UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549










FORM 10-Q






X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2011






TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File No. 333-120507







KENERGY SCIENTIFIC, INC.(Exact name of the Registrant)New Jersey
20-1862816(State of Incorporation)
(I.R.S. Employer ID Number)6 Minneakoning Road, Flemington, New Jersey
08822(Address of Principal Executive Offices)
(Zip Code)908-788-0077(Registrant’s Telephone No. including Area Code)






Indicateby checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  XNo





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YesXNo





Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Act).  Yes   No  X




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






Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company [x]


(Do not check if a smaller reporting company)




Indicate the number of shares outstanding of the issuer's common stock, as of the latest practical date:


12,405,788 shares outstanding of Class A Common stock, no par value as of August 5, 2011.















KENERGY SCIENTIFIC, INC.


TABLE OF CONTENTS







PAGEPart I – Financial InformationItem 1.

Condensed Financial Statements:Condensed Balance Sheets – June 30, 2011 (Unaudited)

and December 31, 2010 (Unaudited)

1Condensed Statements of Operations - Six months and three months

June 30, 2011 and 2010 (Unaudited)

2Condensed Statements of Cash Flows - Six months ended

June 30, 2011 and 2010 (Unaudited)

3-4Notes to Condensed Financial Statements (Unaudited)

5-20Item 2.

Management’s Discussion and Analysis of Financial Position

and Results of Operations

21-23Item 4.

Controls and Procedures

24Part II – Other InformationItem 6.

Exhibits

25











Part 1.Financial Statements





Item 1 - Financial Statements


KENERGY SCIENTIFIC, INC.CONDENSED BALANCE SHEETSJune 30,


December 31,ASSETS

2011


2010(Unaudited)


(Unaudited)Current assets:Cash and cash equivalents

$
37,301


$
190,322Inventories


71,105



31,927Prepaid and other current assets


5,166



2,528Total current assets


113,572



224,777Property and equipment, net


4,140



-Intangible assets, net


480,691



362,045Total assets

$
598,403


$
586,822LIABILITIES & STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and accrued expenses

$
584,593


$
541,763Due to related parties


178,307



162,307Promissory note due to related parties


125,000



-Promissory note due


25,000



-Convertible promissory note, net of unamortized debt discount of $26,879

and $34,803, respectively


53,057



45,133Convertible debentures, net of unamortized debt discount of $56,250

and $306,251, respectively


1,119,873



866,081Derivative liabilities


679,602



2,208,868Total current liabilities


2,765,432



3,824,152Stockholders' deficit:Preferred stock, $1.00 par value; authorized 1,000,000

shares; no shares issued and outstanding


-



-Common stock:Class A – no par value; authorized 25,000,000 shares;

12,405,788 and 11,828,191 shares issued and outstanding,

respectively (see note 11)


4,635,140



4,491,896Class B - $.01 par value; authorized 50,000,000

Shares; 10,000 shares issued and outstanding


100



100Class C - $.01 par value; authorized 20,000,000

Shares; no shares issued and outstanding


-



-Additional paid-in capital


2,128,985



2,128,985Accumulated deficit


(8,931,254
)


(9,858,311
)Total stockholders' deficit


(2,167,029
)


(3,237,330
)Total liabilities and stockholders' deficit

$
598,403


$
586,822





See accompanying notes to condensed financial statements







1








KENERGY SCIENTIFIC, INC.CONDENSED STATEMENTS OF OPERATIONS(Unaudited)Six months ended


Three months endedJune 30, 2011


June 30, 2010


June 30, 2011


June 30, 2010Net sales

$
3,813


$
437


$
1,266


$
-Cost of sales


2,997



-



1,573



-Gross margin (loss)


816



437



(307
)


-Operating expenses:General and administrative expenses


178,205



80,948



71,888



32,321Depreciation and amortization


33,189



22



5,770



11Total operating expenses


211,394



80,970



77,658



32,332Loss from operations


(210,578
)


(80,533
)


(77,965
)


(32,332
)Other income (expense):Interest expense


(133,707
)


(1,669,656
)


(18,761
)


(1,647,196
)Amortization of debt discount


(257,924
)


(219,741
)


(116,484
)


(140,984
)Gain (loss) on valuation of derivative


1,529,266



(1,230,988
)


907,092



(1,179,439
)Total other income (expense)


1,137,635



(3,120,385
)


771,847



(2,967,619
)Income (loss) from operations before

Income taxes


927,057



(3,200,918
)


693,882



(2,999,951
)





Provision for income taxes


-



-



-



-Net income (loss) attributable to common

Shares

$
927,057


$
(3,200,918
)

$
693,882


$
(2,999,951
)Basic income (loss) per common share

$
0.07


$
( 1.02
)

$
0.06


$
( 0.66
)Diluted income (loss) per common share

$
0.04


$
( 1.02
)

$
0.03


$
( 0.66
)Weighted average shares outstanding -Basic (see note 5)


12,383,450



3,141,989



12,383,450



4,518,562Diluted (see note 5)


25,000,000



3,141,989



25,000,000



4,518,562










See accompanying notes to condensed financial statements






2








KENERGY SCIENTIFIC, INC.CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)





Six months EndedJune 30,

2010


June 30,

2009Cash flows from operating activities:Net income (loss)

$
927,057


$
(3,200,918
)Adjustments to reconcile net income (loss) to net

cash provided by (used in) operating activities:Amortization of intangibles


33,189



22(Gain) loss on valuation of derivative


(1,529,266
)


1,230,988Amortization of debt discount


257,924



219,741Beneficial interest on conversion of debt


97,036



1,626,715Changes in assets and liabilities:Increase in inventories


(39,178
)


(277
)Increase in prepaid expenses


(2,638
)


-Increase in accounts payable and accrued

Liabilities


42,830



67,147Increase in amounts due to related parties


16,000



57,352Decrease in deferred maintenance contracts


-



(437
)Net cash provided by (used in) operating activities


(197,046
)


333Cash flows from investing activities:Purchase of office equipment


(4,600
)


-Security deposit on GreenSmart store


(21,375
)


-Purchase of intangible assets


(130,000
)


-Net cash (used in) investing activities


(155,175
)


-Cash flows from financing activities:Issuance of promissory notes - related party


125,000



-Issuance of promissory notes – trade debt


75,000



-Net cash provided by financing activities


200,000



-Net increase (decrease) in cash and cash equivalents


(153,021
)


333Cash and cash equivalents at beginning of period


190,322



117Cash and cash equivalents at end of period

$
37,301


$
450SUPPLEMENTAL CASH FLOW INFORMATION:Taxes paid

$
-


$
-Interest paid

$
-


$
-See accompanying notes to condensed financial statements






3





KENERGY SCIENTIFIC, INC.CONDENSED STATEMENTS OF CASH FLOWS (Continued)(Unaudited)





Supplemental Schedule of Non-Cash Financing Activities:





For the six months ended June 30, 2011:





a)
The Company issued 577,597 (462,077,400 pre-reverse split) shares of Class A common stock for repayment of convertible debenture in lieu of cash, valued at $143,244. The difference in the market value and the reduction in debt of $46,208 was charged to beneficial interest in the amount of $97,036.





b)
The Company issued an aggregate of $125,000 of Promissory Notes to GlynnTech, Inc. to make the remaining payment on the acquisition of the cancer treatment drug delivery system developed and patented by GlynnTech, Inc.





For the six months ended June 30, 2010:





a)
The Company issued an aggregate of 7,057,328 (5,645,862,500 pre-reverse split) shares of Class A common stock and 10,000 shares of Class B common stock to Mr. Glynn in settlement of $509,425 of promissory notes and accrued interest that Mr. Glynn acquired in June 2009. These shares contain a restrictive legend which will limit Mr. Glynn from liquidating these into the open market.





b)
The Company executed two wrap-around agreements, in an aggregate of $337,000, to assign amounts due under various Promissory Notes from GlynnTech, Inc to EPIC Worldwide, Inc. The Company was in default on the original notes and this allowed the Company to extend the payment terms for an additional year while the Company attains alternate financing. (See note 10 for terms of these agreements.)





c)
The Company issued an aggregate of 253,281 (202,625,000 pre-reverse split) shares of Class A common stock for repayment of convertible debt in lieu of cash, valued at $389,843. The difference in the market value and the reduction in debt of $137,000 was charged to beneficial interest in the amount of $252,843.





d)
The Company issued 85,000 (68,000,000 pre-reverse split) shares of Class A common stock for repayment of convertible debenture in lieu of cash, valued at $157,080. The difference in the market value and the reduction in debt of $34,000 was charged to beneficial interest in the amount of $123,080.





























See accompanying notes to condensed financial statements






4





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010








Note 1                      Background





Kenergy Scientific, Inc. (f/k/a SpeechSwitch, Inc.) (“Kenergy Scientific” or the “Company”) was incorporated in New Jersey on November 10, 2004 as a wholly-owned subsidiary of iVoice, Inc.  It was engaged in the design, manufacture, and marketing of specialized telecommunication equipment until mid-2009.  In June 2009, the Company entered into fields of development of various products relating to solar power generating systems; portable solar powered products, such as cell phone and PDA rechargers that are solar rechargeable; solar rechargeable lantern/flashlight devices; solar backpack rechargers; solar power audio devices, such as radios; wind power generating systems; and, creative products based on proprietary positions, especially in the area of healthcare.  In 2010, the Company launched several products on its website www.greensmartstore.com and is pursuing the opening of its first franchise GreenSmart store.  Kenergy Scientific may seek to expand its operations through additional sales and marketing activity and the acquisition of additional businesses.  Any potential acquired additional businesses may be outside the current field of operations of Kenergy Scientific.  Kenergy Scientific may not be able to identify, successfully integrate or profitably manage any such business or operations.  Currently, Kenergy Scientific is in negotiations with a website designer to acquire a domain name, website content, various trademarks and related property rights which will provide the Company with advertising revenues and a method to distribute some of our products. Otherwise, the Company has no plans, proposal or arrangements, either orally or in writing, regarding any proposed acquisitions and is not considering any potential acquisitions.





Note 2                      Business Operations





Products and Services





The following description of our business is intended to provide an understanding of our product and the direction of our initial marketing strategy.  As the new product development is in its early development stages, any focus described in the following pages may change and different initiatives may be pursued, at the discretion of Management.  Our areas of development and recent activities include:





(a)
On June 18, 2009, the Company acquired rights and ownership from GlynnTech, Inc. of technology and pending patent applications relating to cancer treatment drug delivery systems, and the technology transfer into the Company included a prototype, numerous variations on designs, CAD drawings, pending patent applications, risk analysis studies, development history and presentation documents.  The sale was “at cost” of GlynnTech, Inc. in the amount of $425,000.00.  The Agreement called for the aggregate purchase price to be in various denominations of one-year notes. The business objective was to transfer a potentially significant profit opportunity from GlynnTech, Inc. to Kenergy Scientific, Inc.  Three presentations had previously been made to pharmaceutical industry candidates and feedback indicated a high level of interest in potential purchase of this technology following FDA approval of this product.





(b)
In the solar rechargeable products sector, candidates for future sales currently include an iPhone/iPod recharger; a solar powered recharger for the cell phones and PDA’s; a backpack solar recharger with chips for attachment to a backpack, a tent, an outdoor line, etc. with a storage pocket and an array of interchangeable connectors for diverse electronic devices; a solar powered lantern/flashlight; a solar powered radio/flashlight; a solar powered laptop recharger, and other devices.  Product launches on a majority of these items was in the third quarter of 2010.  Product launch is expected to initially involve internet sales, with a roll-out to retail outlets.






5




KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010




(c)
In solar power energy production systems, the Company is reviewing numerous models of solar photovoltaic panels and converters, as well as unique aftermarket opportunities.  The Company intends to partner with installers and market home, office and commercial solar panels through various media.





(d)
In the wind power energy production systems, ten companies will review various microturbine products to represent and resell.





Distribution





Within the first year the Company created a viable website and over the next couple of months expects to have representatives contracting major retailers and multimedia advertising for the solar powered rechargers and other products.  In addition, the Company expects to have at least one retail store opening soon, as well as offering additional products made from recycled materials and/or biodegradable materials in the marketplace.





Product Development





We currently have significant long term plans to engage in future research and development, to create valuable intellectual property rights and/or to launch new products.  The Company will acquire third party patent rights, develop its own patent rights and evolve both new product and intellectual property transfer (sale or license) opportunities.





Business Development





Business development objectives at Kenergy Scientific are focused on the primary functions as listed below:





1.
Continuously develop product ideas, manufacturing and supply alliances;





2.
Expand sales opportunities through diverse resources;





3.
Develop retail outlets;





4.
Evolve franchising opportunities using company retail outlets as a base;





5.
Create a continuous flow of ideas and inventions to develop patent and/or new product opportunity





Strategic Alliances





Kenergy Scientific’s business development efforts will seek to engage and secure strategic alliances with alternative energy related businesses and professional organizations in order to develop marketing programs that will expand market share for our products and develop brand recognition by entering into strategic alliances with companies that offer these products and/or services, the Company will accelerate its entry into various markets, while eliminating or reducing various training, learning curve, employee and overhead costs.






6




KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010




Manage OEM and Reseller Accounts





While we have traditionally sold our product primarily on a direct basis with our existing officers and employees fulfilling orders received by telephone and over the internet, we will seek to obtain new OEM and reseller relationships that will serve as an extension of our sales team which has yet to be hired.  We currently have no material strategic alliances with any OEMs or resellers, but will vigorously attempt to establish significant long-term relationships of this type over the next 18 months.





Sales and Marketing





The Company had nominal sales during the third quarter of 2010. Sales have been slow due to research and development, product selections, product testing and other launch preparation.  Sales in the third quarter of 2010 were through the internet website and additional opportunities are being developed, through third party retail and internet sites and through third party distributors.  In 2011, the Company is on schedule to open its first franchised GreenSmart store and we expect to expand our store plans to include other franchised stores.





Intellectual Property Rights





The Company has completed the acquisition of the patented rights for the cancer treatment patent awarded by the United States Patent and Trademark Office.  No foreign counterparts have been filed at this time.





Employees





The Company has only one employee, Kenneth P. Glynn, President.  It is the present intention of Mr. Glynn to defer salary payment for at least the next 6 months.  All other participants in Company activities are through purchased support services and independent contractors.





Properties





We do not own any real property.  We co-occupy the same rental space as GlynnTech, Inc. and are subleasing from GlynnTech, Inc. located at 6 Minneakoning Road, Flemington, New Jersey. We intend to continue subleasing such space and anticipate no relocation of our offices in the foreseeable future.





Kenergy Scientific’s Management





Kenneth P. Glynn was elected to the positions of President, Secretary and Chairman of the board on June 16, 2009.






7





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





Note 3                      Going Concern





The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern.





For the six months ended June 30, 2011, the Company had a negative cash flow from operations, negative working capital and a loss from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Therefore, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn, is dependent upon the Company's ability to raise capital and/or generate positive cash flow from operations.





Management plans on developing new products and increasing their sales to new customers, to achieve profitability and to generate a positive cash flow. However, these plans are dependent upon obtaining additional capital. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.





Note 4                      Summary of Significant Accounting Policies





a)    Basis of Presentation





The accompanying condensed unaudited interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company's annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the December 31, 2010 unaudited financial statements and the accompanying notes thereto. The financial statements that were reported in the Company’s Form 10-K for the fiscal year ended December 31, 2010 do not contain audited financial statements audited by an independent registered public accounting firm.  While management believes the procedures followed in preparing these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year. These results are not necessarily indicative of the results to be expected for the full year.





These condensed unaudited financial statements reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.





b)    Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.






8





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





c)    Revenue Recognition





The Company currently derives its revenues from the sales of portable solar powered products, solar rechargeable lantern/flashlight devices, solar backpack rechargers and clothing made from recycled products.Our products are sold directly to consumers through our own website or by direct sales. Payment is made for the products prior to delivery.




d)    Product Warranties




The Company warrants the product from defects for 30 days from delivery to the customer.The Company estimates its warranty costs based on historical warranty claims experience in estimating potential warranty claims. Due to the limited sales of the Company's products, management has determined that warranty costs are immaterial and has not included an accrual for potential warranty claims. Presently, costs related to warranty coverage are expensed as incurred. Warranty claims are reviewed quarterly to verify that warranty liabilities properly reflect any remaining obligation based on the anticipated expenditures over the balance of the obligation period.




e)    Research and Development Costs





Research and development costs are charged to expense as incurred.





f)    Cash and Cash Equivalents





The Company considers all highly liquid investments purchased with original maturities of six months or less to be cash equivalents. There were no cash equivalents at June 30, 2011 and December 31, 2010.





g)    Intangible Assets




In June 2009, the Company acquired the patent rights and technology relating to cancer drug delivery systems developed by GlynnTech, Inc. (a related party) by the issuance of three (3) $100,000 one-year promissory notes.





In the thrid quarter of 2010, the Company paid an additional $12,045 for fees related to work on the cancer drug delivery system and to register several “Green” trademark applications.





In 2011, the Company completed the acquisition of the cancer drug delivery system by issuing an additional one-year promissory note for $125,000.





As defined in ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets”, long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Company has adopted this statement and determined that no additional impairment loss should be recognized for applicable assets at this time.




9





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





h)    Income Taxes





The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes”, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.




i)    Derivative Liabilities




The Company accounts for its embedded conversion features in its convertible debentures in accordance ASC 815-10, "Derivatives and Hedging", which requires a periodic valuation of their fair value and a corresponding recognition of liabilities associated with such derivatives, and ASC 815-40, “Contracts in Entity’s Own Equity”. The recognition of derivative liabilities related to the issuance of convertible debt is applied first to the proceeds of such issuance as a debt discount, at the date of issuance, and the excess of derivative liabilities over the proceeds is recognized as “Loss on Valuation of Derivative” in other expense in the accompanying financial statements. Any subsequent increase or decrease in the fair value of the derivative liabilities is recognized as “Other expense” or “Other income”, respectively.




j)    Fair Value of Instruments




The carrying amount reported in the condensed balance sheet for cash and cash equivalents, deposits, prepaid expenses, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes payable approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates.





k)     Concentrations of Credit Risk





Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash. As of June 30, 2011, the Company believes it has no significant risk related to its concentration within its accounts receivable or cash accounts.





The Company maintains cash and cash equivalent balances at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $250,000. The uninsured cash balances at June 30, 2011 and December 31, 2010 were $0.






10




KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





Note 5                      Income (Loss) Per Share





ASC 260, “Earnings Per Share” requires presentation of basic earnings per share (“basic EPS”) and diluted earnings per share (“diluted EPS”). The Company’s basic and diluted income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income per common share is based on net income, divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding stock options. A computation of diluted loss per share would not assume conversion, exercise or contingent exercise of securities due to the beneficial conversion of related party accounts as this would be anti-dilutive.





Six months Ended

Six months EndedJune 30, 2011

June 30, 2011Basic net income (loss) per share computation:Net income (loss) attributable to common stockholders
$
927,057
$
(3,200,918)Weighted-average common shares outstanding (see below)

12,383,450

3,141,989Basic net income (loss) per share attributable to

common stockholders (see below)
$
0.07
$
(1.02)Diluted net income (loss) per share computationNet income (loss) attributable to common stockholders
$
927,057
$
(3,200,918)Weighted-average common shares outstanding (see below)

12,383,450

3,141,989Incremental shares attributable to the assumed conversion of

Convertible debenture and convertible promissory note

12,616,550

-Total adjusted weighted-average shares

25,000,000

3,141,989Diluted net income (loss) per share attributable to

common stockholders (see below)
$
0.04
$
(1.02)





The Company had common stock equivalents of 45,256,751, but when added to the common stock outstanding, they are in excess of the authorized capital at June 30, 2011, so the maximum authorized shares of 25,000,000 are shown for diluted earnings per common share calculations. The Company had common stock equivalents of 5,008,756 at June 30, 2010.





On May 31, 2011, the Company executed a reverse stock split in the ratio of one new share for every eight hundred shares held by stockholders. Concurrent with this change, the weighted average shares outstanding and basic and diluted net income (loss) per share were restated to reflect this change. For the six months ended June 30, 2010, weighted average common shares was changed from 2,513,591,013 to 3,141,989 and net loss per common share was changed from $0.00 to $1.02.





Note 6                      Intangible Assets





Intangible assets consist of accumulated costs incurred with respect to the Company’s patent filings originally paid for by iVoice for $24,000 in May and December 2003. These assets were valued at $16,800 at the date of the spin-off from iVoice, Inc.  Additional filing costs of $225 were capitalized on August 26, 2005. The Company also acquired some patent rights for $425,000. In calendar year 2010, the Company paid an additional $67,045 for fees related to work on the cancer drug delivery system, to register several “Green” trademark applications and to acquire additional patent applications in the Kenergy Development porfolio. In the calendar year 2011, the Company acquired rights to the Smart Bell patent from the inventors.





These assets are reflected at cost, net of accumulated amortization of $49,754, at June 30, 2011.




11





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





Note 7                      Income Taxes





Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company's assets and liabilities. Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company's tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.





At June 30, 2011 and December 31, 2010 deferred tax assets consist of the following:






June 30, 2011
December31, 2010Deferred tax assets
$ 799,000
$ 721,000Less: Valuation Allowance
(799,000)
(721,000)Net deferred tax assets
$ -0-
$-0-




At June 30, 2011 and December 31, 2010, the Company had federal net operating loss carry forwards in the approximate amounts of $2,350,000 and $2,120,000, respectively, available to offset future taxable income. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.





Note 8                      Related Party Transactions





On June 17, 2009, Kenneth P. Glynn, President and CEO of the Company, acquired debt owed by Kenergy Scientific, Inc. to third party creditors as follows:





(1)
Promissory Note due to Jerome Mahoney dated August 5, 2005 having a balance on June 17, 2009 of $71,756 and accrued interest of $98,379;





(2)
Deferred Compensation due to Jerome Mahoney as of June 17, 2009 equal to $319,910;





(3)
Convertible promissory note to iVoice, Inc. dated March 5, 2008 having a balance on June 17, 2009, $79,936 and accrued interest of $4,344; and





(4)
Loan from iVoice Technology, Inc. to Kenergy Scientific, Inc. in the amount of $3,600.





The outstanding promissory note, referred to above, will bear interest at the rate of Prime plus 2.0% per annum (5.25% at June 30, 2011) on the unpaid balance until paid.  Under the terms of the Promissory Note, at the option of the Promissory Note holder, principal and interest can be converted into either (i) one share of Kenergy Scientific Class B Common Stock, par value $.01 per share, for each dollar owed, (ii) the number of shares of Kenergy Scientific Class A Common Stock calculated by dividing (x) the sum of the principal and interest that the Note holder has requested to have prepaid by (y) eighty percent (80%) of the lowest issue price of Class A Common Stock since the first advance of funds under this Note, or (iii) payment of the principal of this Promissory Note, before any repayment of interest. The Board of Directors of the Company maintains control over the issuance of shares and may decline the request for conversion of the repayment into shares of the Company.





The amount of deferred compensation, referred to above, is added to the outstanding promissory note for calculations of accrued interest and is payable in the form of cash, debt, or shares of our Class B Common Stock.




12





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





On May 27, 2010, the Company issued an aggregate of 7,057,328 (5,645,862,500 pre-reverse split) shares of Class A common stock and 10,000 shares of Class B common stock to Mr. Glynn in settlement of $509,425 (items #1 and #2 above) of promissory notes and accrued interest due to Mr. Glynn. These shares contain a restrictive legend which will limit Mr. Glynn from liquidating these into the open market.





On July 1, 2010, the Company extended the employment agreement with Mr. Glynn for an additional one (1) year period for Mr. Glynn to serve as President and CEO of the Company at an annual base salary of $96,000.  As of June 30, 2011, the total amount due to Mr. Glynn for unpaid compensation is $160,000.





During the year ended December 31, 2010, GlynnTech, Inc and Mr. Glynn have paid some bills on behalf of the Company. As of June 30, 2011 and December 31, 2010, the aggregate amounts due for these payments is $18,307.





On July 1, 2010, the Company extended the Administrative Services Agreement with GlynnTech, Inc to provide back office administrative support to the Company.  The administrative services agreement was for an initial term of one year and was extended for an additional one-year periods at the Company’s request. The amended fees are $4,500 per month but may be reduced in scope or eliminated at any time upon 90 days’ prior written notice by the Company to GlynnTech.





In 2011, the Company completed the transfer of the patent rights and technology relating to cancer drug delivery systems developed by GlynnTech, Inc. by the issuance of three (3) one-year promissory notes for the aggregate amount of $125,000. The promissory notes are due on or before the 1st anniversary of the notes and are interest free.





Note 9                    Convertible Promissory Note and Derivative Liability (Related Party)





Kenergy Scientific had entered into a temporary administrative services agreement with iVoice in 2004.  The administrative services agreement continued on a month-to-month basis until December 31, 2008 at which point the agreements were suspended by mutual consent of the parties.





In March 2008, the administrative services agreement was amended to provide that accrued and unpaid administrative services shall be segregated and converted into a Convertible Promissory Note. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid balance and shall be paid annually, and (b) principal shall be payable on demand.





OnMarch 5, 2008, the Company converted its outstanding accounts payable to iVoice, Inc. for unpaid administrative services in the amount of $50,652 into a convertible promissory note at the rate of prime plus 1 percent per annum. Additional amounts of $42,209 were added to this note based on any unpaid administrative services, and will accrue interest at the above specified rate from date of advance until paid.





On June 17, 2009, Kenneth P. Glynn (a related party) acquired this debt from iVoice, Inc. The Note holder may elect payment of the principal and/or interest, at the its sole discretion, owed pursuant to this Note by requiring the Company to issue either: (i) one Class B common stock share of the Company par value $.01 per share, for each dollar owed, (ii) the number of Class A common stock shares of the Company calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to have paid by (y) eighty percent (80%) of the lowest issue price of Class A common stock since the first advance of funds under this Note, or (iii), payment of the principal of this Note, before any repayment of interest.




13





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





As of June 30, 2011, the outstanding balance on the Convertible Promissory Note was $79,936 plus accrued interest of $11,260.





Unless otherwise provided, this Note may be prepaid in full or in part at any time without penalty or premium. Partial prepayments shall be applied to installments due in reverse order of their maturity.





In the event of (a) default in payment of any installment of principal or interest hereof as the same becomes due and such default is not cured within ten (10) days from the due date, or (b) default under the terms of any instrument securing this Note, and such default is not cured within fifteen (15) days after written notice to maker, then in either such event the holder may, without further notice, declare the remainder of the principal sum, together with all interest accrued thereon, and the prepayment premium, if any, at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The unpaid principal of this Note and any part thereof, accrued interest and all other sums due under this Note shall bear interest at the rate of prime plus 1 percent per annum after default until paid.





The promissory note has a security interest in substantially all of the assets of the Company. However, the security interest is subordinate to that of YA Global Investments (see Note 10).





In accordance with ASC 815, "Derivatives and Hedging", the Company determined that the conversion feature of the Promissory Note met the criteria of an embedded derivative, and therefore the conversion feature of this Promissory Note needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions: risk free interest rate: 5.6%; expected dividend yield: 0%: expected life: 5 years; and volatility: 263.04%. The accounting guidance instructs that the conversion options are a derivative liability. As such, at March 5, 2008 the Company recorded the conversion options as a liability, recorded a debt discount of $50,652, and charged Other Expense - Loss on Valuation of Derivative for $67,530, resulting primarily from calculation of the conversion price. For the six months ended June 30, 2011, the Company recorded a Gain on Valuation of Derivative in the amount of $273,630. For the six months ended June 30, 2010, the Company recorded a Loss on Valuation of Derivative in the amount of $1,091,080.





Note 10      Convertible Debenture and Derivative Liability





On March 30, 2007, Kenergy Scientific, Inc. issued a Secured Convertible Debenture (the "Debenture") to YA Global Investments for the sum of $1,000,000 in exchange for previously issued notes payable for the same amount. The Debenture has a term of three years, and pays interest at the rate of 5% per annum. YA Global has the right to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal to eighty percent (80%) of the lowest closing Bid Price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date. YA global may not convert the Debenture into shares of Class A Common Stock if such conversion would result in YA Global beneficially owning in excess of 4.99% of the then issued and outstanding shares of Class A Common Stock. The Conversion Price and number of shares of Class A Common Stock issuable upon conversion of the Debenture are subject to certain exceptions and adjustment for stock splits and combinations and other dilutive events. Subject to the terms and conditions of the Debenture, the Company has the right to redeem ("Optional Redemption") a portion or all amounts outstanding under this Debenture prior to the Maturity Date at any time provided that as of the date of the Holder's receipt of a Redemption Notice (i) the Closing Bid Price of the of the Common Stock, as reported by Bloomberg, LP, is less than the Conversion Price and (ii) no Event of Default has occurred. The Company shall pay an amount equal to the principal amount being redeemed plus a redemption premium ("Redemption Premium") equal to twenty percent (20%) of the principal amount being redeemed, and accrued interest, (collectively referred to as the "Redemption Amount"). During the time that any portion of this Debenture is outstanding, if any Event of Default has occurred, the full principal amount of this Debenture, together with interest and other amounts owing in respect thereof, to the date of acceleration shall become at the Holder's election, immediately due and payable in cash, provided however, the Holder may request (but shall have no obligation to request) payment of such amounts in Common stock of the Company. Furthermore, on addition to any other remedies, the Holder shall have the right (but not the obligation) to convert this Debenture at any time after (x) an Event of Default or (y) the Maturity Date at the Conversion Price then in-effect. The debenture is secured by substantially all of the assets of the Company.




14





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





On July 26, 2010, the convertible debenture with YA Global Investments, LP was amended and restated in order to replace the existing debenture with five (5) debentures of $208,707.74 each. The term of the debentures were amended to extend the due date until July 29, 2011. The amendments had the effect of reclassifying $156,199 of non-interest bearing accrued interest into the secured convertible debentures.





During the year ended December 31, 2010, the Company consented to the assignment of the above debentures from YA Global Investments, LP to E-Lionheart Associates, LLC (“E-Lionheart”) for an aggregate total of $1,043,539. This was done in conjunction with the execution of a Securities Purchase Agreement with E-Lionheart whereby E-Lionheart will purchase from the Company up to $500,000 of convertible debentures which will provide new financing for the Company. The new convertible debentures are due on August 9, 2011 and have conversion rights essentially the same as YA Global.





During the six months ended June 30, 2011, the Company issued 577,597 (462,077,400 pre-reverse split) shares of Class A common stock to E-Lionheart for repayment valued at $143,244. The difference in the market value and the reduction in debt of $46,208 was charged to beneficial interest in the amount of $97,036.





As of June 30, 2011, the outstanding principal balance on the E-Lionheart Convertible Debentures was $626,123.





In accordance with ASC 815, "Derivatives and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative, and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions: risk free interest rate: 5.6%; expected dividend yield: 0%: expected life: 3 years; and volatility: 165.62%. The accounting guidance instructs that the conversion options are a derivative liability. As such, in March 2007 the Company recorded the conversion options as a liability, recorded a debt discount of $1,000,000, and charged Other Expense - Loss on Valuation of Derivative for $124,479, resulting primarily from calculation of the conversion price. For the six months ended June 30, 2011, the Company recorded a Gain on Valuation of Derivative in the amount of $791,658. For the six months ended June 30, 2010, the Company recorded a Loss on Valuation of Derivative in the amount of $289,390.






15





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





On June 8, 2010 and June 22, 2010, the Company executed two wrap-around agreements, in an aggregate of $337,000, to assign amounts due under various Promissory Notes due to GlynnTech, Inc to EPIC Worldwide, Inc. (the “Investor”). The wrap-around agreements also modified the original terms to extend the due dates by one year, to include provisions to allow the Investor to convert the amounts due into common stock at a 50% discount of the average three deep bid on the day of conversion and to increase the interest rate to 15% after a 60 day interest free period.





During the year ended December 31, 2010, the Company issued an aggregate of 696,031 (556,825,000 pre-reverse split) shares of Class A common stock for repayment valued at $752,226. The difference in the market value and the reduction in debt of $287,000 was charged to beneficial interest in the amount of $465,226.





As of June 30, 2011, the outstanding balance on the EPIC Convertible Notes were $50,000.





In accordance with ASC 815, "Derivatives and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative, and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions: risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: 1 years; and volatility: 227.62%. The accounting guidance instructs that the conversion options are a derivative liability. As such, on the issue dates, the Company recorded the conversion options as a liability, recorded a debt discount of $337,000, and charged Other Expense - Loss on Valuation of Derivative for $264,858. For the six months ended June 30, 2011, the Company recorded a Gain on Valuation of Derivative in the amount of $13,414 on the fluctuation in the current market prices.





On August 9, 2010, the Company entered into a securities purchase agreement with E-Lionheart to purchase up to $500,000 of convertible debentures from the Company. Amounts due under this debenture are due on or before August 9, 2011 and pays interest at the rate of 5% per annum. E-Lionheart has the right to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal to eighty percent (90%) of the lowest closing Bid Price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date. E-Lionheart may not convert the Debenture into shares of Class A Common Stock if such conversion would result in YA Global beneficially owning in excess of 4.99% of the then issued and outstanding shares of Class A Common Stock.





During the year ended December 31, 2010, the Company received $450,000 of new funding under this agreement. During the six months ended June 30, 2011, the Company received the remaining $50,000 of new funding under this agreement





In accordance with ASC 815, "Derivatives and Hedging", the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative, and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions: risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: 1 years; and volatility: 301.66%. The accounting guidance instructs that the conversion options are a derivative liability. As such, on the issue dates, the Company recorded the conversion options as a liability and recorded a debt discount of $143,408. For the six months ended June 30, 2011, the Company recorded a Gain on Valuation of Derivative in the amount of $450,564 on the fluctuation in the current market prices.






16





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





Note 11       Capital Stock





Pursuant to Kenergy Scientific's certificate of incorporation, as amended, the Company is authorized to issue 1,000,000 shares of Preferred Stock, par value of $1.00 per share, 25,000,000 shares of Class A Common Stock, no par value per share, 50,000,000 shares of Class B Common Stock, par value $0.01 per share, and 20,000,000 shares of Class C Common Stock, par value $0.01 per share. Below is a description of Kenergy Scientific's outstanding securities, including Preferred Stock, Class A Common Stock, Class B Common Stock, and Class C Common Stock.





On May 5, 2011, the Company amended its Certificate of Incorporation to reflect the reverse stock split authorized by the Board of Directors and adopted by the shareholders on January 19, 2011.  The effect of this amendment was: a) to reduce the authorized shares from 20,000,000,000 to 25,000,000; b) to reduce the outstanding shares from 9,924,630,443 to 12,405,789; and c) to reduce the unissued shares from 10,075,369,557 to 12,594,211.




a) Preferred Stock





Kenergy Scientific is authorized to issue 1,000,000 shares of Preferred Stock, par value $1.00 per share.  As of June 30, 2011, Kenergy Scientific has not issued any shares of Preferred Stock.





b) Class A Common Stock





As of June 30, 2011, there are 25,000,000 shares of Class A Common Stock authorized, no par value, and 12,405,789 shares were issued and outstanding.




Each holder of Class A Common Stock is entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for payment of dividends.  The Company has never paid any dividends on its common stock and does not contemplate doing so in the foreseeable future.  The Company anticipates that any earnings generated from operations will be used to finance its growth objectives.





c) Class B Common Stock





As of June 30, 2011, there are 50,000,000 shares of Class B Common Stock authorized, par value $.01 per share, 10,000 shares were issued and outstanding.





Each holder of Class B Common Stock has voting rights equal to 100 shares of Class A Common Stock.  A holder of Class B Common Stock has the right to convert each share of Class B Common Stock into the number of shares of Class A Common Stock determined by dividing the number of Class B Common Stock being converted by a 20% discount of the lowest price that Kenergy Scientific, Inc. had ever issued its Class A Common Stock.  Upon liquidation, dissolution, or winding-up, holders of Class B Common Stock will be entitled to receive distributions.





17





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





d) Class C Common Stock





As of June 30, 2011 there are 20,000,000 shares of Class C Common Stock authorized, par value $.01 per share, no shares were issued or outstanding.  Each holder of Class C Common Stock is entitled to 1,000 votes for each share held of record.  Shares of Class C Common Stock are not convertible into Class A Common Stock.  Upon liquidation, dissolution or wind-up, the holders of Class C Common Stock are not entitled to receive the Company’s net assets pro rata.





Note 12      Stock Options





During 2005, the Company adopted the 2005 Stock Incentive Plan and the 2005 Directors’ and Officers’ Stock Incentive Plan (“Plan”) in order to attract and retain qualified personnel.  Under the Plan, the Board of Directors, in its discretion may grant stock options (either incentive or non-qualified stock options) to officers, directors and employees.  The Company has not issued any stock options as of June 30, 2011.





Note 13         New Accounting Pronouncements





In May 2011, the Financial Accounting Standards Board (FASB) issued ASU 2011-04, guidance to improve consistency in application of existing fair value measurement and disclosure requirements.  The standard is intended to clarify the application of the requirements, not to establish valuation standards or affect valuation practices outside of financial reporting.  The guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited.  We do not expect adoption of this guidance to have an impact on our financial statements.





In June 2011, the FASB issued ASU 2011-05, guidance to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The standard eliminates the current option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendment does not affect how earnings per share is calculated or presented.  The guidance is effective for interim and annual periods beginning after December 15, 2011.  Early adoption is permitted. We do not expect adoption of this guidance to have an impact on our financial statements.








Note 14         Fair Value Measurements





In September 2006, the FASB issued ASC 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).






18





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





ASC 820 classifies these inputs into the following hierarchy:






Level 1 Inputs- Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.Level 2 Inputs– Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.Level 3 Inputs– Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.




The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2011 and December 31, 2010. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.





June 30, 2011





Assets

Level I


Level II


Level III


TotalTotal Assets

$
-


$
-


$
-


$
-Convertible promissory notes

$
-


$
53,057


$
-


$
53,057Notes payable - related parties


-



125,000



-



125,000Notes payable - trade


-



25,000



-



25,000Convertible debentures


-



1,119,873



-



1,119,873Derivative liabilities


-



679,602



-



679,602Total Liabilities

$
-


$
2,002,532


$
-


$
2,002,532




Assets level I level II Level III Total Total Assets $ - $ - $ - $ - Convertible promissory notes $ - $ 53, 057 $ - $ 53,057 Notes payable - related parties - 125,000 - 125,000 notes payable - trade - 25,000 - 25,000 convertible debentures - 1,119,873 - 1,119,873 derivative liabilities - 679,602 - 679,602 total liabilities $ - $ 2,002,532 $ - $ 2,002,532




19





KENERGY SCIENTIFIC, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 JUNE 30, 2011 and 2010





December 31, 2010





Assets

Level I


Level II


Level III


TotalTotal Assets

$
-


$
-


$
-


$
-Convertible promissory notes

$
-


$
45,133


$
-


$
45,133Convertible debentures


-



866,081



-



866,081Derivative liabilities


-



2,208,868



-



2,208,868Total Liabilities

$
-


$
3,120,082


$
-


$
3,120,082





The Company’s derivatives are classified within Level 2 of the valuation hierarchy. The Company’s derivatives are valued using internal models that use as their basis readily observable market inputs, such as time value, forward interest rates, and volatility factors. Refer to Notes 9 & 10 for more discussion on derivatives.


































20




Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Forward Looking Statements





A number of the statements made by the Company in this report may be regarded as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.





Forward-looking statements include, among others, statements concerning the Company’s outlook, pricing trends and forces within the industry, the completion dates of capital projects, expected sales growth, cost reduction strategies and their results, long-term goals of the Company and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.





All predictions as to future results contain a measure of uncertainty and accordingly, actual results could differ materially.  Among the factors that could cause a difference are:  changes in the general economy; changes in demand for the Company’s products or in the cost and availability of its raw materials; the actions of its competitors; the success of our customers; technological change; changes in employee relations; government regulations; litigation, including its inherent uncertainty; difficulties in plant operations and materials; transportation, environmental matters; and other unforeseen circumstances.  For a discussion of material risks and uncertainties that the Company faces, see the discussion in the Form 10−K for the fiscal year ended December 31, 2010 entitled “Risk Factors”.





Overview and Plan of Operation




In June 2009, the Company entered into fields of development of various products relating to solar power generating systems; portable solar powered products, such as cell phone and PDA rechargers that are solar rechargeable; solar rechargeable lantern/flashlight devices; solar backpack rechargers; solar power audio devices, such as radios; wind power generating systems; and, creative products based on proprietary positions, especially in the area of healthcare.  In 2010, the Company launched several products on its website www.greensmartstore.com and is pursuing the opening of its first franchise GreenSmart store. Kenergy Scientific may seek to expand its operations through additional sales and marketing activity and the acquisition of additional businesses.  Any potential acquired additional businesses may be outside the current field of operations of Kenergy Scientific.  Kenergy Scientific may not be able to identify, successfully integrate or profitably manage any such business or operations.  Currently, Kenergy Scientific is in negotiations with a website designer to acquire a domain name, website content, various trademarks and related property rights which will provide the Company with advertising revenues and a method to distribute some of our products. Otherwise, the Company has no plans, proposal or arrangements, either orally or in writing, regarding any proposed acquisitions and is not considering any potential acquisitions.





Results of Operations





During the six months ended June 30, 2011, the Company sold $3,813 of solar powered products and products made from recycled materials. This is compared to $437 of revenues derived from maintenance contracts on our speech recognition software business for the six months ended June 30, 2010.  For the three months ended June 30, 2011, the Company sold $1,266 of solar powered products and products made from recycled materials.





Gross margin for the six months ended June 30, 2011 of $816 represents a gross margin % to sales of 21.4%. For the three months ended June 30, 2011, Gross margin was a small loss of $307. These margins are the result of keeping prices low to compete with similar products made from virgin materials.  As the volume increases, we expect to achieve greater gross margin % rates.






21





Total operating expenses increased $130,424 (161%) to $211,394 for the six months June 30, 2011, as compared to the same periods in the prior year. For the three months ended June 30, 2011, operating expenses increase by $45,326 to $77,658 as compared to the prior year. The increases were the result of the Company investing resources in reestablishing the operations.




Total other income (expense) for the six months ended June 30, 2011 was total income of $1,137,635 as compared to total expense of $3,120,385 for the six months ended June 30, 2010, for a change of $4,258,020. For the three months ended June 30, 2011. Total other income (expenses) changed by $3,739,466 from an expense of $2,967,619 in the prior year to an income of $771,847 in the current year. These changes are primarily attributed to the change in gain on revaluation of derivatives of $2,760,254 and $2,086,531, respectively, when compared to the prior year and the write off of $1,626,715 of beneficial interest on debt conversions into stock during the prior period that were not repeated in the current period.




Net income for the six months ended June 30, 2011 was $927,057 as compared to a net loss of $3,200,918 for the six months ended June 30, 2010. Net income for the three months ended June 30, 2011 was $693,882 as compared to a net loss of $2,999,951 for the three months ended June 30, 2010. The favorable changes for the six months and three months ending June 30, 2011, were primarily from the favorable changes in revaluation of derivatives and the write off of beneficial interest offset by the increased investment in operating expenses.




Liquidity and Capital Resources




To date, Kenergy Scientific has incurred substantial cash losses, and will require financing for working capital to meet its operating obligations. We anticipate that we will require financing on an ongoing basis for the foreseeable future.




On March 30, 2007, Kenergy Scientific, Inc. issued a Secured Convertible Debenture (the "Debenture") to YA Global Investments (f/k/a/ Cornell Capital Partners, LP) for the sum of $1,000,000 in exchange for a previously issued promissory note for the same amount (see Note 10 to the Condensed Financial Statements).




On July 26, 2010, the Company consented to the assignment of the above debentures from YA Global Investments, LP to E-Lionheart Associates, LLC (“E-Lionheart”) for an aggregate total of $1,043,539. This was done in conjunction with the execution of a Securities Purchase Agreement dated August 9, 2010 with E-Lionheart whereby E-Lionheart will purchase from the Company up to $500,000 of convertible debentures which will provide new financing for the Company.  Amounts due under this debenture are due on or before August 9, 2011 and pays interest at the rate of 5% per annum. E-Lionheart has the right to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal to eighty percent (90%) of the lowest closing Bid Price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date. E-Lionheart may not convert the Debenture into shares of Class A Common Stock if such conversion would result in YA Global beneficially owning in excess of 4.99% of the then issued and outstanding shares of Class A Common Stock. Through June 30, 2011, the Company has received $500,000 of new funding under this agreement.





As of June 30, 2011, the Company has issued an aggregate of $462,000 of one-year Promissory notes to GlynnTech, Inc. in exchange for GlynnTech to assume some of the Company’s debt and to acquire the rights to a cancer delivery system developed by GlynnTech for future development and/or licensing.





The Company currently has no other significant sources of working capital or cash commitments. However, no assurance can be given that Kenergy Scientific will raise sufficient funds from such financing arrangements, or that Kenergy Scientific will ever produce sufficient revenues to sustain its operations, or that a market will develop for its common stock for which a significant amount of Kenergy Scientific’s financing is dependent upon.






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For the six months ended months June 30, 2011, the Company had a net decrease in cash of $153,021.  The Company’s principal sources and uses of funds were as follows:





Cash used by operating activities.The Company used $197,046 in cash for operating activities for the six months ended June 30, 2011 and provided $333 in cash for operating activities for the six months ended June 30, 2010. The current cash operating losses are being funded somewhat by deferred payments to vendors and related parties.





Cash used by investing activities.The Company used $155,175 in cash for investing activities for the six months ended June 30, 2011. These amounts were for the acquisition of the rights and technology for a cancer treatment drug delivery system developed by GlynnTech, Inc., the security deposit on the new GreenSmart Store and acquisition of office equipment.




Cash provided by financing activities.  For the six months ended June 30, 2011, the Company provided $200,000 in financing activities by the issuance of related party promissory notes and outside funding by unrelated parties





There was no significant impact on the Company’s operations as a result of inflation for the six months ended June 30, 2011.




Critical Accounting Policies




The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, inventory obsolescence, intangible assets, payroll tax obligations, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.




OFF BALANCE SHEET ARRANGEMENTS





During the six months ended June 30, 2011, we did not engage in any material off-balance sheet activities nor have any relationships or arrangements with unconsolidated entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities.





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Item 4.                      Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded, as of the end of the quarter covered by this Quarterly Report on Form 10-Q, that our disclosure controls and procedures have not been effective for the following reason:





A deficiency was identified as the Company's limited segregation of duties amongst the Company's employees with respect to the Company's control activities. This deficiency is the result of the Company's limited number of employees. This deficiency may affect management's ability to determine if errors or inappropriate actions have taken place. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible changes in our disclosure controls and procedures.





Changes in internal control over financial reporting.





Management of the Company has also evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q and determined that there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
























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Part II.OtherInformation






Item 6.

Exhibits3.1
Amendment to the Certificate of Incorporation dated May 5, 2011 filed as Exhibit 3.1 in the Current Report on Form 8-K dated May 5, 2011 and is incorporated herein by reference.31.1
Rule 13a-14(a)/15d-14(a) Certifications.32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


























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SIGNATURES





In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





KENERGY SCIENTIFIC, INC.











Date:           August 9, 2011                                                                By: /s/ Kenneth Glynn


Kenneth Glynn


President


Chief Executive Officer and


Chief Financial Officer










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INDEX OF EXHIBITS




3.1
Amendment to the Certificate of Incorporation dated May 5, 2011 filed as Exhibit 3.1 in the Current Report on Form 8-K dated May 5, 2011 and is incorporated herein by reference.31.1
Rule 13a-14(a)/15d-14(a) Certifications.32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.