it andreceiving the entire amount of proceeds in a fixed number of shares or cash atour option. Accordingly, the note and related conversion option was accountedfor by allocating a portion of the proceeds from the note to the common stockbased on the relative fair value of the note and common stock. The relativefair value of the common stock, which amounted to $80,597, was recorded as adiscount to the note and a corresponding increase to additional paid incapital. This amount was accreted to interest expense over the contracted termof the note. The conversion option had a beneficial conversion feature that wasvalued at $45,448 and it was accreted to interest expense over the contractedterm of the note.  The Note was extendedto October 12, 2009 and the Company subsequently obtained an extension on thenote until February 18, 2010.  Asconsideration for the extension the Company granted 50,000 warrants to thepayees.  The Company estimated the fairvalue of the warrants issued using the Black-Scholes option pricing model at$0.75 per warrant utilizing the following assumptions: expected volatilityranging from 131.66%, risk free interest rate ranging from 1.24%, expected termof three years and a market price ranging from $1.00.  This amount is being accreted to interestexpense over the contracted term of the note extension. The warrants expirethree years from the date of issuance and contain a provision allowing for acashless exercise. The note is expected to be repaid using proceeds from futurecapital raises and/or operations.

 

On April 17, 2009, the Company issued a convertiblenote in the aggregate amount of $50,000 to its President and COO. The note boreinterest at a rate of 10% per annum. Principal, plus all accrued and unpaidinterest thereon, were due on August 17, 2009. The note was automatically dueand payable, including accrued interest thereon, upon the initial closing of anequity financing of the Company in the minimum amount of $2,000,000. The notewas convertible at the option of the payee into shares of the Company’s commonstock at a conversion price of $0.50 per share. In addition, the Company issued75,000 shares of its common stock to the payee. The Company evaluated theconversion feature embedded in the note to determine if such conversion featureshould be bifurcated from its host instrument and accounted for as afreestanding derivative. We determined that the note met the definition of aconventional debt instrument since it contained only standard anti-dilutionprovisions and the holders of these notes could only realize the benefit of theconversion option by exercising it and receiving the entire amount of proceedsin a fixed number of shares or cash at our option. Accordingly, the note andrelated conversion option was accounted for by allocating a portion of theproceeds from the note to the common stock based on the relative fair value ofthe note and common stock. The relative fair value of the common stock, whichamounted to $20,149, was recorded as a discount to the note and a correspondingincrease to additional paid in capital. This amount was accreted to interestexpense over the contracted term of the note. The conversion option had abeneficial conversion feature that was valued at $11,362 and it was accreted tointerest expense over the contracted term of the note.    Thenote was paid in full in August 2009.

 

On April 17, 2009, the Company issued a convertiblenote in the aggregate amount of $50,000. The note bore interest at a rate of 10% per annum. Principal, plus allaccrued and unpaid interest thereon, was due on October 17, 2009. The noteswere automatically due and payable, including accrued interest thereon, uponthe initial closing of an equity financing of the Company in the minimum amountof $2,000,000. In addition, the Company issued 75,000 shares of its commonstock to the payee.   The Companyevaluated the conversion feature embedded in the note to determine if suchconversion feature should be bifurcated from its host instrument and accountedfor as a freestanding derivative. We determined that the note met thedefinition of a conventional debt instrument since it contained only standardanti-dilution provisions and the holders of these notes could only realize thebenefit of the conversion option by exercising it and receiving the entireamount of proceeds in a fixed number of shares or cash at our option.Accordingly, the note and related conversion option was accounted for byallocating a portion of the proceeds from the note to the common stock based onthe relative fair value of the note and common stock. The relative fair valueof the common stock, which amounted to $20,149, was recorded as a discount tothe note and a corresponding increase to additional paid in capital. Thisamount was accreted to interest expense over the contracted term of the note.The conversion option had a beneficial conversion feature that was valued at$11,362 and it was accreted to interest expense over the contracted term of thenote. The note was repaid in full during the quarter ended December 31, 2009.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

***12% Senior ConvertibleDebentures***

 

In the quarterended December 31, 2009, the Company issued Senior Convertible Debentures inthe aggregate amount of $5,660,447 in a private placement.  The notes bear interest at a rate of 12% perannum and are due one year from date of issue. The notes are convertible intoone share of common stock with a conversion price of $1.00.  In addition, if, at any time while thisDebenture is outstanding, the Company, sells or grants any option to purchase orsells or grants 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”). Also, for each dollar invested, awarrant was issued which entitles the note holder to purchase one share of commonstock for an exercise price of $2.00 per share. In connection with the issuance, the Company paid a placement agent$566,045 (10% of the amount of the notes issued) and a non-accountable expenseallowance equal to $170,136 (3% of the amount of the notes issued).  Additionally an investment banking fee of$283,147 (5% of the amount of notes issued) was paid to the placementagent.  An amount of $678,952 was placedinto an escrow account at closing which represents the 12% interest to be paidon the notes.  During the quarter, aninvestor agreed to release $240,000 of interest from escrow that related to theinvestor’s note payable and was utilized by the Company for general operatingpurposes.  The Company estimated the fairvalue of the warrants issued using the Black-Scholes option pricing model at arange of $0.38 to $0.71 per warrant utilizing the following assumptions:expected volatility ranging from 131.04% to 132.40%, risk free interest rateranging from 1.12% to 1.50%, expected term of three years and a market priceranging from $0.65 to $1.06.  Thewarrants expire three years from the date of issuance and contain a provisionallowing for a cashless exercise. Accordingly, the Company allocated a portion of the proceeds from thenote to the warrant based on the relative fair value of the note and warrants.The relative fair value of the warrants, which amounted to $2,265,938, wasrecorded as a discount to the note and a corresponding increase to additionalpaid in capital. This amount will be accreted to interest expense over thecontracted term of the note.

 

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, thederivatives associated with the debt instrument were recognized as a discountto the debt instrument and the discount is being amortized over the life of thenote and any excess of the derivative value over the note payable value isrecognized as additional interest expense at issuance date.  During the quarter ended December 31, 2009,the Company recognized a derivative liability at fair value of $3,234,454.   Also, $3,219,387 was recorded as a discountand $15,067 was recognized immediately in the statement of operations as interestexpense.

 

Furtherand 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 statement of operations.  As of December 31, 2009, the fair value ofthe embedded derivative included on the accompanying balance sheet was$1,223,867.  For the three and ninemonths ended December 31, 2009, the Company included $2,010,586 as a gain on changein fair value of derivative liability.

 

***Bridge Loans***

 

During September 2008, the Company issued two notespayable in the aggregate amount of $50,000 (including a note issued to ashareholder of the Company for $25,000). The notes matured one year from thedate of issuance. Additionally, the Company issued a $100,000 note payable in September2008 which matured ninety days from the date of issuance.  The notes bear interest at 10% per annum andrequire the issuance of 300,000 shares of the Company’s common stock. Theaggregate fair value of the 300,000 shares of the Company’s common stock was$150,000, or $0.50 per

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

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

 

share.  TheCompany allocated a portion of the proceeds from the notes to the common stockbased on the relative fair value of the notes and common stock.  The relative fair value of the common stock,which amounted to $75,000, was recorded as a discount to the notes. This amountis being accreted to interest expense over the contracted term of the notes.

 

Upon maturity, the notefor $100,000 was satisfied through the issuance of 200,000 shares of theCompany’s common stock.

 

During October, November and December 2008 the Companyissued notes payable in the aggregate amount of $200,000 and warrants grantingthe holders the right to purchase up to 460,000 shares of common stock at $0.50per share exercisable for a period of three years. The aggregate fair value ofthe warrants issued, amounted to $150,617, which was determined using the BlackScholes option pricing model at a range of $0.32 and $0.33 per warrantutilizing the following assumptions: expected volatility ranging from 105.15%to 110.91%, risk free interest rate ranging from 1.80% to 1.41%, expected termof three years and a market price of $0.50. The warrants expire three years fromthe date of issuance and contain a provision allowing for a cashlessexercise.  The notes had a three monthterm and bore interest at a rate of 5% per annum. These notes were all repaidprior to July 31, 2009.

 

The Company allocated a portion of the proceeds fromthe notes to the warrants.  The relativefair value of the warrants, which amounted to $84,420, was recorded as adiscount to the notes.  This amount isbeing accreted to interest expense over the contracted term of the notes.

 

In April and May 2009, the maturity dates on bridgenotes in the aggregate amount of $175,000 scheduled to mature in January and February2009 were extended to April and May 2009, respectively.  The maturity of the notes was later extendedto June 2009.  In connection with thesecond extension of the maturity dates, the Company issued 425,000 shares ofcommon stock to the debt holders, valued at $219,082.  In accordance with ASC 470, the Companyrecorded a loss on the deemed extinguishments of debt in the amount of $219,082which represented the value of additional equity instruments given to debtholders to extend the maturity.  The debtinstrument charge is included in the accompanying condensed consolidatedstatement of operations for the nine months ended December 31, 2009.  These notes were repaid in full on July 31,2009.

 

As of December 31, 2009, $325,000 of the bridge loanspayable to seven of the debt holders, including two related parties, has beenrepaid.  The remaining $25,000 is now dueFebruary 19, 2010.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 7.**                **ENERWASTE EUROPE, LTD**

 

***Bankruptcy ofEnerwaste Europe, Ltd on February 19, 2009***

 

The Company’s subsidiary, EWE, had significantoperations in Iceland and historically paid a large proportion of its fixedcosts in Icelandic Krona (ISK), while its sales are generally denominated inEuros and its reporting currency is the U.S. dollar. Beginning in the thirdquarter of 2008 and particularly in the first weeks of the fourth quarter, theeffects of the global credit and financial crisis had a significant adverse effecton the Icelandic economy. In mid October 2008, the Icelandic parliament passedemergency legislation to minimize the impact of the financial crisis, resultingin the government takeover of the three largest Icelandic banks, includingGlitnir Bank (“Glitnir”), with whom EWE had bank accounts, lines of credit anda loan payable. The financial crisis had serious consequences for the Icelandiceconomy; the national currency fell sharply in value, foreign currencytransactions were virtually suspended for weeks, and the market capitalizationof the Icelandic stock exchange dropped significantly.

 

The turmoil in the Icelandic financial sector andeconomy as a whole had a significant impact on the Company and a materialadverse impact on the day to day operations of EWE.  In October 2008, the Company was made awarethat Glitnir Bank (“Glitnir”) was placed into receivership due to seriousfinancial difficulties and that transfers of funds between the United Kingdomand Iceland were subject to significant delays and uncertainties. As a resultof the significant delays caused by Glitnir, EWE’s Dargavel contract with AscotEnvironmental Ltd (“Ascot”) was seriously jeopardized, since EWE could notsatisfy the terms of its sub contractual agreements with third parties. As aresult of Glitnir’s inability to transfer funds into and out of Iceland, EWEwas unable to continue work on the Dargavel contract and EWE was unable to payits manufacturing and site workers, sub contractors or material suppliers andwas accumulating significant penalties for non performance and delays on thecontract.

 

Due to the above events, Ascot terminated EWE’sDargavel contract on November 10, 2008 and cancelled their letter of creditsecuring a line of credit for EWE.  Inaddition, because the contract was canceled and EWE was unable to fulfill itsduties under the contract, EWE was unable to bill Ascot for costs they expendedon the contract in excess of billings.  Theresulting loss on the cancellation of the contract for the year ended March 31,2009, totaled $835,079.

 

On November 10, 2008, a new contract was entered intobetween Ascot and IOM to complete the project. As a result of the loss of thismajor contract, on February 19, 2009, a creditor commenced bankruptcyproceedings against EWE and it was placed in involuntary receivership(bankruptcy) and was appointed an Administrator under the supervision of thelocal courts. EWE subsequently delivered all of its books and records, money,bank accounts, bonds and any other valuable assets to the Administrator.Further, under Icelandic law, a ruling of bankruptcy has the effect that a newlegal entity emerges that is controlled by the Administrator.  Management does not believe that the Companywill be materially impacted by the bankruptcy of EWE beyond the impact that hasoccurred to date.  Further, managementdoes not intend to reorganize EWE and continue its operations upon completionof the bankruptcy proceedings.

 

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**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 8.**                **STOCKHOLDER’S EQUITY**

 

***Common Stock***

 

In April 2009, the Company issued 525,000 shares ofcommon stock in connection with the issuance of convertible notes that werepreviously issued.  Additionally, theCompany issued 125,000 shares of common stock in connection with a promissorynote that was previously issued.

 

On April 22, 2009, the Company issued 500,000 sharesof common stock in connection with consulting services rendered, valued at$0.45 per share.  Accordingly, theCompany recorded $225,000 of consulting expense during the nine months ended December31, 2009.

 

On April 22, 2009, the Company issued 500,000 sharesof common stock in connection with identifying its merger candidate, valued at$0.45 per share. Accordingly, the Company recorded $225,000 of expense duringthe nine months ended December 31, 2009.

 

On April 22, 2009, the Company issued 1,000,000 sharesof common stock in connection with the extension of the maturity dates ofcertain notes payable related to the December 2008 Private PlacementMemorandum, which were repaid during the nine months ended December 31, 2009.  The Company recorded the cost as a loss ondeemed extinguishment of debt in accordance with ASC 470.

 

On April 22, 2009, the Company issued 100,000 sharesof common stock, to consultants in connection with the extension of a bridgeloan, valued at $0.45 per share.  Thesecosts have been recorded as deferred financing costs which are being amortizedover the term of the notes.

 

In April 2009, the Company issued 425,000 shares ofcommon stock in connection with the extension of the maturity dates of certainnotes payable (See Note 6).  The Companyrecorded the cost as a loss on deemed extinguishment of debt in accordance withASC 470.

 

On April 30, 2009, the Company issued 50,000 shares ofcommon stock in connection with consulting services rendered, valued at $0.45per share.  Accordingly, the Companyrecorded $22,500 of consulting expense during the nine months ended December 31,2009.

 

On May 4, 2009, the Company issued 750,000 shares ofcommon stock in connection with consulting services rendered, valued at $0.45per share.  Accordingly, the Companyrecorded $337,500 of consulting expense during the nine months ended December 31,2009.

 

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

 

During the period from May 2009 through August 2009the Company issued 1,800,750  shares ofcommon stock in connection with equity units sold in the May 2009 PrivatePlacement offering.  Additionally, theCompany issued 2,500,000 shares in connection with the issue of promissorynotes and debentures between June 2009 and August 2009.

 

In October, 2009, the Company issued 183,335 shares inconnection with the exercise of 200,000 warrants at an exercise price of $0.10per share in a cashless exercise.

 

In October 2009, the Company issued 1,981,391 sharesin connection with the exercise of 2,000,000 warrants at an exercise price of$.01 per share in a cashless exercise.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 8.**                **STOCKHOLDER’S EQUITY (Continued)**

 

In October, 2009, the Company entered into asettlement agreement with a consultant. This agreement required that the Company pay $35,000 and issued 42,000shares of common stock to the consultant in exchange for full settlement of alloutstanding bills. The value of the shares issued charged to expensed duringthe period was $44,520.

 

In August 2009 the Company entered into a consultingagreement for consideration of 200,000 shares of common stock. The agreementrequired that 100,000 shares be issued at inception of the agreement and theremaining 100,000 shares be issued in February 2010.  The value of the shares at the date of theagreement was $230,000 which is being amortized over the one year life of theagreement.  Amortization expense totaled$58,650 and $86,250, respectively, for the three and nine month period ended December31, 2009.

 

***Cancellation andReturn of Common Stock***

 

On May 7, 2009, pursuant to return to treasury agreementswith certain former shareholders such shareholders agreed to return 1,200,000shares of common stock to the Company in consideration for $10,503 which werethen cancelled.

 

In May 2009, 1,250,000 shares of common stock, held bya shareholder, were canceled by the Company for non-payment of theirsubscription agreement amounting to $12,500.

 

***Common StockPurchase Warrants***

 

Warrant activity for the period from April 1, 2009 to December31, 2009 is as follows:

 
| ** **                                                                          | ** ** | ** **    | ** ** | **Weighted**       | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------|------------|--------------------|------------|
| ** **                                                                          | ** ** | **Number of** | ** ** | **Average**        | ** ** |
| ** **                                                                          | ** ** | **Warrants**  | ** ** | **Exercise Price** | ** ** |
|                                                                                |       |          |       |               |       |
| Outstanding at March  31, 2009                                                      |       | 11,410,000    |       | $                  | 0.57       |   |
| Granted                                                                             |       | 7,350,000     |       | 0.53               |       |
| Exercised                                                                           |       |          |       |               |       |
| Forfeited                                                                           |       |          |       |               |       |
| Outstanding at June 30,  2009                                                       |       | 18,760,000    |       | 0.54               |       |
| Granted                                                                             |       | 2,400,000     |       | 0.12               |       |
| Exercised                                                                           |       | —        |       | —             |       |
| Forfeited                                                                           |       | —        |       | —             |       |
| Outstanding at  September 30, 2009                                                  |       | 21,160,000    |       | 0.49               |       |
| Granted                                                                             |       | 7,006,450     |       | 1.75               |       |
| Exercised                                                                           |       | (2,200,000    | )          | 0.02               |       |
| Forfeited                                                                           |       | (1,000,000    | )          | 0.75               |       |
|                                                                                |       | 24,966,450    |       | $                  | 0.88       |   |
|                                                                                |       |          |       |               |       |
| Weighted average fair  value granted during the nine months ended December 31, 2009 |       |          |       | $                  | 0.98       |   |

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 8.**                **STOCKHOLDER’S EQUITY (Continued)**

 

***Warrants issued toNon-Employees***

 

On April 2, 2009, the Company issued warrants topurchase 2,000,000 shares of the Company’s common stock to a vendor, previouslygranted on March 31, 2009 at an exercise price of $0.50.  The warrants expire on April 2, 2014 andcontain a provision allowing for a cashless exercise. The fair value of thewarrants issued, amounting to $701,541, was determined using the Black-Scholesoption pricing model at $0.35 per warrant utilizing the following assumptions:expected volatility of 110.04%, risk-free interest rate of 1.74%, contractualterm of five years and a market price of $0.45. The value of the warrants was accrued as a consulting expense payable atMarch 31, 2009.

 

On August 19, 2009, the Company issued warrants topurchase 2,000,000 shares of the Company’s common stock to its placement agentin connection with the settlement of all amounts due under the previousinvestment banking agreement.  Thewarrants were granted with an exercise price of $.01.  The warrants expire on August 19, 2012 andcontain a provision allowing for a cashless exercise. The fair value of thewarrants issued, amounting to $2,002,335, was determined using theBlack-Scholes option pricing model at $1.0012 per warrant utilizing thefollowing assumptions: expected volatility of 124.2%, risk-free interest rateof 1.54%, contractual term of five years and a market price of $1.01.  The value of the warrants was recorded as acost of capital for the quarter ended September 30, 2009.  On October 9, 2009, the placement agentexercised the 2,000,000 warrants that were issued in September 2009 at a priceof $.01 per share into common shares in a cashless exercise.  The company issued 1,981,391 shares of commonstock as a result of this transaction.

 

In connection with the extension of debt maturities,in November 2009 the Company issued 146,003 warrants with an exercise price of$1.00.  The warrants have a three yearterm and contain a provision allowing for a cashless exercise.  The fair value of the warrants issued,amounting to $109,606, was determined using the Black-Scholes option pricingmodel at $0.75 per warrant utilizing the following assumptions: expectedvolatility of 131.6%, risk-free interest rate ranging from 1.24% to 1.25%,contractual term of three years and a market price of $1.00.

 

In connection with the Company’s sale of ConvertibleDebentures during the quarter ended December 31, 2009 (See Note 6), the Companyissued warrants on a one-for one basis for each dollar invested. A total of5,660,447 warrants were issued during the quarter which are exercisable over athree year period at an exercise price of $2.00.  The warrants contain a provision allowing fora cashless exercise.  The fair value ofthe warrants issued, amounting to $3,797,699, was determined using theBlack-Scholes option pricing model at a range of $0.38 to $0.71 per warrantutilizing the following assumptions: expected volatility ranging from 131.04%to 132.40, risk-free interest rate ranging from 1.12% to 1.5%, contractual termof three years and a market price ranging from $0.65 to $1.06.

 

In consideration of services rendered to the Company,a service provider was awarded 100,000 warrants in October 2009 with anexercise price of $0.75 per share.  Thewarrants are exercisable over a five-year period and contain a provisionallowing for a cashless exercise.  Thefair value of the warrants issued, amounting to $86,028, was determined usingthe Black-Scholes option pricing model at $0.86 per warrant utilizing thefollowing assumptions: expected volatility of 118.92%, risk-free interest rateof 2.31%, contractual term of five years and a market price of $1.01.

 

The Company recorded $86,028 and $133,489 ofconsulting expense during the three months ended December 31, 2009 and 2008,respectively, relating to warrants awarded. For the nine months ended December 31, 2009 and 2008, the Companyrecorded $86,028 and $909,389, respectively, of consulting expense relating towarrants awarded.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 8.**                   **STOCKHOLDER’S EQUITY(Continued)**

 

***Warrants Issued toEmployees***

 

On April 2, 2009, the Company issued warrants topurchase 2,000,000 shares of the Company’s common stock to the CEO previouslygranted on March 31, 2009 at an exercise price of $0.50.  The warrants expire on April 2, 2014 andcontain a provision allowing for a cashless exercise. The fair value of thewarrants issued, amounting to $541,242, was determined using the Black-Scholesoption pricing model at $0.27 per warrant utilizing the following assumptions:expected volatility of 110.05%, risk-free interest rate of 1.25%, expected termof three years and a market price of $0.45.  The value of thewarrants was accrued as a consulting expense payable at March 31, 2009.

 

On April 2, 2009, the Company issued warrants topurchase 1,400,000 shares of the Company’s common stock to the President andCOO previously granted on March 31, 2009 and included on March 31,2009 at an exercise price of $0.50.  The warrants expire on April 2,2014 and contain a provision allowing for a cashless exercise.  Thefair value of the warrants issued, amounting to $378,870, was determined usingthe Black-Scholes option pricing model at $0.27 per warrant utilizing thefollowing assumptions: expected volatility of 110.05%, risk-free interest rateof 1.25%, expected term of three years and a market price of$0.45.  The value of the warrants was accrued as compensation expensepayable at March 31, 2009.

 

On April 2, 2009, the Company issued warrants topurchase 350,000 shares of the Company’s common stock to certain employeespreviously granted on March 31, 2009 at an exercise price of$0.50.  The warrants expire on April 2, 2014 and contain aprovision allowing for a cashless exercise.  The fair value of thewarrants issued, amounting to $94,717, was determined using the Black-Scholesoption pricing model at $0.27 per warrant utilizing the following assumptions:expected volatility of 110.05%, risk-free interest rate of 1.25%, an expectedterm of three years and a market price of $0.45.   The value of thewarrants was accrued as compensation expense payable at March 31, 2009.

 

On May 4, 2009, the Company issued warrants topurchase 600,000 shares of the Company’s common stock toemployees previously granted on March 31, 2009 at an exercise priceof $0.50.  The warrants expire on May 14, 2014 and contain aprovision allowing for a cashless exercise. The fair value of the warrantsissued, amounting to $162,551, was determined using the Black-Scholes optionpricing model at $0.27 per warrant utilizing the following assumptions: expectedvolatility of 110.04%, risk-free interest rate of 1.40%, an expected term ofthree years and a market price of $0.45.  The value of the warrantswas accrued as compensation expense payable at March 31, 2009.

 

On April 2, 2009, the Company issued warrants topurchase 1,000,000 shares of the Company’s common stock to the Chief TechnologyOfficer previously granted on March 31, 2009 at an exercise price of$0.75.  The warrants expire on April 2, 2014 and contain aprovision allowing for a cashless exercise.  The fair value of thewarrants issued, amounting to $233,948, was determined using the Black-Scholesoption pricing model at $0.23 per warrant utilizing the following assumptions:expected volatility of 110.05%, risk-free interest rate of 1.15%, expected termof three years and a market price of $0.45.  The value of thewarrants was accrued as compensation expense payable at March 31, 2009.

 

On July 13, 2009, the Company granted warrants topurchase 400,000 shares of the Company’s common stock to the Chief FinancialOfficer at an exercise price of $0.67 in connection with an employmentagreement.  The warrants expire on July 13, 2014 and contain aprovision allowing for a cashless exercise.  The fair value of thewarrants issued, amounting to $112,010, was determined using the Black-Scholesoption pricing model at $0.28 per warrant utilizing the following assumptions:expected volatility of 126.19%, risk free interest rate of 1.60%, expected termof three years and a market price of $0.45.

 

On October 1, 2009, the Company granted warrantsto purchase 1,000,000 shares of the Company’s common stock to an employee at anexercise price of $0.67 in connection with an employment agreement.  The warrants expire on October 1, 2014and contain a provision allowing for a cashless exercise.  The fair value of the warrants issued,amounting to $852,825, was determined using the Black-Scholes option pricingmodel at $0.85 per warrant utilizing the following

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 8.**                   **STOCKHOLDER’S EQUITY(Continued)**

 

assumptions: expected volatility of 131.63%, risk freeinterest rate of 1.36%, expected term of three years and a market price of$1.06.  The Company recorded $73,550 ofamortization expense for the quarter ended December 31, 2009 in connectionwith these warrants.

 

On October 30, 2009, the Company granted warrantsto purchase 100,000 shares of the Company’s common stock to an employee at anexercise price of $0.67 in recognition of continued service to theCompany.  The warrants expire on October 30,2012 and contain a provision allowing for a cashless exercise.  The fair value of the warrants issued,amounting to $76,114, was determined using the Black-Scholes option pricingmodel at $0.76 per warrant utilizing the following assumptions: expectedvolatility of 143.91%, risk free interest rate of 0.90%, expected term of twoyears and a market price of $1.01.

 

The Company recorded $118,625 and $0 of compensationexpense during the three months ended December 31, 2009 and 2008,respectively, relating to warrants awarded. For the nine months ended December 31, 2009 and 2008, respectively,the Company recorded expense of $256,090 and $1,287,444.

 

***Cancellation ofWarrants***

 

In October 2009, theCompany cancelled 1,000,000 warrants that had previously been issued as partialconsideration for the acquisition of Enerwaste Europe.  The warrants were re-issued earlier in 2009to the same party, but in a different name, and accordingly the originallyissued warrants were cancelled.

 

***Merger and PrivatePlacement Offering — May 2009***

 

On May 6, 2009 under the Merger Agreement, (i) thestockholders of W2E surrendered all of the issued and outstanding shares of W2Ecapital stock and received, in exchange for 45,981,770 shares ofcommon stock the Company, referred to as “Pubco”; (ii) all warrants topurchase shares of W2E common stock outstanding immediately prior to the Mergerwas replaced with corresponding new warrants to purchase shares of Pubco commonstock; (iii) the former stockholders Pubco retained 1,000,000 shares ofcommon stock of Pubco. This has been accounted for as a reverse merger with theacquiring company being W2E.

 

Simultaneous with the reverse merger transaction in May 2009,the Company also initiated a private placement offering (“May PrivatePlacement”) of up to 4,000,000 units of (the Company “Units’). Each Unitconsists of (i) three shares of common stock, par value $0.001 per shareand (ii) a three-year warrant to purchase three additional shares ofcommon stock at an exercise price of $1.25 per share. The Company wasattempting to raise $8,000,000 capital with this transaction. The initialclosing of the May Private Placement was on May 28, 2009. As of August 242009, the Company completed an offering of 600,250 Units at $2.00 per Unit.

 

The Units were being offered on behalf of the Companyby a Placement agent, and the Company paid the placement agent the following (i) salescommissions in an amount of $289,654; (ii) a non-accountable expenseallowance of $79,654 and (iii) an investment banking fee of $60,023.  Additionally, the Placement agent receivedwarrants to purchase two million shares valued for an exercise price of $.01per share upon conclusion of the offering in full settlement of all amounts dueto the agent under the investment banking agreement.  Further, upon exercise of the Warrants issuedto investors, the Placement agent will receive a ten percent (10%) commissionand a three percent (3%) non-accountable expense allowance, and will also beissued a three-year warrant exercisable to purchase such number of shares ofcommon stock equal to 4.5% of the number of the fully diluted outstandingshares of common stock.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 8.**                   **STOCKHOLDER’S EQUITY(Continued)**

 

Details of outstandingshares of common stock are as follows:

 
| ** **                                                             | ** ** | **Shares** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** |
| Shares of Pubco at March 31,  2009                                |       | 3,000,000  |       |
| Cancellation of Pubco  shares at merger date                           |       | (2,000,000 | )          |
| Recapitalized shares of  W2E’s stockholders at exchange (1:1)     |       | 41,152,100 |       |
| Issuance of shares in  connection with notes payable                   |       | 4,575,000  |       |
| Issuance of shares in  connection with consulting agreements           |       | 2,000,000  |       |
| Issuance of shares in  connection with May 2009 private placement |       | 1,800,750  |       |
| Issuance of shares in  connection with warrant exercises               |       | 2,164,726  |       |
| Issuance of shares in  connection with settlement of accounts payable  |       | 42,000     |       |
| Cancellation and return  of shares                                     |       | (2,450,000 | )          |
| Common stock  outstanding at December 31, 2009                    |       | 50,284,576 |       |

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 9.**                   **COMMITMENTS ANDCONTINGENCIES**

 

***Income TaxLiabilities***

 

At December 31, 2009 and March 31,  2009,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 from discontinuedoperations in the accompanying condensed consolidated balance sheets.

 

***EmploymentAgreements***

 

At December 31, 2009, the Company has accruedunpaid fees of $512,500 for the Former Chief Executive Officer and sole boardmember, $126,041 for the President and Chief Executive Officer, and $11,250 forthe VP related to unpaid compensation under their respective employmentagreements.  These amounts are includedin due to related parties in the consolidated balance sheet as of December 31,2009.

 

On July 13, 2009, the Company entered into anemployment agreement with its Chief Financial Officer (“CFO”).  Theagreement is for a one year term; thereafter the agreement automatically renewsfor successive one year terms, unless terminated sooner, upon 30 days notice.   Underthe terms of the agreement, the CFO will receive an annual base salary of$175,000.  The CFO’s base salary will be reviewed, from time to time,and may be adjusted at the discretion of the Board. The first such reviewshall be at the first anniversary date of this agreement. In addition, on July 13,2009, the CFO was granted 400,000 warrants to purchase the Company’s commonstock at an exercise price of $0.67 per share vested two years from theeffective date of the registration statement, or immediately if the Companyfails to raise a minimum of $4,000,000 in the equity offering, provided the CFOis still employed by the Company on such date.  The warrants expireon July 13, 2014 and contain a provision allowing for a cashlessexercise.  The fair value of the warrants issued, amounting to$112,010, was determined using the Black-Scholes option pricing model at $0.28per warrant utilizing the following assumptions: expected volatility of126.19%, risk free interest rate of 1.60%, expected term of three years and amarket price of $0.45.

 

***Investment BankingAgreement***

 

On March 30, 2009, the Company entered into anagreement with a registered broker dealer (“Placement agent”) whereby thePlacement agent will assist the Company with its investment banking requirementswhich includes assistance with mergers, acquisition and internal capitalstructuring, as well as the placement of new debt and/or equity issues. ThePlacement agent will also assist the Company in placing up to $8,000,000 of theCompany’s securities (the “Offering”).

 

The Company was required to pay the Placement agent aretainer of $400,000. In connection with the Offering, the Company agreed topay the Placement agent (i) placement fees equal to 10% of the grossproceeds of the Offering and 3% of the gross proceeds of the Offering as anon-accountable expense allowance; and (ii) issue 3,304,670 shares of theCompany’s common stock valued at $0.45 per share.

 

In September 2009, the May Private Placementwas terminated.  The Placement agent was previously issued 3,304,670shares of the Company’s common stock for services rendered in connection withthe Offering.  Subsequent to the issuance, the common shares werecanceled and replaced with warrants to purchase 2,000,000 shares of theCompany’s common stock at an exercise price of $0.01.  The warrantsexpire on August 19, 2012 and contain a provision allowing for a cashlessexercise. The fair value of the warrants issued, amounting to $2,002,335, wasdetermined using the Black Scholes option pricing model at $1.0012 per warrantutilizing the following assumptions: expected volatility of 124.20%, risk freeinterest rate of 1.54%, contractual term of three years and a market price of$1.01.  The warrants were exercised on acashless basis resulting in the issuance of 1,981,391 shares of common stock inOctober 2009 (See Note 11).

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 9.**                   **COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

 

***TransitionAgreement***

 

On May 28, 2009, the Company, Christopherd’Arnaud-Taylor (“Mr. d’Arnaud-Taylor”) and Peter Bohan entered into aTransition Agreement (the “Transition Agreement”). Pursuant to the TransitionAgreement, Mr. d’Arnaud-Taylor agreed that, effective on the final closingof the May Private Placement, he would resign as Chief Executive Officerof the Company and at such time his employment agreement with the Company wouldbe terminated.  He will continue to serve as a director of theCompany. Mr. d’Arnaud-Taylor entered into a consulting agreement, dated asof May 28, 2009 (the “Consulting Agreement”).  Pursuant to theConsulting Agreement, which became effective upon the final closing of the May PrivatePlacement, Mr. d’Arnaud-Taylor will serve as a consultant to W2E GroupHoldings and shall be paid an annual fee of $300,000. The Company hasguaranteed the payments due to Mr. d’Arnaud-Taylor pursuant to theConsulting Agreement.  Upon his resignation, Mr. Bohan willbecome the Company’s Chief Executive Officer. In September 2009, theCompany amended the Transition Agreement such that Mr. Taylor would resignupon termination of the May Private Placement.  This waseffective September 4, 2009 and Mr. Bohan assumed the role of CEO asof that date.  The Company recorded anaccrual of $300,000 for severance to Mr. Taylor in connection with hisdeparture and the terms of his employment agreement.  This is included as a component of Due torelated parties in the condensed consolidated balance sheet as of December 31,2009.

 

***Dargavel ContractCost Dispute***

 

During the course of the construction of the Dargavelplant, the Company and its customer encountered a number of significant issuesthat have resulted in delays and cost increases to theproject.  These issues include the Icelandic economy collapse,project scoping changes, and changes required by engineers hired by thecustomer and the Scottish Environment Protection Agency(“SEPA”).  These issues have resulted in substantial increases to thecosts to complete this project.  The customer claims that they haveincurred liquidated damages due to the project not being completed on schedulebased on the original contract with our Icelandic subsidiary, Enerwaste Europeof approximately €470,000.  The Company is contesting this claimbased on our belief that a Force Majeure occurred with respect to the Icelandcollapse and the impact on our business operations based inIceland.  Additionally, there are significant other costs that thecustomer claims are our responsibility, the majority of which are costsassociated with the engineering firm that they engaged to participate in theproject.  We do not believe the vast majority of these costs are ourresponsibility and intend to contest this claimvigorously.  Additionally, the Company is in the process of pullingtogether its counter claims with respect to cost increases incurred that wereoutside of our control and are not solely ourresponsibility.   The compilation of those costs is not yetcomplete and therefore we are unable to quantify the amount of thosecosts.  Management is currently unable to estimate the ultimateoutcome of the negotiations and whether or not there will be any additionalamounts owed to the customer by the Company, particularly since we are not yetable to fully quantify our counterclaim.  The Company has commenceddiscussions with the customer regarding settlement of the disputed amounts.Based on the amounts the customer has provided to us as their claim, we estimatethe range of potential future costs to settle this could range from €0 to€900,000.  We have not recorded an accrual for these costs as thelikelihood is reasonably possible but the amounts cannot be estimated at thistime. (See Note 4).

 

***Legal Proceedings***

 

The Company isinvolved, from time to time, in litigation and other legal proceedingsincidental to its business.  Management believes that the outcome ofcurrent litigation and legal proceedings will not have a material adverseeffect upon the Company’s results of operations or financial condition. However, management’s assessment of the Company’s current litigation and otherlegal proceedings could change in light of the discovery of facts with respectto legal actions or other proceedings pending against the Company not presentlyknown to the Company or determinations by judges, juries or

 

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**NOTE 9.**                   **COMMITMENTS ANDCONTINGENCIES (CONTINUED)**

 

other finders of factwhich are not in accord with management’s evaluation of the possible liabilityor outcome of such litigation or proceedings.

 

In December 2009,the Company was named in a Complaint filed in the State of New York by a formerconsultant to the Company.  The Complaintalleges Breach of Contract, Breach of the Covenant of Good Faith and FairDealing and Promissory Estoppel related to a consulting agreement entered intobetween the Company and the Claimant. The complaint seeks damages of $500,000 plus punitive damages. TheCompany denies the allegation contained in the Complaint and intends tovigorously defend the matter and otherwise enforce its rights with respect tothe matter.  The Company has retainedcounsel and has responded to the Complaint. The matter remains unresolved as of this filing.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 10.**                 **INCOME TAXES**

 

The Company recognized a deferred tax asset ofapproximately $6,153,236 as of December 31, 2009, primarily relating tonet operating loss carryforwards of approximately $9,972,512 available tooffset future taxable income through 2030.   Due to changes inownership, these federal net operating loss carryforwards are subject to annuallimitations in their use in accordance with Internal Revenue Code Section 382.  Accordingly,the extent to which the loss carryforwards can be used to offset future taxableincome may be limited.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. The Companyconsiders projected future taxable income and tax planning strategies in makingthis assessment. At present, the Company does not have a sufficient history ofincome to conclude that it is more likely than not that the Company will beable to realize all of its tax benefits in the near future and therefore avaluation allowance was established in the full value of the deferred taxasset.

 

A valuation allowance will be maintained untilsufficient positive evidence exists to support the reversal of any portion orall of the valuation allowance net of appropriate reserves. Should the Companythen continue to be profitable in future periods with supportable trends, thevaluation allowance will be reversed accordingly.

 

**NOTE 11.**                 **SUBSEQUENT EVENTS**

 

***12% Senior Convertible Debentures (See Note 6)***

 

In January and February 2010, the Companyissued Senior Convertible Debentures in the aggregate amount of $688,100 in aprivate placement.  The notes bear interest at a rate of 12% perannum and are due one year from date of issue. In connection with the issuance, the Company paid a placement agent$68,810 (10% of the amount of the notes issued) and a non-accountable expenseallowance equal to $20,643 (3% of the amount of the notesissued).  Additionally an investment banking fee of $34,405 (5% ofthe amount of notes issued) was paid to the placement agent.  An amount of $82,572 was placed into anescrow account at closing which represents the 12% interest to be paid on thenotes.

 

***Amendment to Articles ofIncorporation***

 

The Company’sboard of directors and shareholders holding more than a majority of theCompany’s common stock approved an amendment to the Company’s certificate ofincorporation to increase the number of shares of the Company’s Common Stockthat the Company is authorized to issue from 80,000,000 shares of Common Stockto 200,000,000 shares of Common Stock with a par value of $0.0001 per share(the “Amendment”).  The Amendment was filed with the State of DelawareSecretary of State on January 21, 2010.

 

***FINRA Notification on StockListing Eligibility***

 

On January 22, 2010, the Company received noticefrom The Financial Industry Regulatory Authority (FINRA) that shares of theCompany’s common stock were no longer eligible for trading on the OTC BulletinBoard (“OTCBB”), as a result of the Company’s delayed filing of its’ Form 10Qfor the quarter ended June 30, 2009. The Company’s common stock is currently traded on the “PinkSheets”.  Several market makers havesubmitted applications for the Company to become eligible to resume trading onthe OTCBB, however there can be no assurance that the request will be granted.

 

The removal of theCompany’s common stock from the OTC:BB resulted in the Company being in Defaulton its 12% Senior Convertible Debentures, as the Company’s common stock is notcurrently eligible for quotation on a Trading Market (as defined in theDebenture Agreement).  A market maker hasfiled a Form 15C2-11 with FINRA in order to enable the Company’s commonstock to again be quoted on the OTCBB, although there can be no assurance thatthis will occur.  The Company’s common stock is currently quoted on thePink Sheets.

 

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**WASTE2ENERGYHOLDINGS INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**NOTE 12.**             **SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION**

 
| ** **                                                                                      | ** ** | **Nine Months Ended**      | ** ** | **Nine Months Ended**      | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                      | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| Cash paid for:                                                                                  |       |                       |       |                       |       |
| Interest                                                                                        |       | $                          | 453,704    |                       | $          | 2,630 |   |
|                                                                                            |       |                       |       |                       |       |
| Acquisition of  Enerwaste Europe, Ltd.:                                                         |       |                       |       |                       |       |
| Current assets                                                                                  |       | $                          | —     |                       | $          | 2,148,448 |   |
| Other liabilities  assumed                                                                      |       | —                     |       | (3,947,343                 | )          |
| Building and equipment                                                                          |       | —                     |       | 208,662                    |       |
| Goodwill                                                                                        |       | —                     |       | 333,500                    |       |
| Technology                                                                                      |       | —                     |       | 7,509,515                  |       |
| Deferred tax liability                                                                          |       | —                     |       | (2,928,714                 | )          |
| Issuance of note  payable                                                                       |       | —                     |       | (324,068                   | )          |
| Issuance of common  stock                                                                       |       | —                     |       | (3,000,000                 | )          |
| Cash paid for  acquisition                                                                      |       | $                          | —     |                       | $          | — |   |
|                                                                                            |       |                       |       |                       |       |
| Deferred tax liability  related to acquired intangibles in Investment in Enerwaste Europe, Ltd. |       | $                          | —     |                       | $          | 2,928,715 |   |
|                                                                                            |       |                       |       |                       |       |
| Non-cash investing and  financing activities:                                                   |       |                       |       |                       |       |
| Common stock issued in  connection with notes payable                                           |       | $                          | 1,390,312  |                       | $          | 50,000 |   |
| Common stock issued in  satisfaction of notes payable                                           |       | —                     |       | 100,000                    |       |
| Common stock issued in  connection with modifications of notes payable                          |       | 641,250                    |       | —                     |       |
| Common stock issued for  acquisition of Enerwaste Europe, Ltd.                                  |       | —                     |       | 3,000,000                  |       |
| Warrants issued in  connection with notes payable                                               |       | 2,265,938                  |       | 84,420                     |       |
| Warrants issued in  connection with modifications of notes payable                              |       | 109,606                    |       | —                     |       |
| Embedded derivative  created in connection with issuance of notes payable                       |       | 3,234,454                  |       | —                     |       |
| Promissory note issued  for acquisition of Enerwaste Europe, Ltd.                               |       | —                     |       | 324,068                    |       |
| Common stock  outstanding from share exchange transaction                                       |       | 100                        |       | —                     |       |
| Cancellation and return  of common stock                                                        |       | 3,003                      |       | —                     |       |
|                                                                                            |       |                       |       |                       |       |
| Non-cash operating and  financing activities:                                                   |       |                       |       |                       |       |
| Warrants issued for  satisfaction of accrued expenses                                           |       | 2,112,870                  |       | —                     |       |
| Issuance of common  stock on settlement of accounts payable                                     |       | 44,520                     |       | —                     |       |
| Conversion of accrued  expenses to notes payable                                                |       | $                          | 384,384    |                       | $          | — |   |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

***Forward-LookingStatements and Associated Risks.***

 

*The following discussion should beread in conjunction with the condensed consolidated financial statements andthe notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.This Quarterly Report on Form 10-Q contains certain statements that areforward-looking within the meaning of the Private Securities Litigation ReformAct of 1995. Certain statements contained in the MD&A are forward-lookingstatements that involve risks and uncertainties. The forward-looking statementsare not historical facts, but rather are based on current expectations,estimates, assumptions and projections about our industry, business and futurefinancial results. Our actual results could differ materially from the resultscontemplated by these forward-looking statements due to a number of factors,including those discussed in other sections of this Quarterly Report on Form 10-Q.*

 

**Plan ofOperation**

 

We intend to compete in the growing worldwide marketfor waste-to-energy systems that simultaneously destroy waste and generategreen energy. Our business plan calls for us to design, manufacture and installsmall footprint, simple, cost-effective gasification technologies that arescalable, modular, environment friendly and robust enough to operate in harshand remote environments. We intend to provide customized engineering solutionsthat we believe will enable our current and future customers to convert solidwaste streams traditionally destined for landfill or incineration into clean,renewable energy.

 

We intend to target the local waste-to-energy sectorin the small to mid-range market — from one ton batch systems all the way up tothe continuous 500 metric ton per day (TPD) range — not large centralizedplants such as those operated by waste-to-energy companies like Covanta orWheelabrator who typically develop major facilities in the 1,000+ TPDrange.  We intend to focus on providing any customers we obtain withthe technologies to recover the energy trapped in municipal solid waste,construction and demolition debris, industrial and commercial waste, andbiomass.

 

To date we have financed our activities andacquisitions through private placements of our securities, including thePrivate Placements.  To date we have generated limited revenues, havesubstantial operating losses and an accumulated deficit since our inception in April 2007.

 

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**Resultsof Operations**

 

*For thethree months ended December 31, 2009 compared to December 31, 2008*

 

For the three months ended December 31, 2009,contract revenue was $67,872 compared to $976,131 in the prior yearquarter.   The decrease in contract revenue was due to theprogress toward completion of the Dargavel contract, which is being accountedfor using percentage of completion accounting.

 

For the three months ended December 31, 2009,contract costs totaled $171,003 compared to $885,778 in the prior yearperiod.  Project costs include all costs incurred to date as well asestimated future costs on the contract.  The overall decrease incosts was associated with the fact that in the current year period the projectis nearer to completion.

 

For the three months ended December 31, 2009,gross loss on contracts totaled $103,131, compared to gross profit of $90,353in the prior year period.  The loss inthe current year is due to the delays and cost overruns that have been incurredon the current project in Dumfries Scotland.

 

Selling, general and administrative expenses for thethree months ended December 31, 2009, were $2,228,455 compared to$1,331,410 for the quarter ended December 31, 2008, an increase of67%.  The increase was primarilyattributable to increases in salaries, consulting fees, and professional fees,as well as the recording of an allowance for uncollectible amounts due under acontract of approximately $551,000.

 

Other income/expenses for the three months ended December 31,2009 were net other expense of $100,628 compared to net other expense of$278,914 for the three months ended December 31, 2008.  Thechange in expenses was primarily due to an increase in interest expense for thecurrent year period, which was attributable to the higher debt balancesassociated with the issuance of $5.66 million of 12% Convertible Debenturesduring the quarter as well as the amortization of discounts and write off ofdeferred financing costs, all of which is included in interest expense.  This was offset by a gain recorded on thechange in fair value of derivatives tied to the conversion option of the 12%Debentures.

 

The Company did not record an income tax benefit forthe pre-tax loss from continuing operations for the current year period becausethe deferred tax asset that is associated with this benefit is totally reservedfor as the Company does not have a sufficient history of income to concludethat it is more likely than not that the Company will be able to realize all ofits tax benefits in the near future, and therefore a valuation allowance wasestablished in the full value of the deferred tax asset.  The prior year quarter included an income taxbenefit of $51,926 due to recording the benefit of losses and deferred taxassets that were used to offset deferred tax liabilities for the period.

 

*For thenine months ended December 31, 2009 compared to December 31, 2008*

 

For the nine months ended December 31, 2009,contract revenue was $1,247,089 compared to $2,678,556 in the prior yearperiod.   The decrease in contract revenue was primarily due tothe progress toward completion of the Dargavel contract.

 

For the nine months ended December 31, 2009,contract costs totaled $1,672,122 compared to $2,453,121 in the prior yearperiod.  Project costs include all costs incurred to date as well asestimated future costs on the contract.  Additionally, during thecurrent year period the Company recorded a warranty reserve of approximately$200,000 related to future warranty liabilities associated with the Dargavelplant.  The prior year contract coststhat were incurred through June 25, 2008 were accounted for under theequity method and included as a component of “Loss on equity method investmentin EnerWaste Europe, Ltd.” in the accompanying condensed consolidated statementof operations.  As of June 25, 2008,the results of Enerwaste Europe were fully consolidated (See Note 7).

 

Selling, general and administrative expenses for thenine months ended December 31, 2009, were $5,993,146 compared to$5,040,601 for the nine months ended December 31, 2008, an increase of$952,545, or 19%.  The increase was largely due to higher professionalfees and insurance costs, as well as the recording of an allowance foruncollectible amounts due under a contract of approximately $551,000. This wasoffset by the impact of the deconsolidation of the Company’s 

 

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Enerwaste Europe subsidiary due to the bankruptcy ofthat subsidiary (See Note 7 in the accompanying Notes to the unauditedCondensed Consolidated Financial Statements).

 

Other income/expenses for the nine months ended December 31,2009 were net other expenses of $956,999 compared to net other expense of$710,017 for the nine months ended December 31, 2008.  Thecurrent year period included a gain related to extinguishment of a debtobligation payable to the former owner and CEO of Enerwaste International as aresult of a settlement agreement executed in April 2009.  Also,the current quarter included a gain recorded on the change in fair value ofderivatives tied to the conversion option of the 12% Debentures.  These gains were offset by interest expenseon our debt obligations and a loss on the early extinguishment ofdebt.  The prior year included the net loss on the Company’s equityinvestment in Enerwaste Europe for the period April 1 to June 25,2008 and foreign exchange gains. The foreign exchange gains in 2008 wereprimarily due to the impact of the devaluation of the Icelandic Krona withrespect to the Enerwaste Europe debt and its receivable from the customer onthe Dargavel contract which were transacted in Euros.

 

The Company did not record an income tax benefit forthe pre-tax loss from continuing operations for 2009 because the deferred taxasset that is associated with this benefit is totally reserved for as theCompany does not have a sufficient history of income to conclude that it ismore likely than not that the Company will be able to realize all of its taxbenefits in the near future, and therefore a valuation allowance wasestablished in the full value of the deferred tax asset.  The prior year period included an income taxbenefit of $1,579,152 due to recording the benefit of losses and deferred taxassets that were used to offset deferred tax liabilities for the period.

 

**Liquidityand Capital Resources**

 

We have incurred operating losses since inception. Asof December 31, 2009, we had $140,059 in cash compared to $27,360 at March 31,2009.  As of December 31, 2009, we had a working capitaldeficiency of $5,711,522, compared to a working capital deficiency of$6,308,582 as of March 31, 2009.

 

Net cash used in operating activities for the ninemonths ended December 31, 2009 was $3,966,343, compared with net cash usedof $1,714,641 for the prior year period.  The majority of theincrease in net cash used was due to an increase in operating losses due tohigher operating expenses, increases in project costs, decrease in accruedexpenses and a decrease in amounts due from escrow agent. Net cash used ininvesting activities increased over the prior year due to the purchase ofcomputer equipment and other fixed assets, as well as for legal costsassociated with the development and application of a patent related to ourgasification technology.  Net cash provided by financing activitiesfor the nine months ended December 31, 2009 was $4,284,341, compared tonet cash provided by financing activities in the prior year period of$1,274,624.  The principal reasons for the increase were higherproceeds from notes payable and issuance of stock, offset by higher feesrelated to issuing debt and an increase in repayment of certain debt obligations.

 

The Company must raise additional funds on animmediate basis in order to fund our continued operations.  We maynot be successful in our efforts to raise additional funds. Even if we are ableto raise additional funds through the sale of our securities or through theissuance of debt securities, our cash needs could be greater than anticipatedin which case we could be forced to raise additional capital. At the presenttime, we have no commitments for any additional financing, and there can be noassurance that, if needed, additional capital will be available to us oncommercially acceptable terms or at all. These conditions raise substantialdoubt as to our ability to continue as a going concern, which may make it moredifficult for us to raise additional capital when needed.

 

Our significant financing and investing activities forthe nine months ended December 31, 2009 consisted of the following:

 

In connection with the private placement, theCompany sold to accredited investors 600,250 Units to investors at $2.00per Unit, each Unit consisting of three shares of Common Stock and a three-yearwarrant to purchase three additional shares of Common Stock at an exerciseprice of $1.25 per share.  The Company received gross proceeds ofapproximately $1.2 million from the sale of the Units. A broker-dealer acted asthe exclusive placement agent for the Private Placement. We received netproceeds of approximately $825,000 after deducting commissions and expenses ofthe Private Placement.

 

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In June 2009, the Company issued $804,000 ofnotes payable to accredited investors bearing interest at 10% and due 90 daysfrom date of issue.  Of the total, $655,000 was repaid using proceedsfrom a private placement offering of the Company’s 12% Senior ConvertibleDebentures.  Of the remaining balance of$149,000 outstanding, $104,000 is now due on February 18, 2010 and theremaining $45,000 is in default.

 

In August 2009, the Company issued $1,571,000 ofnotes payable to accredited investors bearing interest at 10% and due 90 daysfrom date of issue.  Of the total, $1,041,000 was repaid usingproceeds from a private placement offering of the Company’s 12% SeniorConvertible Debentures. Of the remaining notes, $230,000 are now due on February 20,2010 and the balance of $300,000 is in default.

 

During the third quarter, the Company issuedapproximately $5.66 million of its 12% Senior Convertible Debentures in aseries of private placement transactions. In connection with the offerings, the Company paid its placement agentcommissions of $566,045 (10%) and a non-accountable expense allowance of $170,136(3%).  Additionally an investment bankingfee was paid of $283,147 (5%).  Theinterest associated with the Debentures totaling $678,952 has been put intoescrow which represents the 12% interest to be paid on the notes.  During the quarter, an investor agreed torelease the interest associated with the investor’s note from escrow for theCompany to use for operating purposes. The Company is still obligated to make the interest payments to theinvestor quarterly when due.  As of thisfiling, the Company is in Default on its 12% Senior ConvertibleDebentures.  The Debenture Agreementprovides that the Company must maintain its listing on a Trading Market (asdefined in the Debenture).  If theCompany is not eligible to be listed on a Trading Market and is not eligible toresume trading within 5 business days, the Company is in Default.  On January 22, 2010, the Company wasnotified by FINRA that its Common Stock is no longer eligible to trade on theOTC:BB.  Several market makers have filedrequests for the Company to be approved to trade again on the OTC:BB.    The Company, and its Placement Agent,intend to attempt to obtain a waiver of the default from the investors holdingthe 12% Debentures.  In conjunction with thewaiver, the Company intends to reduce the conversion price from $1.00 to $0.50,and the exercise price of the warrants issued with the shares from $2.00 to$1.00.  The Company cannot be certainthat the investors will accept the waiver.

 

As of February 1, 2009, the Company had debtobligations totaling $470,000 that had matured and have not been repaid.

 

Management anticipates that over the next two quartersthe order intake will improve once the Dargavel plant is commissioned, whichwill start to provide funding for operational expenses on an on-going basis.

 

However, depending on our future needs and changes andtrends in the capital markets affecting our shares and us, we may determine toseek additional equity or debt financing in the private or public markets.Additional financing, whether through public or private equity or debtfinancing, arrangements with stockholders or other sources to fund operations,may not be available, or if available, may be on terms unacceptable to us.

 

Our material capital expenditure requirements for theremaining period of the year ending March 31, 2010 will be approximately$100,000 to procure office equipment, furniture and IT equipment.

 

We anticipate that our long-term operational expenseswill be approximately $400,000 to $600,000 per month, consisting primarily ofSG&A expenses.

 

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**Recent Accounting Pronouncements**

 

See Note 3 to the Condensed Consolidated FinancialStatements.

 

**Off Balance Sheet Arrangements**

 

None.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Not Applicable

 

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

 

**Evaluation of Disclosure Controls andProcedures**

 

Our management is responsible for establishing andmaintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act) that is designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported, within the timespecified in the Commission’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by an issuer in the reportsthat it files or submits under the Securities Exchange Act of 1934 (the“Exchange Act”), as amended, is accumulated and communicated to the issuer’smanagement, including its principal executive officer or officers and principalfinancial officer or officers, or persons performing similar functions, asappropriate to allow timely decisions regarding required disclosure.

 

Pursuant to Rule 13a-15(b) under theExchange Act, the Company carried out an evaluation with the participation ofthe Company’s management, including Peter Bohan, the Company’s Chief ExecutiveOfficer and Craig Brown, the Company’s Chief Financial Officer, of theeffectiveness of the Company’s disclosure controls and procedures (as definedunder Rule 13a-15(e) under the Exchange Act) as of December 31,2009.  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 rules andforms, 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.  Additionally, the Company hired a ChiefFinancial Officer in July 2009 and will be evaluating the systems andrequired changes needed to strengthen our internal controls.  During the quarter, the Company hasconsolidated data collection and retention in the Company’s new CorporateHeadquarters in Greenville, SC.  Thiswill help to provide assurance that key documents and issues resulting infinancial statement disclosure are captured timely and accurately.

 

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Our management, including our Chief Executive Officerand Chief Financial Officer, believes that any disclosure controls andprocedures or internal controls and procedures, no matter how well conceivedand operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must consider the benefits of controls relative to their costs. Inherentlimitations within a control system include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by unauthorizedoverride of the control. While the design of any system of controls is toprovide reasonable assurance of the effectiveness of disclosure controls, suchdesign is also based in part upon certain assumptions about the likelihood offuture events, and such assumptions, while reasonable, may not take intoaccount all potential future conditions. Accordingly, because of the inherentlimitations in a cost effective control system, misstatements due to error orfraud may occur and may not be prevented or detected.

 

**Changes in internal controls**

 

Our management, with the participation of ourChief Executive Officer and Chief Financial Officer performed an evaluation asto whether any change in our internal controls over financial reportingoccurred during the quarter ended December 31, 2009.  Managementconcluded that, except for the change discussed above, no significant changesoccurred during the quarter.

 

**PART II**

**OTHERINFORMATION**

 

**ITEM 1 - LEGAL PROCEEDINGS**

 

In December 2009, the Company was named in aComplaint filed in the State of New York by a former consultant to theCompany.  The Complaint alleges Breach ofContract, Breach of the Covenant of Good Faith and Fair Dealing and PromissoryEstoppel related to a consulting agreement entered into between the Company andthe Claimant.  The complaint seeksdamages of $500,000 plus punitive damages. The Company denies the allegation contained in the Complaint and intendsto vigorously defend the matter and otherwise enforce its rights with respectto the matter.  The Company has retainedcounsel and has responded to the Complaint. The matter remains unresolved as of this filing.

 

Other than as stated herein, we are not a party to anypending legal proceeding, nor is our property the subject of a pending legalproceeding, that is not in the ordinary course of business or otherwisematerial to the financial condition of our business. None of our directors,officers or affiliates is involved in a proceeding adverse to our business orhas a material interest adverse to our business.

 

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**ITEM 2 - UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

**NOT APPLICABLE**

 

**ITEM 3 -DEFAULTS UPON SENIOR SECURITIES**

 

As of the date of thisfiling the Company is in default on the repayment of certain debt instrumentsthat 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:

 
| **Principal** | ** ** | **Rate** | ** ** | **Accrued Interest as of  Filing Date** | ** ** | **Days in arrears** | ** ** |
|---------------|------------|----------|------------|-----------------------------------------|------------|---------------------|------------|
|          |       |     |       |                                    |       |                |       |
| $             | 45,000     |     | 10         | %                                       | $          | 2,860               |       | 133 |   |
| $             | 125,000    |     | 10         | %                                       | $          | 7,192               |       | 118 |   |
| $             | 50,000     |     | 10         | %                                       | $          | 2,630               |       | 54 |   |
| $             | 250,000    |     | 10         | %                                       | $          | 13,151              |       | 102 |   |

 

Additionally, as of thisfiling, the Company is in Default on its 12% Senior ConvertibleDebentures.  The Debenture Agreementprovides that the Company must maintain its listing on a Trading Market (asdefined in the Debenture).  If theCompany is not eligible to be listed on a Trading Market and is not eligible toresume trading within 5 business days, the Company is in Default.  On January 22, 2010, the Company wasnotified by FINRA that its Common Stock is no longer eligible to trade on theOTC:BB.  Several market makers have filedrequests for the Company to be approved to trade again on the OTC:BB.    As a result of the Default, the interestrate on the 12% Senior Convertible Debentures is now the lessor of 17% or themaximum amount permitted by state law. The Company is seeking waivers of the default from the investors holdingthe 12% Debentures.  In conjunction withthe waiver, the Company intends to reduce the conversion price from $1.00 to$0.50, and the exercise price of the warrants issued with the shares from $2.00to $1.00.  The Company cannot be certainthat the investors will grant a waiver of the default.

 

**ITEM 4 - SUBMISSION OF MATTERS TOVOTE OF SECURITY HOLDERS**

 

In January 2010,shareholders of the Company holding more than a majority of the Company’scommon stock approved an amendment to the Company’s certificate of incorporationto increase the number of shares of the Company’s Common Stock that the Companyis authorized to issue from 80,000,000 shares of Common Stock, with a par valueof $.0001 per share, to 200,000,000 shares of Common Stock with a par value of$0.0001 per share (the “Amendment”).  The Amendment was filed with theState of Delaware Secretary of State on January 21, 2010.

 

**ITEM 5 - OTHER INFORMATION**

 

None.

 

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**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 requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                         | **WASTE2ENERGY HOLDINGS, INC.** |
|------------------------------|---------------------------------|
|                         |                            |   |
| Date: February 12, 2010 | By:                             | /s/ Peter Bohan |
|                         |                            | Peter BohanChief Executive  Officer(Principal  Executive Officer) |
|                         |                            |   |
|                         |                            |   |
|                         | By:                             | /s/ Craig L. Brown |
|                         |                            | Chief Financial Officer(Principal  Financial Officer) |

 

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