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EX-31.2 - EX-31.2 - Waste2Energy Holdings, Inc.a10-3674_1ex31d2.htm
EX-32.2 - EX-32.2 - Waste2Energy Holdings, Inc.a10-3674_1ex32d2.htm

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended December 31, 2009

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                   

 

COMMISSION FILE NUMBER 333-151108

 

WASTE2ENERGY HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

26-2255797

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer
Identification Number)

 

 

 

1 Chick Springs Road, Suite 218, Greenville, SC

 

29609

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

Applicable Only to Corporate Issuers:

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

 

Class

 

Outstanding as of February 5, 2009

Common Stock, $.0001 par value

 

50,284,576

 

 

 




Table of Contents

 

PART I Financial Information

 

ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THE FINANCIAL STATEMENTS.

 

WASTE2ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 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 accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



Table of Contents

 

WASTE2ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED 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 accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



Table of Contents

 

WASTE2ENERGY HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE 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 accompanying notes are an integral part of these condensed consolidated financial statements.

 

5



Table of Contents

 

WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1.                THE COMPANY

 

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

 

Organization

 

We are a “cleantech” acquisition and technology company. We target waste to energy technologies that generate “green power” converting waste streams, traditionally destined for landfill, into clean, renewable energy.  The Company seeks small footprint, simple, cost effective technologies that are scalable, modular, environmentally friendly and robust enough to operate in harsh and remote environments.  The Company is forging strategic alliances for the regional fabrication and manufacturing of its BOSTM systems and the development of sales and distribution channels.

 

On May 6, 2009, the Company entered into an Agreement and 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 was revised to mean 45,981,770 shares of W2E and Section 5.19(e) of the Merger Agreement was revised to note that the issued and outstanding share capital of W2E 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 Merger Agreement, on May 28, 2009 (the “Closing”), the Subsidiary merged with and into W2E resulting in W2E becoming a wholly-owned subsidiary of the Company (the “Merger”). The Merger was accounted for as a reverse merger and recapitalization. Pursuant to the Merger Agreement, the Company issued 45,981,770 shares of common stock (the “Common Stock”) of the Company (the “Acquisition Shares”) to the shareholders of W2E, representing approximately 96% of the issued and outstanding Common Stock following the closing of the Merger and the sale of Units (as defined below) concurrently with the Closing, and warrants to purchase 18,760,000 shares of Common Stock (the “Acquisition Warrants”) to the warrant holders of W2E at exercise prices ranging from $.10 to $.75. Pursuant to the Merger Agreement, the outstanding shares of common stock and warrants to purchase shares of common stock of W2E were cancelled.  Subsequent to the closing of the Merger, the Company continued W2E’s operations. In July 2009, the name was changed to Waste2Energy Holdings, Inc.  On the Closing, the Company sold in a private placement 254,500 units (the “Units”) to investors (the “Investors”), each Unit consisting of (i) three (3) shares of Common 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 a purchase price of $2.00 per Unit and, as a result, the Company received gross proceeds of approximately $509,000 and issued the Investors an aggregate of 763,500 shares of Common Stock and Warrants to purchase 763,500 shares of Common Stock (the “Warrant Shares”). The Warrants may not be exercised to the extent such exercise would cause the holder of the Warrant, together with its affiliates, to beneficially own a number of shares of Common Stock which would exceed 4.99% of the Company’s then outstanding shares of Common Stock following such exercise.

 

The private placement was terminated in September 2009 and, including the units sold in May 2009, the Company raised $1,200,465 from the offering. In July and August 2009, the Company issued $2,500,000 of Debentures due 90 days from the date of issuance. This debt bears interest at 10% 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 Senior Convertible Debentures bearing interest at 12% and due one year from date of issue.  This debt was used to refinance existing debt and to fund operating expenses.

 

On January 22, 2010, the Company received notice from The Financial Industry Regulatory Authority (FINRA) that shares of the Company’s common stock were no longer eligible for trading on the OTC Bulletin Board (“OTCBB”), as a result of the Company’s delayed filing of its’ Form 10Q for the quarter ended June 30, 2009.  The Company’s common stock is currently traded on the “Pink Sheets”.  Several market makers have submitted applications 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 continue operations is dependent on its ability to raise capital.  If the Company is unable to raise additional capital or encounters unforeseen circumstances, it may be required to take

 

6



Table of Contents

 

WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1.                THE COMPANY (CONTINUED)

 

additional measures to conserve liquidity, which could include, 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 that it will raise additional capital as necessary nor can it provide any assurance that new financing will be available to it on acceptable terms, if at all.

 

Basis of Presentation

 

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

 

All significant intercompany accounts and transactions have been eliminated in consolidation.  Significant events which occurred subsequent to December 31, 2009, and prior to our filing date, have been disclosed in Note 11, Subsequent Events.

 

NOTE 2.                LIQUIDITY, FINANCIAL CONDITION AND MANAGEMENT’S PLANS

 

The Company incurred a net loss from continuing operations of $7,375,178 and used $3,966,343 of cash in continuing operations for 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 raise substantial doubt about the Company’s ability to continue as a going concern. These unaudited interim consolidated financial statements do not include any adjustments relating to the recovery of assets or the classification of liabilities should the Company be unable to continue as a going concern.

 

On May 28, 2009, simultaneous with the Merger, the Company also initiated a private placement offering (“May Private Placement”) of up to 4,000,000 units (“Units’). Each Unit consists of (i) three shares of common stock, par value $0.0001 per share and (ii) a three-year warrant to purchase three additional shares of common stock at an exercise price of $1.25 per share. This offering was terminated in September 2009 and the Company raised $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 of issuance. This debt bears interest at 10% and was used to refinance existing debt and to fund operating expenses.

 

In the quarter ended December 31, 2009, the Company issued $5,660,447 of Senior Convertible Debentures bearing interest at 12% and due one year from date of issue.  This debt was used to refinance existing debt and to fund operating expenses. The Company cannot provide any assurance that it will successfully raise any additional capital.

 

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

 

7



Table of Contents

 

WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3.                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following is a summary of the significant accounting policies followed in the preparation of the accompanying condensed consolidated financial statements. On July 1, 2009, the Financial Accounting Standards 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 the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The new guidelines and numbering system prescribed by the Codification are used when referring to GAAP in this Form 10-Q. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on the Company’s condensed consolidated financial statements.

 

Use of Estimates

 

The preparation of consolidated 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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reported period.  The Company evaluates all of its estimates on an on-going basis. Significant estimates and assumptions include the valuation of acquired assets including the establishment of a deferred tax liability, the useful lives of acquired intangible assets and the valuation of equity instruments.  In addition, the Company’s business involves making significant estimates and assumptions in the normal course of business relating to its contracts and the long-term duration of a contract cycle. The most significant estimates with regard to its contracts relate to the estimating of total forecasted construction contract revenues, costs and profits in accordance with accounting for long-term contracts, as well as estimating the allowance for doubtful accounts with respect to contracts receivable and reserves associated with warranty obligations.

 

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

 

Concentrations of Credit Risk

 

Financial instruments that potentially expose the Company to credit risk include cash. At times, our cash may be in uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit.  The Company places its cash with various financial institutions and has not experienced any losses on these accounts.

 

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

 

8



Table of Contents

 

WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3.                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Deferred Financing Costs

 

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

 

Debt Extinguishment Accounting

 

The Company accounted for amendments to certain debt instruments to extended maturity dates, in accordance with the guidelines enumerated in ASC 470 “Debt” (“ASC 470”) (formerly FASB Staff Position EITF Issue No. 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”) ASC 470 provides that a substantial modification of terms in an existing debt instrument should be accounted for like, and reported in the same manner as, an extinguishment of debt. ASC 470 further provides that the modification of a debt instrument by a debtor and a creditor in a non-troubled debt situation is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least ten percent different from the present value of the remaining cash flows under the terms of the original instrument at the date of the modification.

 

The Company evaluated its issuance of the note extensions and the related issuance of equity instruments to determine whether the modification for the change in the maturity date and the related issuance of equity instruments resulted in the issuance of a substantially different debt instrument. The Company determined after giving effect to the changes in the extended due dates and the consideration paid to the debt holders that the Company had issued substantially different debt instruments, which resulted in a constructive extinguishment of the original debt instrument. Accordingly, the Company 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 debt holders to extend the maturity.  The debt instrument charge is included in the accompanying statement of operations for the nine months ended December 31, 2009 (See Note 6).

 

Net Loss Per Share

 

The Company computes net loss per share in accordance with 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 available to common stockholders by the weighted average number of shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic loss per share for the three and nine months ended December 31, 2009 and 2008 excludes potentially dilutive securities because their inclusion would be anti-dilutive.  Excluded from the calculation for the three and nine months ended December 31, 2009 were 24,966,450 warrants and 5,660,447 shares associated with the Company’s 12% Senior Convertible Debentures.

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3.                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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

 

Non-Controlling Interest

 

The Company prospectively adopted the provisions of ASC 810 “Noncontrolling Interests in Consolidated Financial Statements” (formerly SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements”). ASC 810 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This provision of ASC 810 is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this provision of ASC 810 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

Financial Instruments

 

The Company adopted the provisions of ASC 815-40 “Contracts in Entity’s Own Equity” (formerly EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock”). ASC 815-40 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument, or embedded feature, is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuations. This provision of ASC 815-40 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  The adoption of the provisions of ASC 815-40 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

Derivative Instruments

 

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

 

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

 

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

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3.                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The Company accounts for certain warrants to purchase common stock and embedded conversion options as liabilities at fair value and the unrealized changes in the values of these derivatives are recorded in the statement of operations as gain or loss on derivatives.  Contingent conversion features that reduce the conversion price of warrants and conversion features are included in the valuation of the warrants and the conversion features. The recognition of the fair value of derivative liabilities (i.e. warrants and embedded conversion options) at the date of issuance is applied first to the debt proceeds.  The excess fair value, if any, over the proceeds from a debt instrument, is recognized immediately in the statement of operations as interest expense. The value of warrants or derivatives associated with a debt instrument is recognized at inception as a discount to the debt instrument.  This discount is amortized over the life of the debt instrument.  A determination is made upon settlement, exchange, or modification of the debt instruments to determine if a gain or loss on the extinguishment has been incurred based on the terms of the settlement, exchange, or modification and on the value allocated to the debt instrument at such date.

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3.                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

SFAS 167 will be effective April 1, 2010.  The adoption of this pronouncement is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

 

In August 2009, FASB issued Accounting Standards Update 2009-05 which includes amendments to Subtopic 820-10, Fair Value Measurements and Disclosures—Overall. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The amendments in this Update clarify that a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the 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 consolidated financial position and results of operations.

 

The FASB has published FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)-Multiple Deliverable Revenue Arrangements which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method and also requires expanded disclosures. FASB Accounting Standards Update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal 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 the Company’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 Software Elements” (“ASU No. 2009-14”). ASU No. 2009-14 changes the accounting model for revenue arrangements that include both tangible products and software elements to allow for alternatives when vendor-specific objective evidence does not exist. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality and hardware components of a tangible product containing software components are excluded from the software revenue guidance in Subtopic 985-605, “Software-Revenue Recognition;” thus, these arrangements are excluded from this update. ASU No. 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. The adoption of this pronouncement is not expected to have a material impact on our consolidated financial position or results of operations.

 

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

 

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

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4.                CONTRACTS IN PROGRESS

 

The following is a summary of the contracts in progress 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 which are included in accrued expenses in the accompanying consolidated balance sheet amounted to $9,875 at December 31, 2009.  The one contract in progress has incurred cost overruns and other costs that the customer asserts should be part of the contract.  The Company and its customer intend to negotiate the settlement of these costs upon final completion of the contract.  Management cannot at this time estimate the ultimate outcome of the additional chargebacks by the customer or additional billings to be charged to the customer at December 31, 2009 (See Note 9).   The Company has recorded a provision for uncollectible unbilled amounts due under this contract as of December 31, 2009 based on the continued dispute over the cost overruns, which management believes will result in no additional billings being collectible under the contract.

 

NOTE 5.                ACQUISITION OF SUBSIDIARY AND DISCONTINUED OPERATIONS

 

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

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 5.                ACQUISITION OF SUBSIDIARY AND DISCONTINUED OPERATIONS (CONTINUED)

 

A summary of EWI’s assets and liabilities from discontinued operations as of December 31, 2009 and March 31, 2009, and its results of discontinued operations for the three and nine months ended December 31, 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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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6.                NOTES PAYABLE

 

A summary of the notes payable as of December 31, 2009 and 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

 

 


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

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

 

The activity associated with the capitalization and amortization of deferred financing costs and discounts on notes payable for the period 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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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6.                NOTES PAYABLE (continued)

 

Promissory Notes

 

On November 7, 2007, the Company issued a promissory note 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 to mature on May 8, 2008. The promissory note was secured by the Company’s 95% interest in EWI.  On April 21, 2009, the Company entered into a release and Settlement Agreement (the “Settlement Agreement”) with the note holder whereby the Company agreed to pay $125,000 in full settlement of any and all amounts due under the July 10, 2007 Stock Purchase Agreement, as amended, the September 7, 2007 consulting agreement and the November 7, 2007 promissory note, as amended. In addition, the Company and the note holder released each other from any and all claims, as defined in the Settlement Agreement.  As a result of the Settlement Agreement the loan balance and accrued interest was reduced by $1,383,898 and $127,097, respectively.  The note was repaid on July 17, 2009.

 

In April 2009, the Company entered into a promissory note for $265,000 with a vendor for previously provided services that had been included in accounts payable and accrued expenses.  The note was due in ninety days bearing interest at 10% per annum.  Also, in July 2009, 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% per annum.  In September 2009 the due date of the notes was extended through an amendment. The due date of the notes was amended and repayment is now expected to be repaid using proceeds from future capital raises and/or operations.  During the quarter ended December 31, 2009, the Company repaid $258,330 of the balance due on the promissory notes using proceeds from a private debt placement of 12% Convertible Debentures as discussed below.

 

Promissory Notes—Private Placement Offering (December 2008)

 

In January 2009, in connection with its December 2008 PPM, the Company sold ten units and, accordingly, issued promissory notes totaling $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. In connection with the extension of the maturity dates, the Company issued 1,000,000 shares of common stock to the debt holders, valued at $450,000. In accordance with ASC 470, the Company recorded a loss on the deemed extinguishments of debt in the amount of $450,000 which represented the value of additional equity instruments given to debt holders to extend the maturity.  The debt instrument charge is included in the accompanying condensed consolidated statement of operations for the nine months ended December 31, 2009.  These notes were repaid in full on July 31, 2009.

 

Promissory Notes — Private Placement Offering (July 2009)

 

On June 25, 2009, the Company issued notes in the aggregate amount of $804,000.  The notes bear interest at a rate of 10% per annum. Principal, plus all accrued and unpaid 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 equity financing of the Company in the minimum amount of $5,000,000. The Company issued 804,000 shares of its common stock to the payees.  The Company allocated a portion of the proceeds from the note to the common stock based on the relative fair value of the notes and common stock.  The relative fair value of the common stock, which amounted to $249,517, was recorded as a discount to the notes. This amount is being accreted to interest expense over the contracted term of the notes.  During the quarter ended December 31, 2009, the Company repaid in full $650,000 of the notes using proceeds from a private debt placement of 12% Convertible Debentures as discussed below.  In January 2010, another $5,000 of notes was repaid.  The remaining $149,000 of notes has not been repaid.  The Company has obtained extensions on notes totaling $104,000 which are now due on February 18, 2010.  As consideration for the extension the Company granted 26,003 warrants to the payees.  The Company estimated the fair value of the warrants issued using the Black-Scholes option pricing model at $0.75 per warrant utilizing the following assumptions:  expected volatility of 131.66%; risk free interest reate of 1.24%; expected term of three years and a market price of $1.00  This amount is being accreted to interest expense over the contracted term of the note extension.  The remaining notes are expected to be repaid using proceeds from future capital raises and/or operations.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6.                NOTES PAYABLE (Continued)

 

On July 17, 2009, the Company issued a note payable in the aggregate amount of $125,000.  The note bears interest at a rate of 10% per annum. Principal, plus all accrued and unpaid interest thereon, was due on October 17, 2009. The notes are automatically due and payable, including accrued interest thereon, upon the initial 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 the proceeds from the note to the common stock based on the relative fair value of the notes and common stock.  The relative fair value of the common stock, which amounted to $38,793, was recorded as a discount to the notes. This amount was being accreted to interest expense over the contracted term of the notes. In connection with issuance, the Company paid a placement agent $12,500 (10% of the amount of the notes issued) and a non-accountable expense allowance equal to $3,750 (3% of the amount of the notes issued).  The Company did not repay this note at maturity.  The note is expected to be repaid using proceeds from future capital raises and/or operations.

 

On August 4, 2009, the Company issued notes in the aggregate amount of $1,571,000.  The notes bear interest at a rate of 10% per annum. Principal, plus all accrued and unpaid interest thereon, was due on November 4, 2009. The notes are automatically due and payable, including accrued interest thereon, upon the initial 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 the payees.  The Company allocated a portion of the proceeds from the notes to the common stock based on the relative fair value of the notes and common stock.  The relative fair value of the common stock, which amounted to $860,140, was recorded as a discount to the notes. This amount was being accreted to interest expense over the contracted term of the notes. In connection with issuance, the Company 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 of the notes issued).  During the quarter ended December 31, 2009, the Company repaid $1,041,000 of the notes using proceeds from a private debt placement as discussed below.  The remaining $530,000 of notes have not been repaid.  The Company has obtained extensions on $230,000 of the notes until February 20, 2010.  As consideration for the extension the Company granted 57,500 warrants to the payees.  The Company estimated the fair value of the warrants issued using the Black-Scholes option pricing model at $0.75 per warrant utilizing the following assumptions:  expected volatility of 131.66%; risk free interest rate of 1.24%; expected term of three years and a market price of $1.00.  This amount is being accreted to interest expense over the contracted term of the note extension.  The remainder of the notes have not been repaid.  These notes are expected to be repaid using proceeds from future capital raises and/or operations.

 

Convertible Note

 

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

 

On April 6, 2009, the Company issued a convertible note in the amount of $200,000.  The note bears interest at a rate of 10% per annum. Principal, plus all accrued and unpaid interest thereon, was due on October 6, 2009. The note is automatically due and payable, including accrued interest thereon, upon the initial closing of an equity financing of the Company in the minimum amount of $2,000,000. The note is convertible at the option of the payee into shares of the Company’s common stock at a conversion price of $0.50 per share. In addition, the Company issued 300,000 shares of its common stock to the payee.   The Company evaluated the conversion feature embedded in the note to determine if such

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6.                NOTES PAYABLE (CONTINUED)

 

conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. We determined that the note met the definition of a conventional debt instrument since it contained only standard anti-dilution provisions and the holders of these notes could only realize the benefit of the conversion option by exercising it and receiving the entire amount of proceeds in a fixed number of shares or cash at our option. Accordingly, the note and related conversion option was accounted for by allocating a portion of the proceeds from the note to the common stock based on the relative fair value of the note and common stock. The relative fair value of the common stock, which amounted to $80,597, was recorded as a discount to the note and a corresponding increase to additional paid in capital. This amount was accreted to interest expense over the contracted term of the note. The conversion option had a beneficial conversion feature that was valued at $45,448 and it was accreted to interest expense over the contracted term of the note.  The Note was extended to October 12, 2009 and the Company subsequently obtained an extension on the note until February 18, 2010.  As consideration for the extension the Company granted 50,000 warrants to the payees.  The Company estimated the fair value of the warrants issued using the Black-Scholes option pricing model at $0.75 per warrant utilizing the following assumptions: expected volatility ranging from 131.66%, risk free interest rate ranging from 1.24%, expected term of three years and a market price ranging from $1.00.  This amount is being accreted to interest expense over the contracted term of the note extension. The warrants expire three years from the date of issuance and contain a provision allowing for a cashless exercise. The note is expected to be repaid using proceeds from future capital raises and/or operations.

 

On April 17, 2009, the Company issued a convertible note in the aggregate amount of $50,000 to its President and COO. The note bore interest at a rate of 10% per annum. Principal, plus all accrued and unpaid interest thereon, were due on August 17, 2009. The note was automatically due and payable, including accrued interest thereon, upon the initial closing of an equity financing of the Company in the minimum amount of $2,000,000. The note was convertible at the option of the payee into shares of the Company’s common stock at a conversion price of $0.50 per share. In addition, the Company issued 75,000 shares of its common stock to the payee. The Company evaluated the conversion feature embedded in the note to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. We determined that the note met the definition of a conventional debt instrument since it contained only standard anti-dilution provisions and the holders of these notes could only realize the benefit of the conversion option by exercising it and receiving the entire amount of proceeds in a fixed number of shares or cash at our option. Accordingly, the note and related conversion option was accounted for by allocating a portion of the proceeds from the note to the common stock based on the relative fair value of the note and common stock. The relative fair value of the common stock, which amounted to $20,149, was recorded as a discount to the note and a corresponding increase to additional paid in capital. This amount 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 the note.    The note was paid in full in August 2009.

 

On April 17, 2009, the Company issued a convertible note in the aggregate amount of $50,000.  The note bore interest at a rate of 10% per annum. Principal, plus all accrued and unpaid interest thereon, was due on October 17, 2009. The notes were automatically due and payable, including accrued interest thereon, upon the initial closing of an equity financing of the Company in the minimum amount of $2,000,000. In addition, the Company issued 75,000 shares of its common stock to the payee.   The Company evaluated the conversion feature embedded in the note to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. We determined that the note met the definition of a conventional debt instrument since it contained only standard anti-dilution provisions and the holders of these notes could only realize the benefit of the conversion option by exercising it and receiving the entire amount of proceeds in a fixed number of shares or cash at our option. Accordingly, the note and related conversion option was accounted for by allocating a portion of the proceeds from the note to the common stock based on the relative fair value of the note and common stock. The relative fair value of the common stock, which amounted to $20,149, was recorded as a discount to the note and a corresponding increase to additional paid in capital. This amount 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 the note. The note was repaid in full during the quarter ended December 31, 2009.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6.                NOTES PAYABLE (CONTINUED)

 

12% Senior Convertible Debentures

 

In the quarter ended December 31, 2009, the Company issued Senior Convertible Debentures in the aggregate amount of $5,660,447 in a private placement.  The notes bear interest at a rate of 12% per annum and are due one year from date of issue. The notes are convertible into one share of common stock with a conversion price of $1.00.  In addition, if, at any time while this Debenture is outstanding, the Company, sells or grants any option to purchase or sells or grants or any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any common stock or common stock equivalents entitling any person to acquire shares of common stock at an effective price per share that is lower than the then conversion price as defined, then the conversion price is reduced to equal the lower price (“Diluted Issuance Provision”). Also, for each dollar invested, a warrant was issued which entitles the note holder to purchase one share of common stock 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 expense allowance 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 placement agent.  An amount of $678,952 was placed into an escrow account at closing which represents the 12% interest to be paid on the notes.  During the quarter, an investor agreed to release $240,000 of interest from escrow that related to the investor’s note payable and was utilized by the Company for general operating purposes.  The Company estimated the fair value of the warrants issued using the Black-Scholes option pricing model at a range of $0.38 to $0.71 per warrant utilizing the following assumptions: expected volatility ranging from 131.04% to 132.40%, risk free interest rate ranging from 1.12% to 1.50%, expected term of three years and a market price ranging from $0.65 to $1.06.  The warrants expire three years from the date of issuance and contain a provision allowing for a cashless exercise.  Accordingly, the Company allocated a portion of the proceeds from the note 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, was recorded as a discount to the note and a corresponding increase to additional paid in capital. This amount will be accreted to interest expense over the contracted term of the note.

 

The Company evaluated the conversion feature embedded in the notes to determine if such conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. Due to the note not meeting the definition of a conventional debt instrument because it contained a Diluted Issuance Provision, the convertible note was accounted for in accordance with ASC 815.  According to ASC 815, the derivatives associated with the debt instrument were recognized as a discount to the debt instrument and the discount is being amortized over the life of the note and any excess of the derivative value over the note payable value is recognized 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 discount and $15,067 was recognized immediately in the statement of operations as interest expense.

 

Further and in accordance with ASC 815, the embedded derivatives are revalued at each balance sheet date and marked to fair value with the corresponding adjustment as a “gain or loss on derivatives” in the statement of operations.  As of December 31, 2009, the fair value of the embedded derivative included on the accompanying balance sheet was $1,223,867.  For the three and nine months ended December 31, 2009, the Company included $2,010,586 as a gain on change in fair value of derivative liability.

 

Bridge Loans

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 6.                NOTES PAYABLE (CONTINUED)

 

share.  The Company allocated a portion of the proceeds from the notes to the common stock based 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 amount is being accreted to interest expense over the contracted term of the notes.

 

Upon maturity, the note for $100,000 was satisfied through the issuance of 200,000 shares of the Company’s common stock.

 

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

 

The Company allocated a portion of the proceeds from the notes to the warrants.  The relative fair value of the warrants, which amounted to $84,420, was recorded as a discount to the notes.  This amount is being accreted to interest expense over the contracted term of the notes.

 

In April and May 2009, the maturity dates on bridge notes in the aggregate amount of $175,000 scheduled to mature in January and February 2009 were extended to April and May 2009, respectively.  The maturity of the notes was later extended to June 2009.  In connection with the second extension of the maturity dates, the Company issued 425,000 shares of common stock to the debt holders, valued at $219,082.  In accordance with ASC 470, the Company recorded a loss on the deemed extinguishments of debt in the amount of $219,082 which represented the value of additional equity instruments given to debt holders to extend the maturity.  The debt instrument charge is included in the accompanying condensed consolidated statement 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 loans payable to seven of the debt holders, including two related parties, has been repaid.  The remaining $25,000 is now due February 19, 2010.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7.                ENERWASTE EUROPE, LTD

 

Bankruptcy of Enerwaste Europe, Ltd on February 19, 2009

 

The Company’s subsidiary, EWE, had significant operations in Iceland and historically paid a large proportion of its fixed costs in Icelandic Krona (ISK), while its sales are generally denominated in Euros and its reporting currency is the U.S. dollar. Beginning in the third quarter of 2008 and particularly in the first weeks of the fourth quarter, the effects of the global credit and financial crisis had a significant adverse effect on the Icelandic economy. In mid October 2008, the Icelandic parliament passed emergency legislation to minimize the impact of the financial crisis, resulting in the government takeover of the three largest Icelandic banks, including Glitnir Bank (“Glitnir”), with whom EWE had bank accounts, lines of credit and a loan payable. The financial crisis had serious consequences for the Icelandic economy; the national currency fell sharply in value, foreign currency transactions were virtually suspended for weeks, and the market capitalization of the Icelandic stock exchange dropped significantly.

 

The turmoil in the Icelandic financial sector and economy as a whole had a significant impact on the Company and a material adverse impact on the day to day operations of EWE.  In October 2008, the Company was made aware that Glitnir Bank (“Glitnir”) was placed into receivership due to serious financial difficulties and that transfers of funds between the United Kingdom and Iceland were subject to significant delays and uncertainties. As a result of the significant delays caused by Glitnir, EWE’s Dargavel contract with Ascot Environmental Ltd (“Ascot”) was seriously jeopardized, since EWE could not satisfy the terms of its sub contractual agreements with third parties. As a result of Glitnir’s inability to transfer funds into and out of Iceland, EWE was unable to continue work on the Dargavel contract and EWE was unable to pay its manufacturing and site workers, sub contractors or material suppliers and was accumulating significant penalties for non performance and delays on the contract.

 

Due to the above events, Ascot terminated EWE’s Dargavel contract on November 10, 2008 and cancelled their letter of credit securing a line of credit for EWE.  In addition, because the contract was canceled and EWE was unable to fulfill its duties under the contract, EWE was unable to bill Ascot for costs they expended on the contract in excess of billings.  The resulting 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 into between Ascot and IOM to complete the project. As a result of the loss of this major contract, on February 19, 2009, a creditor commenced bankruptcy proceedings against EWE and it was placed in involuntary receivership (bankruptcy) and was appointed an Administrator under the supervision of the local 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 new legal entity emerges that is controlled by the Administrator.  Management does not believe that the Company will be materially impacted by the bankruptcy of EWE beyond the impact that has occurred to date.  Further, management does not intend to reorganize EWE and continue its operations upon completion of the bankruptcy proceedings.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 8.                STOCKHOLDER’S EQUITY

 

Common Stock

 

In April 2009, the Company issued 525,000 shares of common stock in connection with the issuance of convertible notes that were previously issued.  Additionally, the Company issued 125,000 shares of common stock in connection with a promissory note that was previously issued.

 

On April 22, 2009, the Company issued 500,000 shares of common stock in connection with consulting services rendered, valued at $0.45 per share.  Accordingly, the Company recorded $225,000 of consulting expense during the nine months ended December 31, 2009.

 

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

 

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

 

On April 22, 2009, the Company issued 100,000 shares of common stock, to consultants in connection with the extension of a bridge loan, valued at $0.45 per share.  These costs have been recorded as deferred financing costs which are being amortized over the term of the notes.

 

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

 

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

 

On May 4, 2009, the Company issued 750,000 shares of common stock in connection with consulting services rendered, valued at $0.45 per share.  Accordingly, the Company recorded $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 were canceled and 1,000,000 were reissued in the new company.

 

During the period from May 2009 through August 2009 the Company issued 1,800,750  shares of common stock in connection with equity units sold in the May 2009 Private Placement offering.  Additionally, the Company issued 2,500,000 shares in connection with the issue of promissory notes and debentures between June 2009 and August 2009.

 

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

 

In October 2009, the Company issued 1,981,391 shares in 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 8.                STOCKHOLDER’S EQUITY (Continued)

 

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

 

In August 2009 the Company entered into a consulting agreement for consideration of 200,000 shares of common stock. The agreement required that 100,000 shares be issued at inception of the agreement and the remaining 100,000 shares be issued in February 2010.  The value of the shares at the date of the agreement was $230,000 which is being amortized over the one year life of the agreement.  Amortization expense totaled $58,650 and $86,250, respectively, for the three and nine month period ended December 31, 2009.

 

Cancellation and Return of Common Stock

 

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

 

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

 

Common Stock Purchase Warrants

 

Warrant activity for the period from April 1, 2009 to December 31, 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 8.                STOCKHOLDER’S EQUITY (Continued)

 

Warrants issued to Non-Employees

 

On April 2, 2009, the Company issued warrants to purchase 2,000,000 shares of the Company’s common stock to a vendor, previously granted 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. The fair value of the warrants issued, amounting to $701,541, was determined using the Black-Scholes option pricing model at $0.35 per warrant utilizing the following assumptions: expected volatility of 110.04%, risk-free interest rate of 1.74%, contractual term of five years and a market price of $0.45.  The value of the warrants was accrued as a consulting expense payable at March 31, 2009.

 

On August 19, 2009, the Company issued warrants to purchase 2,000,000 shares of the Company’s common stock to its placement agent in connection with the settlement of all amounts due under the previous investment banking agreement.  The warrants were granted with an exercise price of $.01.  The warrants expire on August 19, 2012 and contain a provision allowing for a cashless exercise. The fair value of the warrants issued, amounting to $2,002,335, was determined using the Black-Scholes option pricing model at $1.0012 per warrant utilizing the following assumptions: expected volatility of 124.2%, risk-free interest rate of 1.54%, contractual term of five years and a market price of $1.01.  The value of the warrants was recorded as a cost of capital for the quarter ended September 30, 2009.  On October 9, 2009, the placement agent exercised the 2,000,000 warrants that were issued in September 2009 at a price of $.01 per share into common shares in a cashless exercise.  The company issued 1,981,391 shares of common stock 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 year term 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 pricing model at $0.75 per warrant utilizing the following assumptions: expected volatility 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 Convertible Debentures during the quarter ended December 31, 2009 (See Note 6), the Company issued warrants on a one-for one basis for each dollar invested. A total of 5,660,447 warrants were issued during the quarter which are exercisable over a three year period at an exercise price of $2.00.  The warrants contain a provision allowing for a cashless exercise.  The fair value of the warrants issued, amounting to $3,797,699, was determined using the Black-Scholes option pricing model at a range of $0.38 to $0.71 per warrant utilizing the following assumptions: expected volatility ranging from 131.04% to 132.40, risk-free interest rate ranging from 1.12% to 1.5%, contractual term of 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 an exercise price of $0.75 per share.  The warrants are exercisable over a five-year period and contain a provision allowing for a cashless exercise.  The fair value of the warrants issued, amounting to $86,028, was determined using the Black-Scholes option pricing model at $0.86 per warrant utilizing the following assumptions: expected volatility of 118.92%, risk-free interest rate of 2.31%, contractual term of five years and a market price of $1.01.

 

The Company recorded $86,028 and $133,489 of consulting 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 Company recorded $86,028 and $909,389, respectively, of consulting expense relating to warrants awarded.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 8.                   STOCKHOLDER’S EQUITY (Continued)

 

Warrants Issued to Employees

 

On April 2, 2009, the Company issued warrants to purchase 2,000,000 shares of the Company’s common stock to the CEO previously granted 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. The fair value of the warrants issued, amounting to $541,242, was determined using the Black-Scholes option pricing model at $0.27 per warrant utilizing the following assumptions: expected volatility of 110.05%, risk-free interest rate of 1.25%, expected term of three years and a market price of $0.45.  The value of the warrants was accrued as a consulting expense payable at March 31, 2009.

 

On April 2, 2009, the Company issued warrants to purchase 1,400,000 shares of the Company’s common stock to the President and COO 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.  The fair value of the warrants issued, amounting to $378,870, was determined using the Black-Scholes option pricing model at $0.27 per warrant utilizing the following assumptions: expected volatility of 110.05%, risk-free interest rate of 1.25%, expected term of three years and a market price of $0.45.  The value of the warrants was accrued as compensation expense payable at March 31, 2009.

 

On April 2, 2009, the Company issued warrants to purchase 350,000 shares of the Company’s common stock to certain employees previously granted 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.  The fair value of the warrants issued, amounting to $94,717, was determined using the Black-Scholes option pricing model at $0.27 per warrant utilizing the following assumptions: expected volatility of 110.05%, risk-free interest rate of 1.25%, an expected term of three years and a market price of $0.45.   The value of the warrants was accrued as compensation expense payable at March 31, 2009.

 

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

 

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

 

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

 

On October 1, 2009, the Company granted warrants to purchase 1,000,000 shares of the Company’s common stock to an employee at an exercise price of $0.67 in connection with an employment agreement.  The warrants expire on October 1, 2014 and 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 pricing model at $0.85 per warrant utilizing the following

 

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NOTE 8.                   STOCKHOLDER’S EQUITY (Continued)

 

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

 

On October 30, 2009, the Company granted warrants to purchase 100,000 shares of the Company’s common stock to an employee at an exercise price of $0.67 in recognition of continued service to the Company.  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 pricing model at $0.76 per warrant utilizing the following assumptions: expected volatility of 143.91%, risk free interest rate of 0.90%, expected term of two years and a market price of $1.01.

 

The Company recorded $118,625 and $0 of compensation 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, respectively, the Company recorded expense of $256,090 and $1,287,444.

 

Cancellation of Warrants

 

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

 

Merger and Private Placement Offering — May 2009

 

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

 

Simultaneous with the reverse merger transaction in May 2009, the Company also initiated a private placement offering (“May Private Placement”) of up to 4,000,000 units of (the Company “Units’). Each Unit consists of (i) three shares of common stock, par value $0.001 per share and (ii) a three-year warrant to purchase three additional shares of common stock at an exercise price of $1.25 per share. The Company was attempting to raise $8,000,000 capital with this transaction. The initial closing of the May Private Placement was on May 28, 2009. As of August 24 2009, the Company completed an offering of 600,250 Units at $2.00 per Unit.

 

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

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 8.                   STOCKHOLDER’S EQUITY (Continued)

 

Details of outstanding shares 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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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 9.                   COMMITMENTS AND CONTINGENCIES

 

Income Tax Liabilities

 

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 its acquisition.  Such amounts are included in current liabilities from discontinued operations in the accompanying condensed consolidated balance sheets.

 

Employment Agreements

 

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

 

On July 13, 2009, the Company entered into an employment agreement with its Chief Financial Officer (“CFO”).  The agreement is for a one year term; thereafter the agreement automatically renews for successive one year terms, unless terminated sooner, upon 30 days notice.   Under the 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 review shall 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 common stock at an exercise price of $0.67 per share vested two years from the effective date of the registration statement, or immediately if the Company fails to raise a minimum of $4,000,000 in the equity offering, provided the CFO is still employed by the Company on such date.  The warrants expire on July 13, 2014 and contain a provision allowing for a cashless exercise.  The fair value of the warrants issued, amounting to $112,010, was determined using the Black-Scholes option pricing model at $0.28 per warrant utilizing the following assumptions: expected volatility of 126.19%, risk free interest rate of 1.60%, expected term of three years and a market price of $0.45.

 

Investment Banking Agreement

 

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

 

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

 

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

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 9.                   COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

Transition Agreement

 

On May 28, 2009, the Company, Christopher d’Arnaud-Taylor (“Mr. d’Arnaud-Taylor”) and Peter Bohan entered into a Transition Agreement (the “Transition Agreement”). Pursuant to the Transition Agreement, Mr. d’Arnaud-Taylor agreed that, effective on the final closing of the May Private Placement, he would resign as Chief Executive Officer of the Company and at such time his employment agreement with the Company would be terminated.  He will continue to serve as a director of the Company. Mr. d’Arnaud-Taylor entered into a consulting agreement, dated as of May 28, 2009 (the “Consulting Agreement”).  Pursuant to the Consulting Agreement, which became effective upon the final closing of the May Private Placement, Mr. d’Arnaud-Taylor will serve as a consultant to W2E Group Holdings and shall be paid an annual fee of $300,000. The Company has guaranteed the payments due to Mr. d’Arnaud-Taylor pursuant to the Consulting Agreement.  Upon his resignation, Mr. Bohan will become the Company’s Chief Executive Officer. In September 2009, the Company amended the Transition Agreement such that Mr. Taylor would resign upon termination of the May Private Placement.  This was effective September 4, 2009 and Mr. Bohan assumed the role of CEO as of that date.  The Company recorded an accrual of $300,000 for severance to Mr. Taylor in connection with his departure and the terms of his employment agreement.  This is included as a component of Due to related parties in the condensed consolidated balance sheet as of December 31, 2009.

 

Dargavel Contract Cost Dispute

 

During the course of the construction of the Dargavel plant, the Company and its customer encountered a number of significant issues that have resulted in delays and cost increases to the project.  These issues include the Icelandic economy collapse, project scoping changes, and changes required by engineers hired by the customer and the Scottish Environment Protection Agency (“SEPA”).  These issues have resulted in substantial increases to the costs to complete this project.  The customer claims that they have incurred liquidated damages due to the project not being completed on schedule based on the original contract with our Icelandic subsidiary, Enerwaste Europe of approximately €470,000.  The Company is contesting this claim based on our belief that a Force Majeure occurred with respect to the Iceland collapse and the impact on our business operations based in Iceland.  Additionally, there are significant other costs that the customer claims are our responsibility, the majority of which are costs associated with the engineering firm that they engaged to participate in the project.  We do not believe the vast majority of these costs are our responsibility and intend to contest this claim vigorously.  Additionally, the Company is in the process of pulling together its counter claims with respect to cost increases incurred that were outside of our control and are not solely our responsibility.   The compilation of those costs is not yet complete and therefore we are unable to quantify the amount of those costs.  Management is currently unable to estimate the ultimate outcome of the negotiations and whether or not there will be any additional amounts owed to the customer by the Company, particularly since we are not yet able to fully quantify our counterclaim.  The Company has commenced discussions with the customer regarding settlement of the disputed amounts. Based on the amounts the customer has provided to us as their claim, we estimate the 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 the likelihood is reasonably possible but the amounts cannot be estimated at this time. (See Note 4).

 

Legal Proceedings

 

The Company is involved, from time to time, in litigation and other legal proceedings incidental to its business.  Management believes that the outcome of current litigation and legal proceedings will not have a material adverse effect upon the Company’s results of operations or financial condition.  However, management’s assessment of the Company’s current litigation and other legal proceedings could change in light of the discovery of facts with respect to legal actions or other proceedings pending against the Company not presently known to the Company or determinations by judges, juries or

 

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NOTE 9.                   COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

other finders of fact which are not in accord with management’s evaluation of the possible liability or 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 former consultant to the Company.  The Complaint alleges Breach of Contract, Breach of the Covenant of Good Faith and Fair Dealing and Promissory Estoppel related to a consulting agreement entered into between the Company and the Claimant.  The complaint seeks damages of $500,000 plus punitive damages. The Company denies the allegation contained in the Complaint and intends to vigorously defend the matter and otherwise enforce its rights with respect to the matter.  The Company has retained counsel and has responded to the Complaint.  The matter remains unresolved as of this filing.

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 10.                 INCOME TAXES

 

The Company recognized a deferred tax asset of approximately $6,153,236 as of December 31, 2009, primarily relating to net operating loss carryforwards of approximately $9,972,512 available to offset future taxable income through 2030.   Due to changes in ownership, these federal net operating loss carryforwards are subject to annual limitations 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 taxable income may be limited.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income and tax planning strategies in making this assessment. At present, the Company does not have a sufficient history of income to conclude that it is more likely than not that the Company will be able to realize all of its tax benefits in the near future and therefore a valuation allowance was established in the full value of the deferred tax asset.

 

A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance net of appropriate reserves. Should the Company then continue to be profitable in future periods with supportable trends, the valuation allowance will be reversed accordingly.

 

NOTE 11.                 SUBSEQUENT EVENTS

 

12% Senior Convertible Debentures (See Note 6)

 

In January and February 2010, the Company issued Senior Convertible Debentures in the aggregate amount of $688,100 in a private placement.  The notes bear interest at a rate of 12% per annum 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 expense allowance equal to $20,643 (3% of the amount of the notes issued).  Additionally an investment banking fee of $34,405 (5% of the amount of notes issued) was paid to the placement agent.  An amount of $82,572 was placed into an escrow account at closing which represents the 12% interest to be paid on the notes.

 

Amendment to Articles of Incorporation

 

The Company’s board of directors and shareholders holding more than a majority of the Company’s common stock approved an amendment to the Company’s certificate of incorporation to increase the number of shares of the Company’s Common Stock that the Company is authorized to issue from 80,000,000 shares of Common Stock to 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 Delaware Secretary of State on January 21, 2010.

 

FINRA Notification on Stock Listing Eligibility

 

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

 

The removal of the Company’s common stock from the OTC:BB resulted in the Company being in Default on its 12% Senior Convertible Debentures, as the Company’s common stock is not currently eligible for quotation on a Trading Market (as defined in the Debenture Agreement).  A market maker has filed a Form 15C2-11 with FINRA in order to enable the Company’s common stock to again be quoted on the OTCBB, although there can be no assurance that this will occur.  The Company’s common stock is currently quoted on the Pink Sheets.

 

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WASTE2ENERGY HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 12.             SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

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 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements and Associated Risks.

 

The following discussion should be read in conjunction with the condensed consolidated financial statements and the 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 are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the MD&A are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated 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 of Operation

 

We intend to compete in the growing worldwide market for waste-to-energy systems that simultaneously destroy waste and generate green energy. Our business plan calls for us to design, manufacture and install small footprint, simple, cost-effective gasification technologies that are scalable, modular, environment friendly and robust enough to operate in harsh and remote environments. We intend to provide customized engineering solutions that we believe will enable our current and future customers to convert solid waste streams traditionally destined for landfill or incineration into clean, renewable energy.

 

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

 

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

 

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Results of Operations

 

For the three 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 year quarter.   The decrease in contract revenue was due to the progress toward completion of the Dargavel contract, which is being accounted for 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 year period.  Project costs include all costs incurred to date as well as estimated future costs on the contract.  The overall decrease in costs was associated with the fact that in the current year period the project is nearer to completion.

 

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

 

Selling, general and administrative expenses for the three months ended December 31, 2009, were $2,228,455 compared to $1,331,410 for the quarter ended December 31, 2008, an increase of 67%.  The increase was primarily attributable to increases in salaries, consulting fees, and professional fees, as well as the recording of an allowance for uncollectible amounts due under a contract 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.  The change in expenses was primarily due to an increase in interest expense for the current year period, which was attributable to the higher debt balances associated with the issuance of $5.66 million of 12% Convertible Debentures during the quarter as well as the amortization of discounts and write off of deferred financing costs, all of which is included in interest expense.  This was offset by a gain recorded on the change in fair value of derivatives tied to the conversion option of the 12% Debentures.

 

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

 

For the nine 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 year period.   The decrease in contract revenue was primarily due to the 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 year period.  Project costs include all costs incurred to date as well as estimated future costs on the contract.  Additionally, during the current year period the Company recorded a warranty reserve of approximately $200,000 related to future warranty liabilities associated with the Dargavel plant.  The prior year contract costs that were incurred through June 25, 2008 were accounted for under the equity method and included as a component of “Loss on equity method investment in EnerWaste Europe, Ltd.” in the accompanying condensed consolidated statement of operations.  As of June 25, 2008, the results of Enerwaste Europe were fully consolidated (See Note 7).

 

Selling, general and administrative expenses for the nine 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 professional fees and insurance costs, as well as the recording of an allowance for uncollectible amounts due under a contract of approximately $551,000. This was offset by the impact of the deconsolidation of the Company’s

 

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Enerwaste Europe subsidiary due to the bankruptcy of that subsidiary (See Note 7 in the accompanying Notes to the unaudited Condensed 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.  The current year period included a gain related to extinguishment of a debt obligation payable to the former owner and CEO of Enerwaste International as a result of a settlement agreement executed in April 2009.  Also, the current quarter included a gain recorded on the change in fair value of derivatives tied to the conversion option of the 12% Debentures.  These gains were offset by interest expense on our debt obligations and a loss on the early extinguishment of debt.  The prior year included the net loss on the Company’s equity investment in Enerwaste Europe for the period April 1 to June 25, 2008 and foreign exchange gains. The foreign exchange gains in 2008 were primarily due to the impact of the devaluation of the Icelandic Krona with respect to the Enerwaste Europe debt and its receivable from the customer on the Dargavel contract which were transacted in Euros.

 

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

 

Liquidity and Capital Resources

 

We have incurred operating losses since inception. As of 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 capital deficiency 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 nine months ended December 31, 2009 was $3,966,343, compared with net cash used of $1,714,641 for the prior year period.  The majority of the increase in net cash used was due to an increase in operating losses due to higher operating expenses, increases in project costs, decrease in accrued expenses and a decrease in amounts due from escrow agent. Net cash used in investing activities increased over the prior year due to the purchase of computer equipment and other fixed assets, as well as for legal costs associated with the development and application of a patent related to our gasification technology.  Net cash provided by financing activities for the nine months ended December 31, 2009 was $4,284,341, compared to net cash provided by financing activities in the prior year period of $1,274,624.  The principal reasons for the increase were higher proceeds from notes payable and issuance of stock, offset by higher fees related to issuing debt and an increase in repayment of certain debt obligations.

 

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

 

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

 

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

 

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

 

In August 2009, the Company issued $1,571,000 of notes payable to accredited investors bearing interest at 10% and due 90 days from date of issue.  Of the total, $1,041,000 was repaid using proceeds from a private placement offering of the Company’s 12% Senior Convertible 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 issued approximately $5.66 million of its 12% Senior Convertible Debentures in a series of private placement transactions.  In connection with the offerings, the Company paid its placement agent commissions of $566,045 (10%) and a non-accountable expense allowance of $170,136 (3%).  Additionally an investment banking fee was paid of $283,147 (5%).  The interest associated with the Debentures totaling $678,952 has been put into escrow which represents the 12% interest to be paid on the notes.  During the quarter, an investor agreed to release the interest associated with the investor’s note from escrow for the Company to use for operating purposes.  The Company is still obligated to make the interest payments to the investor quarterly when due.  As of this filing, the Company is in Default on its 12% Senior Convertible Debentures.  The Debenture Agreement provides that the Company must maintain its listing on a Trading Market (as defined in the Debenture).  If the Company is not eligible to be listed on a Trading Market and is not eligible to resume trading within 5 business days, the Company is in Default.  On January 22, 2010, the Company was notified by FINRA that its Common Stock is no longer eligible to trade on the OTC:BB.  Several market makers have filed requests 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 holding the 12% Debentures.  In conjunction with the 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 $2.00 to $1.00.  The Company cannot be certain that the investors will accept the waiver.

 

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

 

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

 

However, depending on our future needs and changes and trends in the capital markets affecting our shares and us, we may determine to seek additional equity or debt financing in the private or public markets. Additional financing, whether through public or private equity or debt financing, 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 the remaining 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 expenses will be approximately $400,000 to $600,000 per month, consisting primarily of SG&A expenses.

 

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Recent Accounting Pronouncements

 

See Note 3 to the Condensed Consolidated Financial Statements.

 

Off Balance Sheet Arrangements

 

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not Applicable

 

ITEM 4T. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Peter Bohan, the Company’s Chief Executive Officer and Craig Brown, the Company’s Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2009.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective. Furthermore, certain matters involving our internal control over financial reporting constitute a material weakness under standards established by the Public Company Accounting Oversight Board (“PCAOB”).  The Company’s disclosure controls and procedures were not effective due to a lack of internal resources to account for the completeness of transactions to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO, as appropriate, to allow timely decisions regarding required disclosure. The Company is evaluating its structure and processes and procedures so that it can begin to implement corrective action where necessary to ensure that the appropriate resources are in place throughout the company to ensure the Company’s disclosure controls and procedures are effective.  Additionally, the Company hired a Chief Financial Officer in July 2009 and will be evaluating the systems and required changes needed to strengthen our internal controls.  During the quarter, the Company has consolidated data collection and retention in the Company’s new Corporate Headquarters in Greenville, SC.  This will help to provide assurance that key documents and issues resulting in financial statement disclosure are captured timely and accurately.

 

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Our management, including our Chief Executive Officer and Chief Financial Officer, believes that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must consider the benefits of controls relative to their costs. Inherent limitations within a control system include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. While the design of any system of controls is to provide reasonable assurance of the effectiveness of disclosure controls, such design is also based in part upon certain assumptions about the likelihood of future events, and such assumptions, while reasonable, may not take into account all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be prevented or detected.

 

Changes in internal controls

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the quarter ended December 31, 2009.  Management concluded that, except for the change discussed above, no significant changes occurred during the quarter.

 

PART II

OTHER INFORMATION

 

ITEM 1 - LEGAL PROCEEDINGS

 

In December 2009, the Company was named in a Complaint filed in the State of New York by a former consultant to the Company.  The Complaint alleges Breach of Contract, Breach of the Covenant of Good Faith and Fair Dealing and Promissory Estoppel related to a consulting agreement entered into between the Company and the Claimant.  The complaint seeks damages of $500,000 plus punitive damages.  The Company denies the allegation contained in the Complaint and intends to vigorously defend the matter and otherwise enforce its rights with respect to the matter.  The Company has retained counsel 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 any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

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

 

NOT APPLICABLE

 

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

 

As of the date of this filing the Company is in default on the repayment of certain debt instruments that have not been cured within thirty (30) days.  The following table summarizes the default status by instrument and includes the principal amount, interest rate, current accrued interest payable, and the number of days in default as of the filing date 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 this filing, the Company is in Default on its 12% Senior Convertible Debentures.  The Debenture Agreement provides that the Company must maintain its listing on a Trading Market (as defined in the Debenture).  If the Company is not eligible to be listed on a Trading Market and is not eligible to resume trading within 5 business days, the Company is in Default.  On January 22, 2010, the Company was notified by FINRA that its Common Stock is no longer eligible to trade on the OTC:BB.  Several market makers have filed requests for the Company to be approved to trade again on the OTC:BB.    As a result of the Default, the interest rate on the 12% Senior Convertible Debentures is now the lessor of 17% or the maximum amount permitted by state law.  The Company is seeking waivers of the default from the investors holding the 12% Debentures.  In conjunction with the 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 $2.00 to $1.00.  The Company cannot be certain that the investors will grant a waiver of the default.

 

ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

 

In January 2010, shareholders of the Company holding more than a majority of the Company’s common stock approved an amendment to the Company’s certificate of incorporation to increase the number of shares of the Company’s Common Stock that the Company is authorized to issue from 80,000,000 shares of Common Stock, with a par value of $.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 the State 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 Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

WASTE2ENERGY HOLDINGS, INC.

 

 

 

Date: February 12, 2010

By:

/s/ Peter Bohan

 

 

Peter Bohan
Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 

 

 

By:

/s/ Craig L. Brown

 

 

Chief Financial Officer
(Principal Financial Officer)

 

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