ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

   

Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements" and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. You are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the extremely competitive conditions that currently exist in the market for companies similar to the Company and (ii) lack or resources to maintain the Company's good standing status and requisite filings with the Securities and Exchange Commission. The foregoing list should not be construed as exhaustive and the company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The following discussion should be read in conjunction with our financial statements and their explanatory notes included as part of this prospectus.

 

The Company's wholly owned subsidiary, Sub Surface Waste Management, Inc., engages in developing, manufacturing and selling engineered remediation solutions for clean up of toxic waste releases to soil and/or groundwater and the bio-recycling of spent activated carbon filtration media. The treatments may be made directly to the contaminated soil or groundwater in the location at which the contamination was found ("in situ"), using wells and subsurface injection/extraction points to administer the Company's proprietary microbial blends for bioremediation of various waste streams, or the treatments may require excavation of contaminated soil or pumping of groundwater ("ex situ"), and washing activated carbon filtration media with microbes to Bio-recycle with the Company providing technical engineering consultation and microbial blends to its teaming partners and/or executing the work directly as a contractor.

 

The Company's plan of operation for the next 12 months is to continue the existing business in Mexico, while developing new work and promoting new projects in Mexico, and raise additional working capital which can augment the base business of the Company.

 

The Company remains teamed with its technology licensee Grupo Bartlett, S.A. de C.V. to execute work in Mexico using its registered technology with SEMARNAT (Mexico EPA).

 

Additional capital must be raised to fund existing and new projects, support overhead expenses and execute project work identified. During the next 12 months, the Company's foreseeable cash requirements are approximately $5,000,000 to implement its business plan in the environmental cleanup business. The Company will most likely need to issue additional common or preferred stock, which will have a dilutive effect on current shareholders, in order to raise the necessary capital to continue and expand its operations and incur debt in the form of guaranteed lines of credit backed by issuance of common and preferred stock.

 

RESULTS OF OPERATIONS

 

For the nine months and three months ended June 30, 2007 compared to the nine months and three months ended June 30, 2006.

 

The Company had revenues of $229,668 and $55,379 during the nine months and three months ended June 30, 2007, respectively, as compared to revenues of $444,082 and $76,662 for the same period in 2006 which represents a decrease of 48% and 28% for these periods. Revenues for the nine months and three months ended June 30, 2007 consisted primarily of engineering services, construction, and bio-remediation of hydro-carbons in contaminated soil for projects in Mexico. Gross profit for the nine months and three months ended June 30, 2007 was $139,996 and $12,723 or 61% and 23% of sales compared to $153,455 and $37,680 or 35% and 49% of sales for the corresponding period in fiscal 2006.

 

Selling, general and administrative ("SG&A") expenses for the nine months and three months ended June 30, 2007 totaled $2,028,732 and $761,864 respectively, compared to $1,658,215 and $441,804 for the same periods in fiscal 2006. SG&A expenses for the nine months and three months ended June 30, 2007 consisted of occupancy, payroll, accounting, consulting services, and finance fees.

 

The Company incurred a net loss of $1,988,646 and $781,346 for the nine months and three months ended June 30, 2007, and had negative cash flows from operations of $1,341,197 for the nine months ended June 30, 2007 compared to a net loss of $1,560,374 and $423,361 for the nine months and three months ended June 30, 2006 and had negative cash flows from operations of $722,677 for the nine months ended June 30, 2006. Basic and diluted net loss per share was $(0.02) and $(0.01) for the nine months and three months ended June 30, 2007, respectively, compared to a loss of $(0.02) and $(0.01) for the nine months and three months ended June 30, 2006.

 

As of June 30, 2007, the Company had an accumulated deficit of $16,230,140 compared to $13,302,449 as of June 30, 2006. The shareholders equity as of June 30, 2007 was negative $901,703 compared to $547,282 as of June 30, 2006.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - continued

 

Liquidity And Capital Resources

 

As of June 30, 2007, the Company had a negative working capital of $997,356 compared to a negative working capital of $237,269 at September 30, 2006, or a decrease of $760,087 in the working capital. The change in working capital resulted primarily from the Company's operating losses. Recently the Company has focused much of its effort and capital towards expanding its operations in Mexico, which may lead to increased revenues in subsequent periods but generated little revenue during the nine months ended June 30, 2007.

 

During the nine months ended June 30, 2007 the Company incurred a cash flow deficit of $1,341,197 from operating activities, and had negative cash flows from investing activities of $817,616. The Company met its cash requirements during this period through the issuance of common and preferred stock providing net proceeds of $523,792, proceeds from affiliates 682,372 and cash proceeds of $654,665 drawn from a $1,000,000 line of credit. Cash totaled $12,824 as of June 30, 2007.

 

To date, the Company has financed its operations principally through private placements of equity securities and debt. The Company believes that it will raise sufficient cash to continue its operations through September 30, 2007, and anticipates that cash generated from anticipated private placements and projected revenues during the next quarter of fiscal 2007 will enable it to fulfill cash needs for 2007 operations.

 

On September 9, 2006, the Company entered into a $500,000 line of credit agreement with a Pilgrim Bank maturing on September 9, 2007. The line of credit agreement is collateralized substantially by all of the assets of the Company and pledged certificates of deposit held as collateral by one of the Company's affiliates. The line of credit has a fixed rate of interest of 7% per annum. On January 11, 2007 the credit line was increased from $500,000 to $1,000,000 for which the Company incurred a finance fee $112,500. As of June 30, 2007, the balance outstanding on the line of credit was $999,665.

 

To obtain this line of credit, a finance fee of 3,000,000 shares of restricted common stock was issued to an affiliate at discount of $0.032 per share. This resulted in a finance fee of $96,000 which is being amortized over the 12 month term of the note. To obtain the increase in the principal of the line of credit, 4,500,000 shares of restricted common stock were issued to an affiliate at discount of .005 per share. This resulted in a finance fee of $112,500 which is being amortized over the remaining term of the note. During the nine months ended June 30, 2007 the Company has amortized $152,077 of these finance fees to interest expense, leaving a remaining balance of $56,423 to be amortized during the remaining fiscal year.

 

Equity Financing

 

The Company has obtained financing in the form of equity in order to provide the necessary working capital. On June 10, 2004, we entered into a Common Stock Purchase Agreement with Fusion Capital Fund II, LLC ("Fusion") a Chicago-based institutional investor. Under terms of the agreement, Fusion has agreed to purchase from the company up to $6.0 million of our common stock over a 24-month period. Since the Securities & Exchange Commission declared effective a registration statement covering the securities issued or issuable to Fusion on November 9, 2004, each month the company has the right to sell to Fusion up to $250,000 of its common stock at a purchase price based upon the market price of the company's common stock on the date of each sale without any fixed discount to the market price. The company's may also require Fusion to purchase lesser or greater amounts of its common stock each month up to $6.0 million in the aggregate. The company has the right to control the timing and the amount of stock sold to Fusion Capital. The Company has the right to terminate the agreement at any time without any additional cost. The Company also has the right, at its election to enter into a new agreement with Fusion Capital under which Fusion would be required to purchase up to an additional $6.0 million of the Company's common stock on the same terms and conditions as the original agreement.

 

A limiting factor on the Company's ability to sell shares of common stock to Fusion Capital is that there is a floor price of $0.10 per share. Until the market price of the Company's common stock is at or above $0.10 it will not be able to sell its common stock to Fusion Capital.

 

 The Company has relied mostly on cash infusions from its parent company, U.S. Microbics, Inc., and the sale of its common stock during the first six years of its existence. Its parent company has limited resources and may not be able to continue to provide sufficient funds for SSWM to successfully continue its operations.

 

There can be no assurance that the Company will generate revenues from operations or obtain sufficient capital on acceptable terms, if at all. Failure to obtain such capital or generate such operating revenues would have an adverse impact on the Company's financial position and results of operations and ability to continue as a going concern.

 

The Company's operating and capital requirements during the next fiscal year and thereafter will vary based on a number of factors, including: (i) the rate at which microbial products are shipped and generate profits; (ii) the necessary level of sales and marketing activities for environmental projects; and (iii) the level of effort needed to develop additional distribution channels to the point of commercial viability.

 

There can be no assurance that additional private or public financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to the Company. Any additional equity financing may be dilutive to shareholders and such additional equity securities may have rights, preferences or privileges that are senior to those of the Company's existing Common or Preferred Stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on the operating flexibility of the Company. The failure of the Company to successfully obtain additional future funding may jeopardize the Company's ability to continue its business and operations.

 

The independent auditor's report on the Company's September 30, 2006 financial statements included in this Annual Report states that the Company's recurring losses raise substantial doubts about the Company's ability to continue as a going concern.

 

Promissory Note

 

In addition, on August 4, 2004, the Company entered into a loan agreement and convertible promissory note with Fusion Capital to borrow $200,000 at annual interest rate of 10%. The Note matured on January 31, 2005, and may be redeemed by the Company, subject to Fusion Capital's right to convert any outstanding principal and accrued interest due into the Company's common shares. The Note shall convert at a price equal to the lesser of (i) 50% of the average of the three (3) lowest closing sale prices of the common shares during the twelve (12) trading days prior to the submission of a conversion notice or (ii) $0.25 per share. In connection with the Note, Fusion Capital was issued 250,000 warrants with an exercise price of $.275 per share. If the Note is converted, the Company may issue more than 840,000 shares of its common stock to Fusion Capital, including interest as of the conversion date. The Company has registered up to 1,500,000 in connection with the conversion of the Note to preserve its option to utilize its cash resources for purposes other than paying down the Note. The remaining balance of interest and principal on this note as of June 30, 2007 is $164,146 including $54,146 of accrued interest.

 

From and after the maturity date or after the occurrence of an event of default under the Note, the interest rate shall be increased to fifteen percent (15%) and shall be calculated in accordance with the terms of the Note. At any time after the maturity date, the Company shall redeem Note for cash equal to 125% of the outstanding principal plus accrued interest.

 

In the event Fusion Capital does not accept common stock as payment of their note, the Company will be obligated to raise additional capital of $164,146 possibly through the sale of restricted common stock or through additional borrowings. There is no assurance that the Company will be able to raise the required funds to repay the loan to Fusion Capital.

 

The Company will continue to need additional capital to continue its operations and will endeavor to raise funds through the sale of equity shares and revenues from operations. There can be no assurance that the Company will obtain sufficient capital or generate revenues on acceptable terms, if at all. Failure to obtain such capital or generate such revenues would have an adverse impact on the Company's financial position and results of operations and ability to continue as a going concern.

 

Any additional equity financing may be dilutive to shareholders and such additional equity securities may have rights, preferences or privileges that are senior to those of the Company's existing common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on the operating flexibility of the Company. The failure of the Company to successfully obtain additional future funding may jeopardize the Company's ability to continue its business and operations.

 

The Company's operating and capital requirements during the next fiscal year and thereafter will vary based on a number of factors, including: (i) the rate at which microbial products are shipped and generate profits; (ii) the necessary level of sales and marketing activities for environmental projects; and (iii) the level of effort needed to develop additional distribution channels to the point of commercial viability.

 

Subsequent Events

 

On July 5, 2007, Mr. Bruce Beattie ("Mr. Beattie") announced his resignation as the Chief Executive Officer and as a director of Sub Surface Waste Management of Delaware, Inc. (the "Company"), effective immediately. Mr. Beattie did not serve on any committees of the Board of Directors. Mr. Beattie resigned for personal reasons.

 

As a result of Mr. Beattie's resignation, the Company's Chief Executive Officer position is currently vacant. The Company intends to appoint a new Chief Executive Officer as soon as practicable. The Company filed a form 8-K with the S.E.C. on July 17, 2007 to disclose this information.

 

Risks And Uncertainties

 

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "expect," or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should carefully review various risks and uncertainties identified in this Report, including the matters set forth under the captions "Risk Factors" and in the Company's other SEC filings. These risks and uncertainties could cause the Company's actual results to differ materially from those indicated in the forward-looking statements. The Company undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.

 

Impact of Inflation

 

The effect of inflation on the Company's revenue and operating results was not significant. The Company's operations are located in North America and there are no seasonal aspects that would have a material effect on the Company's financial condition or results of operations.

 

Off-Balance Sheet Arrangements

 

The Company does not maintain off-balance sheet arrangements not does it participate in non-exchange traded contracts requiring fair value accounting treatment.