UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
|_| 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 1-11476
_________________________
WORLD WASTE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3977501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13500 EVENING CREEK DRIVE, SAN DIEGO, CA 92128
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 391-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
___________
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark if whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the voting and nonvoting common equity held by
non-affiliates of the registrant as of the last business day of the registrant's
most recently completed second fiscal quarter (June 30, 2006) was approximately
$61,905,312. As of March 30, 2007, there were 26,257,122 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
TABLE OF CONTENTS
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PAGE
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EXPLANATORY NOTE...............................................................1
CAUTIONARY STATEMENT...........................................................1
GLOSSARY OF SELECTED TERMS.....................................................4
PART I.........................................................................4
ITEM 1. BUSINESS......................................................4
ITEM 1A. RISK FACTORS...............................................12
ITEM 1B. UNRESOLVED STAFF COMMENTS....................................23
ITEM 2. PROPERTIES...................................................23
ITEM 3. LEGAL PROCEEDINGS............................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........23
PART II.......................................................................24
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES...................................................24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.........................25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...35
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................66
ITEM 9A. CONTROLS AND PROCEDURES......................................66
ITEM 9B. OTHER INFORMATION............................................66
PART III.....................................................................67
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.......67
ITEM 11. EXECUTIVE COMPENSATION.......................................69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS...................77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE........................................79
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.......................80
PART IV.......................................................................81
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES...................81
SIGNATURES....................................................................86
i
EXPLANATORY NOTE
World Waste Technologies, Inc. (the "Company") is filing this Amendment
No. 1 to its Annual Report on Form 10-K for the Company's fiscal year ended
December 31, 2006 to file the information required to be disclosed pursuant to
Part III of Form 10-K and to correct certain typographical and other technical
errors contained in its Annual Report on Form 10-K as described below.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The disclosure of the number of holders of record of our common stock
has been updated.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The line-item in the Selected Statement of Operations Data entitled
"Change in fair value of warrant liabilities" has been corrected to read "Change
in warrant liability." Cash used in operating activities disclosed in
footnote*** to such statement has been changed from $5,441,000 to $5,370,000.
Certain corrections have also been made to the Consolidated Balance Sheet.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Registered Public Accounting Firm has been
corrected to include the word "losses" after the word "costs" in the second
sentence of the last paragraph of the report.
The Consolidated Statements of Income (Loss) have been corrected to
move the number under the line-item entitled "Impairment of Assets" from the
year ended December 31, 2005 column to the June 18, 2002 (inception) to December
31, 2006 column, and to correct certain other typographical errors.
In note 9 to our consolidated financial statements under the caption
"8% Series B Cumulative Redeemable Convertible Participating Preferred Stock,"
the redemption price in the third paragraph has been changed from $53 million to
$38 million.
As a result of this amendment, the Company is also filing as exhibits
to this Form 10-K/A the certifications required under Section 302 and Section
906 of the Sarbanes-Oxley Act of 2002. Except for the foregoing amended
information, this Form 10-K/A continues to describe conditions as of the date of
the prior filing, and the Company has not updated the disclosures contained
herein to reflect any events that may have occurred at a later date. Exhibits
previously filed with the Form 10-K are not filed herewith, but are incorporated
herein by reference.
Solely for the convenience of the reader, this Form 10-K/A includes, in
their entirety, those items in the original filing that are not being amended
and restated. This Form 10-K/A does not otherwise modify or update the
disclosures in, or exhibits to, the Form 10-K.
CAUTIONARY STATEMENT
This report contains forward-looking statements, which reflect the
views of our management with respect to future events and financial performance.
Certain of the statements contained in all parts of this report including, but
not limited to, those relating to our development plans, the effect of changes
in strategy and business discipline, the need for a significant waste supply,
fluctuations of the market prices of recyclable materials, environmental
regulations and litigation, permitting and construction of our processing
facilities, the high concentration of our potential sources of revenue, our
ability to protect our intellectual property, the development and viability of
our technology and recycling process and any other statements regarding future
operations, financial results, opportunities, growth, business plans and
strategy and other statements that are not historical facts are forward looking.
1
These forward-looking statements reflect our current view of future
events and financial performance. When used in this report, the words
"budgeted," "anticipate," "estimate," "expect," "may," "project," "believe,"
"intend," "plan," "potential" and similar expressions are intended to be among
the statements that identify forward-looking statements. These forward-looking
statements speak only as of their dates and should not be unduly relied upon. We
undertake no obligation to update or review any forward-looking statement,
whether as a result of new information, future events, or otherwise. Such
statements involve risks and uncertainties, including, but not limited to, the
numerous risks and substantial and uncertain costs associated with the need for
a significant waste supply, fluctuations of the market prices of recyclable
materials, environmental regulations and litigation, permitting, construction of
our processing facilities, the high concentration of our sources of revenue, our
ability to protect our intellectual property, the development and viability of
our technology and recycling process, and other factors detailed in this report.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes will likely vary
materially from those indicated.
2
GLOSSARY OF SELECTED TERMS
The following abbreviations and definitions are terms commonly used in the waste
industry and throughout this report:
BIOLOGICAL OXYGEN DEMAND (BOD) - A measure of how much oxygen would be depleted
from a receiving water (e.g., a lake or stream) if a specific quantity of
effluent was released into it. BOD is usually expressed as milligrams per liter.
CELLULOSE BIOMASS - Generally any plant material such as straws, grasses, reeds,
and both deciduous and conifer wood species.
CORRUGATING MEDIUM - Unbleached cellulose formed into a sheet with particular
properties allowing the sheet to be fluted for use as the inner ply of cardboard
container stock.
MATERIAL RECOVERY FACILITY (MRF) - A FACILITY WHERE SOLID WASTES OR RECYCLABLE
MATERIALS ARE SORTED OR SEPARATED FOR THE PURPOSES OF RECYCLING OR COMPOSTING.
PRESSURIZED STEAM CLASSIFICATION - A specific combination of temperature, steam,
pressure and agitation applied for a specified time period.
RESIDUAL MUNICIPAL SOLID WASTE (RMSW OR RESIDUAL WASTE) - Material remaining in
MSW after recovery of recyclable materials in an MRF.
TIPPING FEE - The amount charged by a facility, usually a landfill or an MRF
receiving MSW. The fee is usually quoted on a per-ton basis or a per-yard basis.
UNBLEACHED FIBER - Cellulose fiber of wood origin that contains some coloration
from residual lignin and hemi-cellulose that could be removed by bleaching the
fiber.
VOLATILE ORGANIC COMPOUND - Generally, a low molecular weight organic liquid
such as gasoline, kerosene, and various alcohols, etc., that vaporize at a
relatively low temperature.
WETLAP PULP - Cellulose fiber of wood origin that is formed as a sheet with
generally 50 +/- 5% solids.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
We are a development stage company formed to develop technologies designed to
profitably transform municipal solid waste (MSW) into usable commodities and
products such as ethanol, electricity and paper pulp, and to design, build, own
and operate facilities that utilize such technologies. We recently completed
construction of our first facility in Anaheim, California, located on the campus
of the regional transfer facility and Material Recovery Facility (MRF) of
Taormina Industries, a wholly owned subsidiary of Republic Services, Inc.
Our Anaheim facility has been in a limited startup phase and has successfully
transformed MSW to produce small test quantities of paper pulp, which we have
sold to paper manufacturer. We are now utilizing the facility to continue
improving our pulp technology and for research and development on additional
technologies to create renewable energy products such as ethanol and
electricity.
Although our Anaheim facility has successfully transformed MSW to produce paper
pulp, we recently determined, based on a number of factors (including the
prohibitive cost of making necessary capital improvements), that our initial
facility could not under existing circumstances operate profitably on a
commercial scale. Accordingly, we have reduced our work force and are running
the plant on an intermittent basis so as to avoid the necessity of making
certain capital expenditures. Our revised strategy is to utilize the facility
solely to continue improving our pulp technology and to conduct research and
development activities as we strive to develop additional technologies designed
to transform MSW into renewable energy products such as ethanol and co-generated
renewable electricity. Because these additional capital investments would be
necessary in order to potentially recover the carrying amount of the plant
assets through projected future cash flows from operations, we recorded a
non-cash asset impairment charge of approximately $9.7 million at December 31,
2006, reflecting the carrying value of a portion of our plant assets. Please see
note 3 to our consolidated financial statements for a more detailed description
of this impairment charge.
We anticipate that our technologies generally will position us to generate three
distinct revenue streams: (a) "tipping" fees charged to the entities that supply
us with MSW, (b) recycling revenue from the sale of commodity recyclables (such
as aluminum, tin, steel, and plastics) that our process recovers and which
otherwise would be interned in landfills, and (c) revenue from the sale of our
end product, anticipated to be either ethanol, electricity, or paper pulp,
depending on which technology is employed, which in turn will depend upon a
number of factors including local market demand. We believe that the fact that
we are able to receive fees from the entities that provide us with "feedstock"
(i.e. waste) is an important and beneficial characteristic of our process and
our design, build, own and operate business model.
According to information currently posted on the National Solid Waste Management
Association's website (the most recent publicly available information on this
topic that we are aware of), the MSW industry in the United States, the primary
market that we plan to serve, accounts for approximately $43 billion in
spending. We believe that our existing and future technologies will potentially
offer benefits to a number of different constituencies, including solid waste
companies (by reducing transportation costs and increasing diversion of waste
from landfills), communities and regulators (by increasing recycling rates,
lengthening landfill life, gaining a renewable energy source, and reducing
traffic), utilities and ethanol distributors (by increasing renewable content in
energy production and diversifying ethanol supply away from corn-based
production), and environmentally conscious consumers (by decreasing reliance on
hydrocarbon-based power, reducing greenhouse gases from landfill methane and
truck traffic, and creating ethanol from non-grain sources). We believe that our
process will compliment the existing investment made by communities to create
and expand curbside recycling programs by targeting the MSW that is still going
to the landfill (the "residual MSW", or "RMSW"). RMSW may have already been
processed by an MRF, and often contains material that has historically been the
most difficult portion of MSW to recycle.
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OUR ANAHEIM FACILITY
At our Anaheim facility, we use a rotating pressure vessel to combine steam,
heat, pressure and agitation to change the waste's physical composition. The
process converts paper, cardboard, and paper packaging found in RMSW into a
cellulose biomass fiber-containing material. The cellulose biomass can be
screened and cleaned using conventional and non-conventional pulp recycling
equipment, and the resulting unbleached fiber, known as "wetlap" pulp, can be
used as a raw material for making new lower grade paper stocks such as
linerboard, corrugating medium, and packaging.
We have entered into a long-term contract with Taormina to supply us with RMSW.
We began processing RMSW at our Anaheim facility on a limited start-up basis
during the second quarter of 2006, and since then have processed over 2,500 tons
of RMSW through the facility and the resulting cellulose biomass has been
refined into over 400 tons of wetlap pulp. This wetlap product has been supplied
to several cardboard and paper manufacturers with operations in Southern
California. We have also sold a limited amount of the other inorganic,
recyclable materials captured by our process including aluminum, steel, tin and
plastics, into various commodity markets.
Although our customers have provided positive feedback on the pulp quality and
specifications and have requested continued shipments, we recently became aware
of several issues with our process, including its creation of an unexpectedly
high level of biological oxygen demand (BOD) from organic wastes in the
wastewater from the pulp screening and cleaning process, and design issues
related to the steam classification vessels. These issues would require a
significant level of reengineering and repairs to put us in a position to
potentially conduct sustained and profitable operations on a commercial level at
our current facility.
Due to, among other factors, the significant costs of additional capital
improvements required at our Anaheim plant that would be necessary in order to
address the BOD issue, we recently decided not to make these improvements for
the pulp process or to actively pursue the creation or sale of wetlap pulp
generated at this plant. Rather, we plan to expend our resources on analyzing
the data gathered through the plant's limited operation and refining those
lessons learned from the design, construction, commissioning and operation of
the plant. We will focus our cash spending on the development of additional
larger scale facilities and on the development of our renewable energy platform
which we believe holds the potential for better returns than investing
additional capital in a small scale facility. Accordingly, we recently reduced
our workforce and began to run the plant on an intermittent basis for process
improvement trials, technology demonstration, product development and other
research and development initiatives, including as relates to the production of
ethanol and electricity. We expect to continue to use the steam classification
assets at the Anaheim facility in a research mode in an effort to develop
ethanol, electricity and pulp opportunities until such time, if ever, as we can
develop or acquire the technology to enable us to operate the plant profitably.
Based on our research and development, including our accumulated experience from
operating the Anaheim plant, we believe the necessary characteristics for the
successful development of additional wetlap-based MSW conversion facilities
include: a relatively high volume of MSW, larger physical plant enabling a
larger scale operation, a desire by the community to increase recycling rates to
minimize the amount of this waste disposed of in landfills, feedstock
composition which includes a higher amount of paper products, a fully scoped
on-site water treatment facility, and higher landfill tipping fees than we
currently receive in Anaheim, California. We plan to continue to conduct
business development discussions with various paper and solid waste companies
and government agencies to determine where the proper combination of operating
characteristics can be achieved to pursue a larger scale wetlap production
facility in future locations.
ETHANOL AND ELECTRICITY OPPORTUNITIES
We recently began pursuing the development of various energy products which can
be produced from MSW. One process which we believe has potential for successful
commercialization involves using gasification technologies to produce a
synthetic gas (or "syngas") from wetlap or intermediate products in our process.
This syngas can be used to produce energy to drive a turbine or passed through a
catalyst environment to produce fuel grade alcohols, primarily ethanol. We
believe this same basic process can also be used to produce hydrogen for
5
industrial applications and fuel cells. In this area we recently filed a
provisional patent covering a process and certain conditions, which we believe
may maximize the yield of these alcohols. A by-product of the catalyst process
is a residual producer gas that can be used for the beneficial co-generation of
renewable electricity. The syngas can be used to fire either a boiler driving a
steam turbine, or a gas-fired turbine, and thereby produce energy to reduce our
utility costs.
Also in the ethanol area, in addition to the above process for producing fuel
alcohols through gasification, we are investigating alternative pathways for
transforming our cellulose biomass product into ethanol using various acid and
enzymatic hydrolysis processes. We have produced small quantities of ethanol
through an intermediate acid hydrolysis process in the early trials and are
currently performing additional testing and engineering studies to determine the
economic feasibility of a commercial size plant based on the insights from our
research.
We recently established a Technical Advisory Board to assist us in advancing our
business of creating usable commodity products from MSW, particularly as it
pertains to developing our ethanol and electricity technologies.
STRATEGY
Our goal is to profitably transform residual MSW into usable commodity products,
such as ethanol, electricity, and paper pulp and to build, own and operate
facilities to accomplish this goal. Our strategies to achieve our goal include
the following:
PRELIMINARY COMMERCIALIZATION AND FURTHER RESEARCH AND DEVELOPMENT. Technical
feasibility and process characterization of our RMSW to pulp process has been
achieved at our facility in Anaheim. We are now utilizing the facility to
collect further detailed operating data in anticipation of developing a
potential full-scale plant. We are also using the facility to perform research
and development on alternative energy technologies for processing RMSW, such as
gasification for the production of electricity and ethanol, and acid hydrolysis
for the production of ethanol. We are investigating the installation of a
small-scale gasification unit in Anaheim or elsewhere, with the intention of
collecting detailed operating data on ethanol and electricity production. In
addition we anticipate constructing a small-scale hydrolysis facility to
generate ethanol from MSW. We anticipate that this phase of our strategy will
continue through at least the remainder of 2007.
FULL SCALE FACILITY AND COMMERCIALIZATION. We are in the early stages of
identifying potential sites for our next facility, which we anticipate will be a
full-scale facility. We are identifying high priority sites and targeting
locations with advantageous MSW tip fees and volume.
REPLICATION AND ROLLOUT. We anticipate that our technologies will be configured
to meet the needs of the local market, and we will seek to develop additional
facilities, implementing the most profitable end product platforms on a site by
site basis. We will seek to develop facilities in the most favorable locations
within the United States, and we anticipate exploring licensing opportunities to
accelerate the rollout. We plan to leverage experienced engineering and
construction partners for the most effective utilization of our resources.
In addition, as part of the implementation of our strategy, we may investigate
potential acquisitions. In general, we may seek acquisition candidates with
characteristics that included: (a) established and growing revenue, (b) positive
cash flow, or (c) technology or strategy that complements our focus.
Our ability to implement our strategy will be dependent upon our ability to
raise significant amounts of additional capital, of which there can be no
assurance.
6
CORPORATE HISTORY OF REVERSE MERGER
We were formed as a result of two mergers that occurred in 2004. First, in March
2004, World Waste of America, Inc. ("WWA") merged with and into a wholly owned
subsidiary of Waste Solutions, Inc. ("WSI"), a California corporation. Cagan
McAfee Capital Partners and its affiliates were the controlling shareholders of
WSI. As a result of this merger, WSI continued as the surviving corporation,
assumed the operations and business plan of WWA, the stockholders of WWA became
stockholders of WSI, and WSI changed its name to World Waste Technologies, Inc.
("Old WWT").
In March 2004, Old WWT entered into an Agreement and Plan of Reorganization with
Voice Powered Technologies International, Inc., a California corporation
("VPTI"), to merge with and into a wholly owned subsidiary of VPTI. VPTI was a
publicly traded company trading under the stock symbol VPTI.OB. VPTI had no
material assets, liabilities or operations. The merger of Old WWT with VPTI's
wholly owned subsidiary was completed on August 24, 2004. Pursuant to the
merger, Old WWT's shareholders became the holders of approximately 95% of the
outstanding shares of VPTI. Upon completion of this merger, VPTI changed its
name to World Waste Technologies, Inc. VPTI was incorporated on June 21, 1985
and provided voice recognition and voice activated products. We currently do not
plan to conduct any business other than operations heretofore conducted or
contemplated to be conducted by WWT. Because the shareholders of Old WWT became
the controlling shareholders of VPTI after the merger, Old WWT was treated as
the acquirer for accounting purposes, and therefore the transaction was
accounted for as a reverse merger. Accordingly, for accounting purposes, the
historical financial statements presented are those of Old WWT. Additionally,
the prior operating results of VPTI are not indicative of our future operations,
and none of the assets or liabilities on our balance sheet as of December 31,
2006 and 2005 relate to VPTI prior to the merger.
Since the formation of WWA in 2002, our efforts have been principally devoted to
research and development activities, construction of our initial facility,
raising capital, and recruiting additional personnel and advisors. To date, we
have not generated any significant revenues. We do not anticipate generating
significant revenue until sometime in 2007, if ever.
Our stock is quoted on the OTC Bulletin Board under the symbol WDWT.
OUR PLANNED REVENUE AND ANTICIPATED MARKETS
Pursuant to our current business model, we anticipate our product and services
will result in three distinct revenue streams. First, we would receive a
"tipping fee" for each ton of RMSW delivered to and processed by us. For
example, under the terms of our agreement with Taormina, Taormina has agreed to
pay us an initial tipping fee paid per ton (payable monthly) of "Net Processed
Waste" (defined as the total RMSW delivered to us less the total
residual/non-processable waste removed by WWT for handling and disposal by
Taormina). This tipping fee is subject to increase or decrease based upon
changes in certain county landfill disposal fees Taormina is required to pay.
Second, our process is expected to mechanically sort and collect standard
recyclable materials such as scrap steel, cans, and aluminum. We expect to
collect and sell these materials to Taormina for resale to commodities buyers.
Third, our process is expected to enable us to produce a commodity product such
as ethanol, electricity or wetlap pulp that can be sold in commercial
quantities. We plan to accomplish this by refining the cellulose biomass we
produce into (a) unbleached fiber in the form of wet-lap pulp suitable for sale
to paper and board manufacturing facilities for incorporation into their
products, (b) electricity and potentially ethanol through gasification
technology, or (c) ethanol through acid hydrolysis.
Our plan is to provide waste processing services to other companies and
municipalities in the MSW industry throughout the United States. The MSW
industry in the United States is dominated by large MSW processors such as Waste
Management, Inc., Allied Waste Industries, Inc. and Republic Services, Inc. Many
7
other smaller regional companies and municipalities are also in the waste
handling business. Many state governments in the United States mandate that
certain percentages of all MSW be recycled. The State of California, where our
headquarters and our Anaheim facility are located, currently mandates the
highest standard in the United States by requiring that 50% of all incoming MSW
be diverted from landfills. We believe that the trend in state law throughout
the country is to migrate toward this California standard. Accordingly, we
anticipate providing our processing services to MSW handlers looking for
efficient ways to increase the percentage of their recycled MSW.
We plan to use the biomass fiber we produce to conduct research and development
to determine its use in producing unbleached fiber or wetlap pulp for making new
lower-grade paper stocks such as linerboard, corrugating medium, and packaging,
and also to determine its use in producing ethanol, specialty chemicals,
synthetic gas, and other energy products, building products and other industrial
products.
Our process is expected to mechanically sort and collect other inorganic
standard recyclable materials such as scrap steel, tin cans, and aluminum cans
and scrap. These materials are expected to be collected and sold to Taormina.
SALES AND MARKETING
We currently plan to market our services to waste handlers, waste collectors and
municipalities, focusing on higher recycling rates, with the goal of lowering
use of the landfills and creating a cost savings for these customers. In
addition, we plan to sell the other inorganic standard recyclable materials such
as scrap steel, cans, and aluminum to Taormina for bailing and selling in the
marketplace. We also plan to market our wetlap pulp to paperboard and packaging
mills as a raw material for making new lower-grade paper stocks such as
linerboard, corrugating medium, and packaging, among other things, and to sell
ethanol and electricity products into their respective markets.
Other than the Taormina agreement which requires Taormina to provide us with up
to 2,500 tons of waste per day, 500 tons for the initial facility and 2,000 tons
for an anticipated second facility, and to pay us for every ton of RMSW that we
process, as well as pay us 90% of the price Taormina receives for standard
recyclable materials we collect in our process, we currently do not have any
agreements in place to market any of our products or services. We currently
plan to establish an in-house marketing and sales program to promote our
services. Alternatively, we may enter into strategic alliances with larger
companies. We currently expect that our services and products will be marketed
in the U.S., although we may also pursue specified international opportunities.
THE TAORMINA AGREEMENT
In June 2003, we entered into a 10-year contract, with Taormina Industries, a
wholly owned division of Republic Services, Inc. The Taormina Recycle Agreement
requires Taormina to deliver up to 500 tons of RMSW per day to us for processing
at our Anaheim facility on the campus of Taormina in Anaheim, CA. Under the
terms of the Taormina agreement, Taormina is required to pay us a tipping fee
per ton of RMSW delivered to us. The second phase of the Taormina agreement
calls for us to build a 2,000-tons per day plant in the Orange County,
California area. The Taormina agreement also grants Taormina a right of first
refusal to participate in potential future projects in an additional 10 counties
throughout California where Republic Services has operations. Our success is
highly dependent upon the ability of both parties to the contract to fulfill
their obligations, of which there is no assurance.
The Taormina agreement was amended twice to allow us additional time to complete
all permitting, approvals and construction and to occupy the facility. We
completed the primary construction of this facility early in the second quarter
of 2006. In April 2006, Taormina accepted our completion and commencement
notification in accordance with the lease agreement.
8
In the agreement, we represented to Taormina that the residual waste we deliver
to them would not exceed 40%, by weight, of the associated RMSW delivered to us
by Taormina. Currently, we are not in compliance with this representation
because the waste that we are delivering to Taormina contains too high a
quantity of residual streams of waste that Taormina must send to the landfill.
Due to the start-up nature of our operations, we have not yet determined the
most efficient method of resolving this issue. Potential solutions include
identifying third party sources willing to accept these residual streams, and/or
making changes to our process. Even if we are unable to resolve this problem we
believe that the waste we deliver under the agreement will be acceptable to
Taormina. However, until we are able to remedy this situation, Taormina could
attempt to renegotiate or terminate the agreement or refuse to accept any waste
from us.
The Taormina agreement also provides that Taormina's obligations are subject to
our ability to maintain compliance with all necessary permits and that Taormina
may suspend delivery of MSW to us at any time if it determines that our
operations would threaten to place Taormina's operations in non-compliance with
its own permits or other governmental approvals.
COMPETITION
We expect to compete with numerous other products, technologies and services
that are in use currently or are subsequently developed by companies, academic
institutions and research institutions. These competitors consist of both large
established companies as well as small, single product or service development
stage companies. We expect competition from these companies as they develop
different and/or novel approaches to the processing of MSW. Some of these
approaches may directly compete with the products or services that we are
currently developing.
According to the July 17, 2006 issue of WASTE NEWS (the most recent publicly
available information on this topic that we are aware of), three companies
dominate the MSW industry in the United States: Waste Management, Inc. ($13.1
billion in revenues); Allied Waste Industries, Inc. ($5.73 billion in revenues);
and Republic Services, Inc. ($2.86 billion in revenues). There are also many
smaller regional companies and municipalities in the waste handling business.
Although we do not view MSW haulers as competitors, but rather as consumers for
the services we plan to provide, such haulers would be competitors to the extent
they make capital investments in material recovery facilities, incineration,
composting, or landfills rather than outsourcing through us. We believe that the
primary competitive factors in our industry are price, reliability of service,
and quality of recycling programs.
Corrugated packaging and mixed waste paper companies may also be a source of
competition for us. Our process converts MSW into a sanitized cellulose fiber
containing material, which once screened and cleaned using conventional paper
recycling equipment, is known as "wetlap pulp." Wetlap pulp can be used by many
paper mills in the manufacture of corrugating cardboard and associated packaging
materials and other products. These paper mills also use other feedstocks such
as used cardboard, mixed waste paper and virgin pulp in their mill processes. To
the extent that companies which provide other feedstocks which may include MRFs,
meet or exceed the demand of the mills for feedstock, they could have a negative
impact on the demand for our wetlap.
Several companies have developed businesses burning MSW to generate energy.
Others have focused on converting MSW to recyclables, ethanol or other
beneficial uses. These companies may compete against us for MSW supply
contracts.
Several companies are attempting to create ethanol from cellulosic sources such
as corn. We believe that MSW is superior to corn as a feedstock for ethanol
production for numerous reasons. For instance, (a) corn must be grown,
harvested, and delivered, all of which add cost, (b) ethanol diverts corn from
food use, which may raise the cost of other foods, (c) significant energy in the
form of planting, harvesting, and transportation must be expended to grow corn,
and (d) growing corn requires significant other resources, such as water,
9
fertilizer, and gasoline. By contrast, we believe utilizing MSW to produce
ethanol can be beneficial for numerous reasons including, (a) MSW is
comparatively inexpensive because we would be paid a tip fee to accept it, (b)
utilizing MSW achieves landfill diversion goals, (c) MSW is located in areas
where ethanol is in demand, and (d) MSW has a strong positive energy balance.
Nevertheless, there are numerous large and well capitalized companies in the
corn to ethanol production industry which may compete with us for investor
resources and in the sale of ethanol.
REGULATION
Our business is subject to extensive federal, state and local environmental,
health, safety and transportation laws and regulations. These laws and
regulations are administered by the Environmental Protection Agency ("EPA") and
various other federal, state and local environmental, zoning, transportation,
land use, health and safety agencies in the United States. Many of these
agencies regularly examine our operations to monitor compliance with these laws
and regulations and have the power to enforce compliance, obtain injunctions or
impose civil or criminal penalties in case of violations.
Because a major component of our business will be the processing of solid waste
in an environmentally sound manner, a portion of our capital expenditures is
related, either directly or indirectly, to environmental protection measures,
including compliance with federal, state or local provisions that regulate the
discharge of materials into the environment. Although we only incurred
approximately $10,000 of expenses relating to our compliance with environmental
laws in 2006, we anticipate that there will be significant costs if and when the
plant is operational on a commercial-scale level and that there will be
significant costs associated with sighting, design, operations, monitoring, site
maintenance, corrective actions, and financial assurance of each facility that
we plan to operate going forward. In connection with our development or
expansion of a facility, we must often spend considerable time, effort and money
to obtain or maintain necessary required permits and approvals. There cannot be
any assurances that we will be able to obtain or maintain necessary governmental
approvals. Once obtained, operating permits are subject to modification and
revocation by the issuing agency. Compliance with these and any future
regulatory requirements could require us to make significant capital and
operating expenditures. Although we were able to obtain all of our environmental
permits that were necessary in order for us to complete the construction of our
initial facility in Anaheim, California, we cannot assure you that we will
successfully retain these permits, or that we will obtain or retain the permits
required to operate this or any additional facilities we may seek to construct.
The primary United States federal statutes affecting our business as currently
conducted are summarized below:
The Resource Conservation and Recovery Act of 1976, as amended ("RCRA"),
regulates handling, transporting and disposing of hazardous and non-hazardous
wastes and delegates authority to the states to develop programs to ensure the
safe disposal of solid wastes. In 1991, the EPA issued its final regulations
under Subtitle D of RCRA, which set forth minimum federal performance and design
criteria for solid waste landfills. These regulations must be implemented by the
states, although states can impose requirements that are more stringent than the
Subtitle D standards. We expect to incur costs in complying with these standards
in the ordinary course of our operations.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), which is also known as Superfund, provides for
federal authority to respond directly to releases or threatened releases of
hazardous substances into the environment. CERCLA's primary means for addressing
such releases is to impose liability for cleanup of disposal sites upon current
and former site owners and operators, generators of the hazardous substances at
the site and transporters who selected the disposal site and transported
substances to the site. Liability under CERCLA is not dependent on the
intentional disposal of hazardous substances; it can be based upon the release
or threatened release, even as a result of lawful, unintentional and
non-negligent action, of hazardous substances as the term is defined by CERCLA
and other applicable statutes and regulations.
10
The Federal Water Pollution Control Act of 1972 (the "Clean Water Act")
regulates the discharge of pollutants into streams, rivers, groundwater, or
other surface waters from a variety of sources. If run-off from our operations
may be discharged into surface waters, the Clean Water Act would require us to
apply for and obtain discharge permits, conduct sampling and monitoring, and,
under certain circumstances, reduce the quantity of pollutants in those
discharges. In addition, if a landfill or a transfer station discharges
wastewater through a sewage system to a publicly owned treatment works, the
facility must comply with discharge limits imposed by the treatment works. The
Clean Water Act provides for civil, criminal and administrative penalties for
violations of its provisions.
The Clean Air Act of 1970, as amended, provides for increased federal, state and
local regulation of the emission of air pollutants. The Clean Air Act would
likely apply to certain of our planned and potential operations, including
gasification of MSW, solid waste landfills and waste collection vehicles.
The Occupational Safety and Health Act of 1970, as amended ("OSHA"), establishes
certain employer responsibilities, including maintenance of a workplace free of
recognized hazards likely to cause death or serious injury, compliance with
standards promulgated by the Occupational Safety and Health Administration, and
various record keeping, disclosure and procedural requirements.
There are also various state and local regulations that affect our existing and
potential future operations. Sometimes states' regulations are stricter than
comparable federal laws and regulations.
Many states, provinces and local jurisdictions have enacted "fitness" laws that
allow the agencies that have jurisdiction over waste services contracts or
permits to deny or revoke these contracts or permits based on the applicant's or
permit holder's compliance history. Some states, provinces and local
jurisdictions go further and consider the compliance history of the parent,
subsidiaries or affiliated companies, in addition to the applicant or permit
holder. These laws authorize the agencies to make determinations of an applicant
or permit holder's fitness to be awarded a contract to operate, and to deny or
revoke a contract or permit because of unfitness, unless there is a showing that
the applicant or permit holder has been rehabilitated through the adoption of
various operating policies and procedures put in place to assure future
compliance with applicable laws and regulations.
RESEARCH AND DEVELOPMENT
During 2006, 2005 and 2004, we spent $273,894, $250,060 and $284,587,
respectively, on research and development activities. During 2007, we have
redirected our activities to focus on research and development activities
primarily in alternative energy. Therefore, we expect research and development
expense to increase significantly in 2007.
INTELLECTUAL PROPERTY
On June 21, 2002, we entered into a U.S. technology sub-license agreement with
Bio-Products International, Inc., an Alabama corporation, with respect to
several patent claims and other related intellectual property relating to the
methods and processes developed by the University of Alabama in Huntsville
("UAH"). The technology was designed to provide for the processing and
separation of material contained in MSW. Temperatures of several hundred degrees
sterilize the material and the pressure and agitation cause a pulping action. A
combination is designed to result in a large volume reduction, yielding a
high-density cellulose biomass product. The significant portion of the material
is a biomass cellulose with significant papermaking fiber content that may be
sold to container board plants after a screening and cleaning process. The most
recent patent includes the capturing of all Volatile Organic Compounds and was
granted by the United States Patent and Trademark Office in October 2001. (See
note 5 to the accompanying audited financial statements.)
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On May 1, 2006, we purchased the patent for this technology, subject to existing
licenses, from UAH, for a payment of $100,000 in cash and 167,000 shares of our
common stock. The common stock was valued at $698,000, the fair value on May 1,
2006. We continue to exploit the technology covered by this patent through our
sub-license from BPI. By virtue of our acquisition of the patent, we now own all
right, title and interest in the patent, subject to BPI's existing license,
which in turn continues to sublicense the technology to us.
Under the sub-license agreement, we paid an upfront sub-license fee of $350,000
and currently pay a monthly fee for technical services of $20,000. We are also
required to pay a daily per-ton royalty based on the tons of waste processed
utilizing the technology of $0.50 for the first 2,000 tons processed, $1.00 for
the next 8,000 tons processed and $1.50 for any additional tons processed. We
also pay royalties based on the sales price of fiber products recovered from the
process of 2.5% of the gross sales price in excess of $10.00 per ton.
The sub-license agreement between us and BPI covers technology developed by BPI,
its affiliates, and UAH, and generally covers technology relating to the volume
reduction, separation, recovery, treatment, recycling and utilization of various
components of waste materials. Other than as described below, we hold exclusive
rights to this technology in all applications throughout the United States.
BPI retained the exclusive right to utilize this technology in Arkansas, and the
non-exclusive right to utilize technology to construct up to four facilities in
any of Alabama, Tennessee, Georgia and/or South Carolina. In addition, BPI
retained the exclusive right to utilize the technology in the United States for
applications in which the cellulosic by-product of the process utilizing the
technology is either used directly as a fuel source or converted into an end
product for energy production; however, BPI agreed to grant us a sub-license for
such applications on a site-specific basis upon our request. Accordingly, BPI
may grant third parties the right to use the technology for the production of
marketable solid combustion fuel end products. We hold no rights under the
technology outside of the U.S. By acquiring title to the patent from UAH, we
effectively reduced the royalties payable by us to BPI by approximately 9%. In
addition, by becoming the patent holder ourselves, we are no longer at risk of
losing the right to practice the technology claimed in the patent in the event
that BPI were to breach its agreement with the patent holder.
The license extends until the expiration date of the last patent issued to BPI
covering the technology, which is expected to occur on October 23, 2021. In its
license with us, BPI is required to continue to make certain payments to us to
maintain exclusivity.
EMPLOYEES
As of February 28, 2007, we had 13 full-time employees. There are four members
in our executive management team and 9 persons employed in operations and
administration. We are not a party to any collective bargaining agreements. We
have not experienced work stoppages and we believe that our relationship with
our employees is good.
ITEM 1A. RISK FACTORS
IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS OR FUTURE GROWTH COULD SUFFER. YOU SHOULD ALSO REFER TO THE OTHER
INFORMATION IN THIS REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED
NOTES. FOR THE DEFINITION OF SOME OF THE TERMS USED IN THIS SECTION AND
THROUGHOUT THIS REPORT, YOU SHOULD REFER TO THE "GLOSSARY OF SELECTED TERMS."
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WE FACE DELAYS IN THE DEVELOPMENT OF OUR TECHNOLOGY, WE NEED TO DEVELOP AND/OR
ACQUIRE NEW TECHNOLOGIES, AND ANY TECHNOLOGY WE USE MAY NOT WORK AS WELL AS
EXPECTED, IF AT ALL, OR EVER BE ECONOMICALLY VIABLE.
The steam classification and processing technology that we intend to use has not
yet been widely applied within the municipal solid waste industry and may not
work as well as expected or be economically viable. The successful application
of the technology at large scale and high volumes to create commercially usable
cellulose fiber, electricity, ethanol or other products has yet to be proven.
Any inability under our current plan to operate our Anaheim plant in a manner
that will produce large volumes of commercially usable cellulose fiber may
require additional investment in capital equipment and/or increased operating
expenses beyond currently contemplated business and construction plans.
Potential issues may include, but are not limited to, handling large quantities
of textiles and other debris, unforeseen labor and energy costs, higher than
expected contamination levels of the water discharge to the sewer, and capturing
sufficient cellulose in the process. Unforeseen difficulties in the development
or market acceptance of this cellulose fiber may lead to significant delays in
production and the subsequent generation of revenue. For example, laboratory
testing of the cellulose biomass created during trials since December 2005
indicated that higher than anticipated levels of BOD will result from our fiber
cleaning and screening process. Although we believe technology to address and
remove these BOD levels is readily available to us and that equipment
incorporating such technology can be installed at this facility, we have
determined, based on the size of our facility, the regulatory environment in
which the facility is located, and the level of tipping fees we generate, not to
expend any additional funds to address this BOD problem. We have instead
redirected our focus to research and development activities during the remainder
of 2007 and will continue to analyze changes to the Anaheim plant that could
enable us to operate profitably at such facility. We also need to seek to
develop or identify and acquire other technologies to enable us to continue to
pursue our strategy. In any event we will need to raise additional financing
which, if not available, could force us to curtail or cease operations
altogether.
WE MAY BE UNABLE TO OBTAIN THE LARGE AMOUNT OF ADDITIONAL CAPITAL THAT WE NEED
TO EXECUTE OUR BUSINESS PLAN.
Our business plan includes the construction and operation of additional plants
and the development and/or acquisition of new technologies. Each plant is
expected to cost between $50 million and $70 million. We anticipate that we will
fund the construction and startup operation of these plants through the sale of
securities or the issuance of debt. We may be unable to raise the additional
funds necessary to build and operate these additional plants. You should not
rely on the prospect of future financings in evaluating us. Any additional
funding that we obtain may reduce the percentage ownership of the company held
by our existing stockholders. The amount of this dilution may be substantially
increased as the trading price of our common stock declines.
WE MAY BE UNABLE TO ACHIEVE COMMERCIAL PRODUCTION LEVELS AT OUR INITIAL FACILITY
ON A TIMELY BASIS OR AT ALL.
We recently completed construction of our initial facility in Anaheim,
California. Prior to completion, laboratory testing of the cellulose biomass
created during certain trial runs of our process indicated that the level of
biological oxygen demand ("BOD") that will result from our process would be
higher than the levels previously anticipated. We believe that the sewer
surcharges by the local sanitation district as a result of such discharges would
negatively affect our profitability. We believe that the technology capable of
significantly reducing these BOD discharges to acceptable levels is readily
available to us and that equipment incorporating such technology is available
for purchase and installation at our facility. However, we have determined that
the costs to remedy the BOD problem is greater than we are willing to spend at
this time on the Anaheim facility. We have taken an impairment charge for the
"wetlap" processing equipment in 2006. We plan to spend the remainder of 2007
focusing on research and development. We plan to make appropriate changes to the
"steam classification" equipment during 2008 depending on the results of the
research and development.
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WE ANTICIPATE THAT A SUBSTANTIAL PORTION OF OUR REVENUES WILL BE GENERATED FROM
OUR AGREEMENT WITH TAORMINA INDUSTRIES; WE ARE NOT CURRENTLY IN COMPLIANCE WITH
ALL OF OUR OBLIGATIONS UNDER THIS AGREEMENT.
In June 2003, we signed a 10-year contract with Taormina Industries, a division
of Republic Services, Inc. The agreement provides for Taormina to deliver up to
500 tons of MSW per day to us for processing at our Anaheim facility on the
campus of Taormina in Anaheim, California. The second phase calls for us to
build an additional plant in the Orange County area at which Taormina will
deliver up to an additional 2,000 tons of MSW per day. The agreement grants
Taormina a right of first refusal to participate in potential additional
projects in an additional 10 counties throughout California where Taormina has
operations. Under the terms of the agreement, Taormina is required to pay us a
per ton tipping fee. We anticipate that a substantial portion of our revenues
will be generated from this agreement for the foreseeable future.
The Taormina agreement, as amended, provides that Taormina's obligations are
subject to our ability to maintain compliance with all necessary permits and
that Taormina may suspend delivery of MSW to us at any time if it determines
that our operations would threaten to place Taormina's operations in
non-compliance with its own permits or other governmental approvals. In
addition, in the agreement we represented to Taormina that the residual waste we
deliver to them would not exceed 40%, by weight, of the associated MSW delivered
to us by Taormina. Primarily because we are currently operating the plant solely
in a research and development mode, we are not currently in compliance with this
representation. Until we are able to remedy this situation, Taormina could
attempt to re-negotiate or terminate the agreement or refuse to deliver any
waste from us. If Taormina were to stop delivering MSW to us for any reason or
if we are unable to extend this agreement on terms favorable to us or at all
prior to its expiration, our business, financial condition and results of
operations would be materially harmed.
IF WE FAIL TO IMPLEMENT NEW TECHNOLOGIES, WE WILL NOT BE ABLE TO KEEP UP WITH
OUR INDUSTRY, WHICH COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS.
We expect to utilize patented and proprietary steam classification technology in
our processing facilities and to adopt other technologies from time to time. Our
ability to achieve profitability and future growth is dependant on our ability
to improve our knowledge and implementation of waste processing and energy
development technologies. Inability to successfully implement commercially
viable waste processing technologies will have a material adverse effect on our
business and results of operation.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT FUTURE RESULTS.
We are in the development stage and are subject to all the business risks
associated with a new enterprise, including uncertainties regarding product
development, constraints on our financial and personnel resources, and
dependence on and need for third party relationships. For the period from June
18, 2002 (inception) to December 31, 2006, we incurred total net losses of
approximately $32.0 million. To date, we have not generated substantial revenues
and do not know when or whether we will be able to develop meaningful sources of
revenue or whether our operations will become profitable, even if we are able to
begin generating sufficient revenue. If we are unable to generate sufficient
revenue, we would need to develop a new business plan or curtail or cease
operations completely.
The auditors' report with respect to our financial statements for the fiscal
years ended December 31, 2006 and December 31, 2005 includes an explanatory
paragraph wherein they expressed substantial doubt about our ability to continue
as a going concern. The financial statements do not include any adjustment that
might result from the outcome of these uncertainties.
14
THE MARKET FOR SERVICES AND PRODUCTS IN THE SOLID WASTE PROCESSING AND RECYCLING
INDUSTRY IS COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The market for services and products in the solid waste processing industry is
highly competitive. Most of these competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than we have, and may be able to respond more quickly than we can to new or
changing opportunities and customer requirements. Also, our competitors have
greater name recognition and more extensive customer bases that they can
leverage to gain market share. These competitors are able to undertake more
extensive promotional activities, adopt more aggressive pricing policies and
offer more attractive terms to purchasers than we can, which could adversely
affect our competitive position and business. Likewise, the selling cycle for
developing, permitting, financing and constructing new plants is long and will
consume considerable resources. We may be unable to develop additional projects
in a timely manner which may adversely affect our business.
WE MAY ENGAGE IN STRATEGIC TRANSACTIONS THAT MAY FAIL TO ENHANCE STOCKHOLDER
VALUE.
We may investigate potential strategic transactions, including the
acquisitions of products, technologies and companies, and other alternatives
within and outside of our industry with the goal of maximizing stockholder
value. We may never complete a strategic transaction(s) and in the event that we
do complete a strategic transaction(s), it may not be consummated on terms
favorable to us. Further, such transactions may impair stockholder value or
otherwise adversely affect our business. Any such transaction may require us to
incur non-recurring or other charges and may pose significant integration
challenges and/or management and business disruptions, any of which could harm
our results of operation and business prospects.
WE MAY NOT BE ABLE TO OBTAIN OR SUSTAIN MARKET ACCEPTANCE FOR OUR SERVICES AND
PRODUCTS.
We do not intend to engage in advertising during our development phase. Failure
to establish a brand and presence in the marketplace on a timely basis could
adversely affect our financial condition and operating results. We may fail to
successfully complete the development and introduction of new products or
product enhancements, and new products that we develop may not achieve
acceptance in the marketplace. We may also fail to develop and deploy new
products and product enhancements on a timely basis. Any of the foregoing could
require us to revise our business plan, raise additional capital or curtail
operations.
OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends, to a significant degree, upon the protection of our, and
that of our licensors', proprietary technologies. We exploit our technology
through owning the patent itself and through a sublicense of the patent from
Bio-Products International, Inc (BPI). BPI licenses this patent from the patent
owner, which had been, until recently, the University of Alabama in Huntsville
(UAH). Although we recently acquired ownership of the patent from the
University, our use of the technology is still subject to our sublicense with
BPI. Additionally, the need to pursue additional protections for our
intellectual property is likely as new products and techniques are developed and
as existing products are enhanced, and such protections may not be attained in a
timely manner or at all.
Legal fees and other expenses necessary to obtain and maintain appropriate
patent protection in the U.S. could be material. Insufficient funding may
inhibit our ability to obtain and maintain such protection. Additionally, if we
must resort to legal proceedings to enforce our intellectual property rights, or
those of our licensors', the proceedings could be burdensome and expensive and
could involve a high degree of risk to our proprietary rights if we are
unsuccessful in, or cannot afford to pursue, such proceedings.
15
We also rely on trade secrets and contract law to protect certain of our
proprietary technology. If any of our contracts is breached or if any of our
trade secrets becomes known or independently discovered by third parties, we
could face significant increased competition and our business could be harmed.
If other persons independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how, the result could be significant increased competition for our
services. In addition, we may be required to obtain licenses to patents or other
proprietary rights from third parties. If we are unable to obtain such licenses
on acceptable terms, we may encounter delays in product development or find that
the development, manufacture or sale of products requiring such licenses could
be foreclosed.
IF WE DO NOT OBTAIN A SIGNIFICANT SUPPLY OF SOLID WASTE AND TIMELY PAYMENT FOR
THAT SOLID WASTE, OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
If we do not obtain a supply of solid waste at quantities and qualities that are
sufficient to operate our proposed facilities at the expected operating levels,
or if third parties do not promptly pay for the solid waste they deliver to us
for processing, our financial condition and operating results could be adversely
affected. Additionally, our current waste supply agreement does not include a
specification requirement for the composition of materials in our incoming waste
stream. One or more of the following factors could impact the price and supply
of waste:
o defaults by waste suppliers under their contracts;
o changing composition of the material in the waste stream,
including the percentage of paper fiber;
o a decline in recyclables in the solid waste supply due to
increased recovery by material recovery facilities;
o composting of municipal solid waste;
o incineration of municipal solid waste;
o legal prohibitions against processing of certain types of solid
waste in our facilities; or
o increased competition from landfills and increasingly automated
recycling facilities.
OUR REVENUES AND RESULTS OF OPERATIONS WILL FLUCTUATE.
Our revenues and results of operations will vary from quarter to quarter in the
future. A number of factors, many of which are outside our control, may cause
variations in our results of operations, including:
o demand and price for our products;
o the timing and recognition of product sales;
o unexpected delays in developing and introducing products;
o unexpected delays in building and permitting our processing
facilities;
o unexpected downtime in operations to maintain or improve
equipment;
16
o increased expenses, whether related to plant operations,
marketing, product development or administration or otherwise;
o the mix of revenues derived from products;
o the hiring, retention and utilization of personnel;
o waste collection companies being impacted by seasonal and cyclical
changes and facing competition, work stoppages and environmental
issues that could adversely affect our business and operations;
o general economic factors; and
o changes in the revenue recognition policies required by generally
accepted accounting principles.
THE DEMAND FOR OUR SERVICES MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL LAWS AND
REGULATIONS.
To a certain extent, demand for our services is created by environmental laws
and regulations, including (a) requirements to safely dispose of RMSW by various
methods including in properly constructed and operated landfills, (b)
requirements to attempt to recycle a certain proportion of RMSW, and (c)
requirements that businesses operating in the solid waste industry comply with
applicable land, water and air emission regulations. The lack of environmental
laws and regulations, or the loosening or non-enforcement of existing
regulations, would decrease demand for our services and may have a material
adverse affect on our business.
THE LOSS OF KEY EXECUTIVES AND THE FAILURE TO ATTRACT QUALIFIED MANAGEMENT COULD
LIMIT OUR GROWTH AND NEGATIVELY IMPACT OUR OPERATIONS.
We depend highly upon our senior management team. We will continue to depend on
operations management personnel with waste handling experience. At this time, we
do not know the availability of such experienced management personnel or how
much it may cost to attract and retain such personnel. The loss of the services
of any member of senior management or the inability to hire experienced
operations management personnel could have a material adverse effect on our
operations and financial condition. We do not have an employment agreement with
our CEO.
OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY CHANGING RESALE PRICES OR
MARKET REQUIREMENTS FOR RECYCLABLE MATERIALS.
The resale price for our recycled products, including our unbleached fiber
product, aluminum, and steel, will be tied to commodity pricing. Our results of
operations may be adversely affected by changing resale prices or market
requirements for these recyclable materials. The resale, and market demand for,
these materials can be volatile due to numerous factors beyond our control,
which may cause significant variability in our period-to-period results of
operations.
ENVIRONMENTAL REGULATIONS AND LITIGATION COULD SUBJECT US TO FINES, PENALTIES,
JUDGMENTS AND LIMITATIONS ON OUR ABILITY TO EXPAND.
We are subject to potential liability and restrictions under environmental laws,
including those relating to handling, recycling, treatment, storage of wastes,
discharges to air and water, and the remediation of contaminated soil, surface
water and groundwater. We will also be subject to liability under laws relating
to the production of ethanol, electricity and other energy products that we may
produce in the future. The waste management industry has been, and will continue
to be, subject to significant regulation, including permitting and related
financial assurance requirements, as well as to attempts to further regulate the
industry through new legislation. Our business is subject to a wide range of
federal, state and, in some cases, local environmental, odor and noise and land
use restrictions and regulations. If we are not able to comply with the
17
requirements that apply to a particular facility or if we operate without
necessary approvals, we could be subject to civil, and possibly criminal, fines
and penalties, and we may be required to spend substantial capital to bring an
operation into compliance or to temporarily or permanently discontinue
operations, and/or take corrective actions. We may not have sufficient insurance
coverage for our environmental liabilities. Those costs or actions could be
significant to us and significantly impact our results of operations, as well as
our available capital.
In addition to the costs of complying with environmental laws and regulations,
if governmental agencies or private parties brought environmental litigation
against us, we would likely incur substantial costs in defending against such
actions. We may be, in the future, a defendant in lawsuits brought by parties
alleging environmental damage, personal injury, and/or property damage. A
judgment against us, or a settlement by us, could harm our business, our
prospects and our reputation.
FUTURE COSTS UNDER ENVIRONMENTAL, HEALTH AND SAFETY LAWS MAY ADVERSELY AFFECT
OUR BUSINESS.
We could be liable if our operations cause environmental damage to our
properties or to the property of other landowners, particularly as a result of
the contamination of drinking water sources or soil. Under current law, we could
even be held liable for damage caused by conditions that existed before we
acquired the assets or operations involved. Any substantial liability for
environmental damage could have a material adverse effect on our financial
condition, results of operations and cash flows.
WE MAY BE UNABLE TO OBTAIN OR RETAIN PERMITS THAT ARE REQUIRED TO OPERATE OUR
BUSINESS.
Our failure to obtain or retain the permits required to operate our initial
facility or additional facilities we may seek to construct would have a material
negative effect on our business operations. Permits to operate waste processing
facilities have become increasingly difficult and expensive to obtain and retain
as a result of many factors including numerous hearings and compliance with
zoning, environmental and other regulatory measures. The granting of these
permits is also often subject to resistance from citizen or other groups and
other political pressures. Our failure to obtain or retain the required permits
to operate our facilities could have a material negative effect on our future
results of operations.
WE MAY BE EXPOSED TO SUBSTANTIAL LIABILITY CLAIMS IN THE ORDINARY COURSE OF OUR
BUSINESS.
Since our personnel are expected to routinely handle solid waste materials, we
may be subject to liability claims by employees, customers and third parties. We
currently have liability insurance in place, but such insurance may not be
adequate to cover claims asserted against us. Also, we may be unable to maintain
or purchase such insurance in the future. Either of these events could have a
material adverse affect on our financial condition or our ability to raise
additional capital.
CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHTS MAY ADVERSELY AFFECT OUR BUSINESS.
If any of our products or processes is found to violate third party intellectual
property rights, we may be required to re-engineer one or more of those products
or processes or seek to obtain licenses from third parties to continue offering
our products or processes without substantial re-engineering, and such efforts
may not be successful. We may be unable to obtain such licenses at a reasonable
cost, if at all. Failure to do so could result in significant curtailment of our
operations.
Future patents may be issued to third parties upon which our technology may
infringe. We may incur substantial costs in defending against claims under any
such patents. Furthermore, parties making such claims may be able to obtain
injunctive or other equitable relief, which effectively could block our ability
to further develop or commercialize some or all of our products or services, and
18
could result in the award of substantial damages against us. In the event of a
claim of infringement, we may be required to obtain one or more licenses from
third parties. We may be unable to obtain such licenses at a reasonable cost, if
at all. Defense of any lawsuit or failure to obtain any such license could have
a material adverse effect on our business and results of operations.
OUR SUB-LICENSE AGREEMENT WITH BIO-PRODUCTS INTERNATIONAL, INC. IS NOT EXCLUSIVE
IN ALL RESPECTS AND IMPOSES CERTAIN REQUIREMENTS ON US TO MAINTAIN EXCLUSIVITY
IN SPECIFIED APPLICATIONS.
Our sub-license agreement with BPI generally grants us the exclusive rights to
exploit the technology covered by the license in the United States with respect
to most applications. We do not, however, have the exclusive right to
applications in which the cellulose biomass product of waste, including
municipal solid waste, processed utilizing the licensed technology is either
used directly as a fuel source or converted into an end product for energy
production (although BPI agreed to grant us a sub-license for such applications
on a site-specific basis upon our request). Accordingly, BPI may grant third
parties the right to use the technology for the production of marketable solid
combustion fuel end products. In order to maintain exclusivity with respect to
the other applications, we are required to continue to improve our initial
facility in Anaheim, California on a regular schedule or construct new
facilities. Our failure to maintain exclusivity of the sub-license could have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY NOT BE ABLE TO IMPLEMENT SECTION 404 OF THE SARBANES-OXLEY ACT ON A
TIMELY BASIS.
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules
generally requiring each public company to include a report of management on the
company's internal controls over financial reporting in its annual report on
Form 10-K that contains an assessment by management of the effectiveness of the
company's internal controls over financial reporting. In addition, the company's
independent registered accounting firm must attest to and report on management's
assessment of the effectiveness of the company's internal controls over
financial reporting. The requirement to include such a report will first apply
to our annual report on Form 10-K for the fiscal year ending December 31, 2008.
We have not yet developed a Section 404 implementation plan. We have in the past
discovered, and may in the future discover, areas of our internal controls that
need improvement. How companies should be implementing these new requirements
including internal control reforms to comply with Section 404's requirements and
how independent auditors will apply these requirements and test companies'
internal controls, is still reasonably uncertain.
We can not assure you that we will be able to complete a Section 404 plan on a
timely basis. Additionally, upon completion of a Section 404 plan, we may not be
able to conclude that our internal controls are effective, or in the event that
we conclude that our internal controls are effective, our independent
accountants may disagree with our assessment and may issue a report that is
qualified. Any failure to implement required new or improved controls, or
difficulties encountered in their implementation, could negatively affect our
operating results or cause us to fail to meet our reporting obligations.
WE MAY BECOME SUBJECT TO LIABILITY AND INCUR INCREASED EXPENDITURES AS A RESULT
OF THE RESTATEMENT OF OUR FINANCIAL STATEMENTS.
We previously restated our financial statements for the years ended December 31,
2005 and 2004 and the quarters ended March 31, 2005, June 30, 2005, and
September 30, 2005, to correct certain accounting errors in the original
financial statements related to the fair value of options and warrants, the
relative value of senior secured debt and the related warrants and the
classification of redeemable preferred stock.
The principal accounting errors reflected in such financial statements that led
to the restatements were as follows:
19
1. FAIR VALUE OF OPTIONS AND WARRANTS: In order to properly account for
the expense associated with the issuance of options and warrants, we are
required to determine the fair value of these securities. In determining this
value we undertook a "Black Scholes" analysis, a method of valuation that takes
into account the expected volatility of the stock underlying the convertible
securities being valued. Because at the time of this valuation we had no stock
trading history as a company with the operations of Old WWT (i.e. all of the
trading had been as VPTI, a company with no operations), in determining expected
volatility, we used the trading prices of a representative sample of companies
within our industry as opposed to VPTI's trading history.
Based on our review of current practices in applying the
applicable accounting guidelines and further review of the authoritative
accounting literature for new public companies, we concluded that the use of a
volatility factor more consistent with our stage of life cycle and financial
leverage would be more appropriate than a volatility factor based on the trading
of shares of companies within our industry. We also changed the price used in
calculating the fair value of the warrants issued in connection with the private
placement of our Series A Preferred Stock from the price such shares were
actually sold at to the quoted market price of our common stock as of the
closing of such issuance. These changes affected primarily the recorded value on
our balance sheet of debt offering costs, patent and licenses, senior secured
debt, redeemable preferred stock, warrant liability, additional paid in capital
and deficit accumulated during the development stage.
For the year ended December 31, 2005, these changes resulted
in a $250,507 increase in general and administrative expense and a $323,450
increase in fair value of warrant liabilities resulting in a $72,943 net
decrease in our net loss for the year. In addition, the amortization of
preferred stock warrants, offering costs and beneficial conversion feature
classified similar to preferred stock dividends increased by $491,939.
2. RELATIVE FAIR VALUE: In November 2005 we completed a private
placement of senior debt securities with detachable warrants. In accounting for
this transaction, we discounted the recorded value of the senior debt securities
by an amount equal to the fair value of the warrants. Upon further review of the
applicable accounting literature, we determined that we should have discounted
the senior debt for the "relative fair value" of the warrants rather than the
"fair value" of the warrants. Although this had the effect of overstating the
discount on the senior debt at December 31, 2005 by approximately $235,000, the
change had no impact on our statement of operations for 2005.
3. PREFERRED STOCK: Our preferred stock had been classified as a
liability because it is redeemable at the end of five years, at the option of
the holders. Upon further review of authoritative literature, we determined that
our preferred stock should have been classified as "mezzanine equity" rather
than as a liability. This change had no impact on our statement of operations
for 2005.
Based on our assessment of the foregoing, we concluded that the factors that
resulted in the restatements were caused by a lack of consistent authoritative
guidance and not a failure to detect and assess the issues and collect relevant
data.
The restatement of these previously issued financial statements could expose us
to legal and regulatory risk, such as securities class action or other lawsuits
that may be brought against us or our officers and directors, or inquiries,
proceedings or actions from United States federal or state regulatory agencies.
The defense of any such actions could cause the diversion of management's
attention and resources, and we could be required to pay damages to settle such
actions if any such actions are not resolved in our favor. Even if resolved in
our favor, such actions could cause us to incur significant legal and other
expenses. Moreover, we may be the subject of negative publicity focusing on the
financial statement inaccuracies and resulting restatements and negative
reactions from our stockholders or others with which we do business. The
occurrence of any of the foregoing could harm our business and reputation and
cause the price of our securities to decline.
20
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
As of March 27, 2007, we had outstanding 26,257,122 shares of common stock and
approximately 17.0 million shares of common stock issuable upon conversion of
our outstanding preferred stock, as well as options and warrants to acquire up
to an additional approximately 7.0 million shares of common stock. A substantial
portion of these shares are either freely tradable shares or eligible for public
resale under Rule 144. In addition, we currently have an effective registration
statement on file with the SEC which covers the resale of approximately 32
million shares of our common stock (which includes shares of common stock
issuable upon conversion of our preferred stock). Sales of the shares subject to
Rule 144 or the registration statement, or the possibility that substantial
amounts of common stock may be sold in the public market under Rule 144 or the
registration statement, may adversely affect prevailing market prices for our
common stock and could impair our ability to raise capital through the sale of
our equity securities.
THE LIMITED MARKET FOR OUR COMMON STOCK MAY ADVERSELY AFFECT TRADING PRICES OR
THE ABILITY OF A SHAREHOLDER TO SELL OUR SHARES IN THE PUBLIC MARKET.
Our common stock is thinly-traded on the OTC Bulletin Board, meaning that the
number of persons interested in purchasing our common stock at or near ask
prices at any given time may be relatively small or non-existent. This situation
is attributable to a number of factors, including that we are a small company
that is relatively unknown to stock analysts, stock brokers, institutional
investors and others in the investment community that generate or influence
sales volume, and that even if we came to the attention of such persons, they
tend to be risk-averse and would likely be reluctant to follow an unproven,
early stage company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price.
SHAREHOLDERS MAY HAVE DIFFICULTY SELLING THEIR SHARES BECAUSE OUR SHARES ARE
DEEMED "PENNY STOCKS."
Since our common stock is not listed on the Nasdaq Capital Market, if the
trading price of our common stock remains below $5.00 per share, trading in our
common stock will continue to be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally defined as an investor with a net worth in
excess of $1,000,000 or annual income exceeding $200,000 individually or
$300,000 together with a spouse). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
the sale. The broker-dealer also must disclose the commissions payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Such information
must be provided to the customer orally or in writing before or with the written
confirmation of trade sent to the customer. Monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. The additional burdens
imposed upon broker-dealers by such requirements could discourage broker-dealers
from effecting transactions in our common stock, which could severely limit the
market liquidity of our common stock and the ability of holders of our common
stock to sell their shares.
21
THE HOLDERS OF OUR PREFERRED STOCK HAVE CERTAIN RIGHTS THAT COULD ADVERSELY
AFFECT THE VALUE OF OUR COMMON STOCK.
Under our articles of incorporation, our board of directors has the power,
without further action by the holders of our common stock, to designate the
relative rights and preferences of the preferred stock, and to issue the
preferred stock in one or more series as designated by our board of directors.
The designation of rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, any of which may be dilutive of the interest of the holders of our
common stock or the preferred stock of any other series. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control of our company without further stockholder action and may adversely
affect the rights and powers, including voting rights, of the holders of our
common stock.
We currently have two such series of preferred stock, designated as "8% Series A
Cumulative Redeemable Convertible Participating Preferred Stock" and "8% Series
B Cumulative Redeemable Convertible Participating Preferred Stock." The rights,
preferences and privileges of our preferred stock are described under note 9 to
our financial statements.
OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES HOLD A SUBSTANTIAL AMOUNT
OF OUR COMMON STOCK AND MAY BE ABLE TO PREVENT OTHER STOCKHOLDERS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Our directors and executive officers and their affiliates beneficially own a
substantial amount of our outstanding common stock. These stockholders, if they
were to act together, would likely be able to direct the outcome of matters
requiring approval of the stockholders, including the election of our directors
and other corporate actions such as:
o our merger with or into another company;
o a sale of substantially all of our assets; and
o amendments to our articles of incorporation.
The decisions of these stockholders may conflict with our interests or those of
our other stockholders.
In addition, the holders of our Series A Preferred Stock currently have the
right, upon 30 days' prior notice to us, to appoint, as a class, a majority of
the members of our Board of Directors. This right terminates upon the first to
occur of (i) the Operational Date (generally defined as if and when our initial
plant in Anaheim, California generates total operating cash flow of at least
$672,000 for any consecutive three month period) and (ii) the date on which less
than 3.0 million shares of Series A Preferred Stock are outstanding.
THE MARKET PRICE OF OUR STOCK MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY.
The market price of our common stock is likely to be volatile and could
fluctuate widely in response to many factors, including:
o actual or anticipated variations in our operating results due to
the level of development expenses and other factors;
o developments with respect to patents or proprietary rights;
o announcements of technological innovations by us or our
competitors;
o announcements of new products or new contracts by us or our
competitors;
22
o changes in financial estimates by securities analysts and whether
our earnings meet or exceed such estimates;
o conditions and trends in the waste industry and other industries;
o changing environmental standards;
o new accounting standards;
o general economic, political and market conditions and other
factors; and
o the occurrence of any of the other risks described in this
prospectus.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are in San Diego, California, where we
lease approximately 1,400 square feet under a lease scheduled to expire on
September 30, 2008, with monthly rental payments of $4,343.
We recently completed construction of a plant on leased real property
in Anaheim, California, which covers an approximately 30,000 square foot
building and expires in July 2014. Base rent under this lease is $15,900 per
month, subject to annual cost-of-living adjustments.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for a vote
during the fourth quarter of the fiscal year covered by this report.
23
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock has been traded on the OTC Bulletin Board over-the-counter
market since August 24, 2004 under the symbol "WDWT." Prior to the merger in
which World Waste Technologies, Inc. became our wholly owned subsidiary on
August 24, 2004, our common stock was listed on the OTC Bulletin Board
over-the-counter market under the symbol "VPTI."
There was little trading in our common stock prior to the merger on August 24,
2004 and there has only been limited trading since then. Prior to the merger,
trading in our common stock was not necessarily based on our company's
operations or prospects, and trading since the merger also may not be fully
reflective of those factors. On March 25, 2004, the controlling stockholder of
VPTI approved a one-for-60 reverse split of our common stock to be effectuated
upon the closing of the merger between VPTI and Old WWT. The reverse stock split
became effective at the close of business on August 24, 2004. The following
table sets forth, for the periods indicated, the high and low closing bid prices
for our Common Stock on the OTC Bulletin Board, for the quarters presented. The
bid prices have been adjusted to reflect the reverse stock split. Bid prices
represent inter-dealer quotations without adjustments for markups, markdowns,
and commissions, and may not represent actual transactions:
QUARTER ENDING HIGH LOW
------------------------- ----------- ----------
FISCAL 2004
March 31, 2004 $9.00 $0.60
June 30, 2004 $11.40 $4.20
September 30, 2004 $7.00 $2.50
December 31, 2004 $4.85 $3.20
FISCAL 2005
March 31, 2005 $4.90 $2.80
June 30, 2005 $5.50 $2.80
September 30, 2005 $4.55 $2.10
December 31, 2005 $3.50 $2.15
FISCAL 2006
March 31, 2006 $4.07 $2.50
June 30, 2006 $6.20 $2.90
September 30, 2006 $4.16 $2.18
December 31, 2006 $2.70 $1.41
HOLDERS
As of March 27, 2007 there were approximately 785 holders of record of our
common stock, not including holders who hold their shares in street name.
24
DIVIDENDS
We have not paid any dividends on our common stock to date and do not anticipate
that we will be paying dividends in the foreseeable future. Any payment of cash
dividends on our common stock in the future will be dependent upon the amount of
funds legally available, our earnings, if any, our financial condition, our
anticipated capital requirements and other factors that our Board of Directors
may think are relevant. However, we currently intend for the foreseeable future
to follow a policy of retaining all of our earnings, if any, to finance the
development and expansion of our business and, therefore, do not expect to pay
any dividends on our common stock in the foreseeable future. Additionally, the
terms of our preferred stock impose restrictions on our ability to pay
dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data. You
should read this information in conjunction with our financial statements,
including the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report. The selected statement of operations data for each of the fiscal years
ended December 31, 2006, December 31, 2005, and December 31, 2004 and the
summary consolidated balance sheet dated as of December 31, 2006 and December
31, 2005 have been derived from our audited consolidated financial statements
included elsewhere in this report. The selected statement of operations data for
the period from June 18, 2002 (inception) to December 31, 2002 and for the
fiscal year ended December 31, 2003 and the summary consolidated balance sheet
data as of December 31, 2003 and December 31, 2004 have been derived from our
audited consolidated financial statements not included in this report.
For the Year Ending June 18, 2002
December 31, inception) to
---------------------------------------------- December 31,
Selected Statement of Operations Data: 2006 2005 2004 2003 2002*
------------ ------------ ------------ ------------ ------------
Gross Revenue $ 93,784 $ -- $ -- $ -- $ --
Loss from Operations (18,701,625)** (3,851,814) (2,430,994) (741,279) (346,590)
Interest Income (Expense) 107,810 63,485 (65,194) (63,326) (12,773)
Change in warrant liability 1,079,721 709,412 -- -- --
Financing transaction (expense) (7,442,426) -- -- -- --
Net Loss $(24,956,520) $ (3,078,917) $ (2,496,188) $ (804,605) $ (359,363)
Preferred Stock Dividend and
amortization of preferred stock
warrants, offering costs and the
beneficial conversion feature (8,638,271) (1,234,473) -- -- --
Net Loss available to common
shareholders (33,594,791)*** (4,313,390) (2,496,188) -- --
Basic and diluted Net Loss available to
common shareholders per share $ (1.34) $ (0.18) $ (0.15) $ (0.09) $ (0.04)
* Approximately $67,526 in consulting and travel expenses incurred prior to inception of the business on June 18, 2002 are
not included.
** Includes a $9,737,344 charge for impairment of assets.
*** Cash used in operating activities was $5,370,000; see the Cash Flow Statement.
25
As of December 31,
----------------------------------------
2006 2005 2004 2003
------- ------- ------- -------
Consolidated Balance Sheet Data: (in thousands)
Cash $14,331 $ 2,864 $ 1,129 $ 167
Working capital 13,586 1,170 (533) (1,390)
Total fixed assets 9,268 17,021 4,999 29
Total assets 25,088 21,182 6,892 578
Long-term liabilities 80 3,810 17 22
Redeemable preferred stock 14,507 7,097
Total stockholders' equity 9,569 7,945 5,120 (1,033)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion, as well as information contained elsewhere in this
report, contain "forward-looking statements." These statements include
statements regarding the intent, belief or current expectations of us, our
directors or our officers with respect to, among other things: anticipated
financial or operating results, financial projections, business prospects,
future product performance and other matters that are not historical facts. The
success of our business operations is dependent on factors such as the impact of
competitive products, product development, commercialization and technology
difficulties, the results of financing efforts and the effectiveness of our
marketing strategies, and general competitive and economic conditions.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those
projected in the forward-looking statements as a result of various factors,
including those set forth in this report under "Risk Factors."
OVERVIEW
We were formed as a result of two mergers that occurred in 2004. First, in March
2004, World Waste of America, Inc. ("WWA") merged with and into a wholly owned
subsidiary of Waste Solutions, Inc. ("WSI"), a California corporation. Cagan
McAfee Capital Partners and its affiliates were the controlling shareholders of
WSI. As a result of this merger, WSI continued as the surviving corporation,
assumed the operations and business plan of WWA, the stockholders of WWA became
stockholders of WSI, and WSI changed its name to World Waste Technologies, Inc.
("Old WWT").
In March 2004, Old WWT entered into an Agreement and Plan of Reorganization with
Voice Powered Technologies International, Inc., a California corporation
("VPTI"), to merge with and into a wholly owned subsidiary of VPTI. VPTI was a
publicly traded company trading under the stock symbol VPTI.OB. VPTI had no
material assets, liabilities or operations. The merger of Old WWT with VPTI's
wholly owned subsidiary was completed on August 24, 2004. Pursuant to the
merger, Old WWT's shareholders became the holders of approximately 95% of the
outstanding shares of VPTI. Upon completion of this merger, VPTI changed its
name to World Waste Technologies, Inc. VPTI was incorporated on June 21, 1985
and provided voice recognition and voice activated products. We currently do not
plan to conduct any business other than operations heretofore conducted or
contemplated to be conducted by WWT. Because the shareholders of Old WWT became
the controlling shareholders of VPTI after the merger, Old WWT was treated as
the acquirer for accounting purposes, and therefore the transaction was
accounted for as a reverse merger. Accordingly, for accounting purposes, the
historical financial statements presented are those of Old WWT. Additionally,
the prior operating results of VPTI are not indicative of our future operations,
and none of the assets or liabilities on our balance sheet as of December 31,
2006 relate to VPTI prior to the merger.
26
Since the formation of WWA in 2002, our efforts have been principally devoted to
research and development activities, construction of our initial facility,
raising capital, and recruiting additional personnel and advisors. To date, we
have marketed and sold only a limited amount of product and have not generated
any significant revenues, therefore, the Company continues to report as a
Development Stage Company.
PLAN OF OPERATIONS
COMPANY OVERVIEW
We are a development stage company formed to develop technologies designed to
profitably transform municipal solid waste (MSW) into usable commodities and
products such as ethanol, electricity and paper pulp, and to design, build, own
and operate facilities that utilize such technologies. We recently completed
construction of our first facility in Anaheim, California, located on the campus
of the regional transfer facility and Material Recovery Facility (MRF) of
Taormina Industries, a wholly owned subsidiary of Republic Services, Inc.
Our Anaheim facility has been in a limited startup phase and has successfully
transformed MSW to produce small quantities of paper pulp, which we have sold to
paper manufacturers. We are now utilizing the facility to continue improving our
pulp technology and for research and development on additional technologies to
create renewable energy products such as ethanol and electricity.
Although our Anaheim facility has successfully transformed MSW to produce paper
pulp, we recently determined, based on a number of factors (including the
prohibitive cost of making necessary capital improvements), that our initial
facility could not under existing circumstances operate profitably on a
commercial scale. Accordingly, we have reduced our work force and are running
the plant on an intermittent basis so as to avoid the necessity of making
certain capital expenditures. Our revised strategy is to utilize the facility
solely to continue improving our pulp technology and to conduct research and
development activities as we strive to develop additional technologies designed
to transform MSW into renewable energy products such as ethanol and co-generated
renewable electricity. Because these additional capital investments would be
necessary in order to potentially recover the carrying amount of the plant
assets through projected future cash flows from operations, we recorded a
non-cash asset impairment charge of approximately $9.7 million at December 31,
2006, reflecting the carrying value of a portion of our plant assets. Please see
note 3 to our consolidated financial statements for a more detailed description
of this impairment charge.
We anticipate that our technologies generally will position us to generate three
distinct revenue streams: (a) "tipping" fees charged to the entities that supply
us with MSW, (b) recycling revenue from the sale of commodity recyclables (such
as aluminum, tin, steel, and plastics) that our process recovers and which
otherwise would be interned in landfills, and (c) revenue from the sale of our
end product, anticipated to be either ethanol, electricity, or paper pulp,
depending on which technology is employed, which in turn will depend upon a
number of factors including local market demand. We believe that the fact that
we are able to receive fees from the entities that provide us with "feedstock"
(i.e. waste) is an important and beneficial characteristic of our process and
our design, build, own and operate business model.
According to information currently posted on the National Solid Waste Management
Association's website (the most recent publicly available information on this
topic that we are aware of), the MSW industry in the United States, the primary
market that we plan to serve, accounts for approximately $43 billion in
spending. We believe that our existing and future technologies will potentially
offer benefits to a number of different constituencies, including solid waste
companies (by reducing transportation costs and increasing diversion of waste
from landfills), communities and regulators (by increasing recycling rates,
lengthening landfill life, gaining a renewable energy source, and reducing
traffic), utilities and ethanol distributors (by increasing renewable content in
energy production and diversifying ethanol supply away from corn-based
production), and environmentally conscious consumers (by decreasing reliance on
hydrocarbon-based power, reducing greenhouse gases from landfill methane and
truck traffic, and creating ethanol from non-grain sources).
27
We believe that our process will compliment the existing investment made by
communities to create and expand curbside recycling programs by targeting the
MSW that is still going to the landfill (the "residual MSW", or "RMSW"). RMSW
may have already been processed by an MRF, and often contains material that has
historically been the most difficult portion of MSW to recycle.
OUR ANAHEIM FACILITY
At our Anaheim facility, we use a rotating pressure vessel to combine steam,
heat, pressure and agitation to change the waste's physical composition. The
process converts paper, cardboard, and paper packaging found in RMSW into a
cellulose biomass fiber-containing material. The cellulose biomass can be
screened and cleaned using conventional and non-conventional pulp recycling
equipment, and the resulting unbleached fiber, known as "wetlap" pulp, can be
used as a raw material for making new lower grade paper stocks such as
linerboard, corrugating medium, and packaging.
We have entered into a long-term contract with Taormina to supply us with RMSW.
We began processing RMSW at our Anaheim facility on a limited start-up basis
during the second quarter of 2006, and since then have processed over 2,500 tons
of RMSW through the facility and the resulting cellulose biomass has been
refined into over 400 tons of wetlap pulp. This wetlap product has been supplied
to several cardboard and paper manufacturers with operations in Southern
California. We have also sold a limited amount of the other inorganic,
recyclable materials captured by our process including aluminum, steel, tin and
plastics, into various commodity markets.
Although our customers have provided positive feedback on the pulp quality and
specifications and have requested continued shipments, we recently became aware
of several issues with our process, including its creation of an unexpectedly
high level of biological oxygen demand (BOD) from organic wastes in the
wastewater from the pulp screening and cleaning process, and design issues
related to the steam classification vessels. These issues would require a
significant level of reengineering and repairs to put us in a position to
potentially conduct sustained and profitable operations on a commercial level at
our current facility.
Due to, among other factors, the significant costs of additional capital
improvements required at our Anaheim plant that would be necessary in order to
address the BOD issue, we recently decided not to make these improvements for
the pulp process or to actively pursue the creation or sale of wetlap pulp
generated at this plant. Rather, we plan to expend our resources on analyzing
the data gathered through the plant's limited operation and refining those
lessons learned from the design, construction, commissioning and operation of
the plant. We will focus our cash spending on the development of additional
larger scale facilities and on the development of our renewable energy platform
which we believe holds the potential for better returns than investing
additional capital in a small scale facility. Accordingly, we recently reduced
our workforce and began to run the plant on an intermittent basis for process
improvement trials, technology demonstration, product development and other
research and development initiatives, including as relates to the production of
ethanol and electricity. We expect to continue to use the steam classification
assets at the Anaheim facility in a research mode in an effort to develop
ethanol, electricity and pulp opportunities until such time, if ever, as we can
develop or acquire the technology to enable us to operate the plant profitably.
Based on our research and development, including our accumulated experience from
operating the Anaheim plant, we believe the necessary characteristics for the
successful development of additional wetlap-based MSW conversion facilities
include: a relatively high volume of MSW, larger physical plant enabling a
larger scale operation, a desire by the community to increase recycling rates to
minimize the amount of this waste disposed of in landfills, feedstock
composition which includes a higher amount of paper products, a fully scoped
on-site water treatment facility, and higher landfill tipping fees than we
currently receive in Anaheim, California. We plan to continue to conduct
business development discussions with various paper and solid waste companies
and government agencies to determine where the proper combination of operating
characteristics can be achieved to pursue a larger scale wetlap production
facility in future locations.
28
ETHANOL AND ELECTRICITY OPPORTUNITIES
We recently began pursuing the development of various energy products which can
be produced from MSW. One process which we believe has potential for successful
commercialization involves using gasification technologies to produce a
synthetic gas (or "syngas") from wetlap or intermediate products in our process.
This syngas can be used to produce energy to drive a turbine or passed through a
catalyst environment to produce fuel grade alcohols, primarily ethanol. We
believe this same basic process can also be used to produce hydrogen for
industrial applications and fuel cells. In this area we recently filed a
provisional patent covering a process and certain conditions, which we believe
may maximize the yield of these alcohols. A by-product of catalyst process is a
residual producer gas that can be used for the beneficial co-generation of
renewable electricity. The syngas can be used to fire either a boiler driving a
steam turbine, or a gas-fired turbine, and thereby produce energy to reduce our
utility costs.
Also in the ethanol area, in addition to the above process for producing fuel
alcohols through gasification, we are investigating alternative pathways for
transforming our cellulose biomass product into ethanol using various acid and
enzymatic hydrolysis processes. We have produced small quantities of ethanol
through an intermediate acid hydrolysis process in the early trials and are
currently performing additional testing and engineering studies to determine the
economic feasibility of a commercial size plant based on the insights from our
research.
We recently established a Technical Advisory Board to assist us in advancing our
business of creating usable commodity products from MSW, particularly as it
pertains to developing our ethanol and electricity technologies.
You should read this discussion in conjunction with the selected historical
financial information and the financial statements and related notes included
elsewhere in this report.
REVERSE STOCK SPLIT
On March 25, 2004, VPTI's controlling stockholder approved a one-for-60 reverse
stock split of our common stock to be effectuated upon the closing of the merger
between VPTI and Old WWT, which became effective at the close of business on
August 24, 2004.
TRENDS IN OUR BUSINESS
The Resource Conservation and Recovery Act of 1991 requires landfills to install
expensive liners and other equipment to control leaching toxics. Due to the
increased costs and expertise required to run landfills under this Act, many
small, local landfills closed during the 1990's. Larger regional landfills were
built requiring increased logistics costs for the waste haulers.
In addition, state and federal governments have continued to increase the
pressure on the industry to improve their recycling percentages. California
currently mandates one of the highest standards in the United States by
requiring 50% of all incoming MSW to be diverted from landfills. We believe that
the trend in state law throughout the U.S. is to migrate toward this California
standard.
We expect that the resale price of our products, including wetlap pulp,
aluminum, steel, plastic, glass and tin will be tied to commodity markets. The
resale and market demand for these materials can be volatile, which can
significantly impact our results of operations. Due in part to increasing
demands for packaging material from China and India, the demand is expected to
increase in the future.
29
High prices for hydrocarbon-based fuels have led to increasing market interest
in renewable fuel sources such as ethanol. Investment into corn-based ethanol
production facilities is increasing in the U.S. Research and development
investment spending is also increasing for technologies and processes which can
convert cellulose biomass into ethanol and other fuels.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, bad debts, impairment of
long-lived assets, including finite lived intangible assets, accrued liabilities
and certain expenses. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates under
different assumptions or conditions.
Our significant accounting policies are summarized in note 3 to the accompanying
audited financial statements included in this report. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our 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 revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Company used estimates to perform
the undiscounted cash flow projections used in the impairment analysis of the
Anaheim plant assets, see Fixed Assets below. The estimates of future operating
costs and future revenues and plant alternations were derived from operating
results during the last nine months and results from research and development
activities.
REVENUE RECOGNITION
Revenue for receiving Municipal Solid Waste (MSW) is recognized when the MSW is
delivered. Revenue for products sold, such as unbleached fiber, metals and
aluminum, are recognized when the product is delivered to the customer.
All shipping and handling costs are accounted for as cost of goods sold.
INTANGIBLES
Intangible assets are recorded at cost. On May 1, 2006, pursuant to a Patent
Assignment Agreement and a Patent Assignment, both dated as of May 1, 2006, (the
"Patent Assignment Agreement and a Patent Assignment"), we completed the
purchase of all right, title and interest in United States Patent No. 6,306,248
(the "Patent") and related intellectual property, subject to existing licenses,
from the University of Alabama in Huntsville for $100,000 and 167,000 shares of
our unregistered common stock valued at approximately $698,000, based on the
market price of the stock on the date issued, May 1, 2006.
30
FIXED ASSETS
Machinery and equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful asset lives or for leasehold
improvements or equipment installed in the Anaheim plant, over the remaining
life of the lease, whichever is shorter.
We completed the construction of our initial plant in Anaheim, California early
in the second quarter of 2006. We capitalized all costs directly associated with
developing the plant, including interest and labor, throughout the construction
period. We placed into service and began depreciating the assets related to this
facility in the second quarter of 2006.
Our policy regarding fixed assets is to review such fixed assets for impairment
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. If the review indicates that intangible assets are not
recoverable (i.e. the carrying amounts are more than the future projected
undiscounted cash flows), their carrying amounts would be reduced to fair value.
The assets at the Anaheim plant are comprised of two basic technologies; the
front half of the plant consists of assets related to our core patented
technology related to "steam classification" and material separation and the
back half of the plant consist of assets related to screening and cleaning of
the cellulose biomass material to prepare it for sale to paper mills. During the
plant start up phase, we became aware of several issues, including the creation
of an unexpectedly high level of biological oxygen demand (BOD) from organic
wastes in the wastewater from the pulp screening and cleaning process, and
design issues related to the steam classification vessels. We recently decided
not to make the capital improvements necessary to the Anaheim plant's wetlap
process, or "back half," which we consider necessary in order to recover the
carrying amount of the wetlap plant assets through projected future undiscounted
cash flow from its operation. Consequently, we recorded a charge of $9,737,344
which represented the net carrying value of the wetlap process or back half
equipment. The charge was equal to the carry cost of the assets of the wetlap
process, net of accumulated depreciation. We did not record an impairment charge
for the steam classification equipment or front half of the plant because we
intend to use that equipment in research and development activities as part of
our development of alternative back end processes such as, but not limited to,
gasification and acid hydrolysis and because we also believe that by making
certain improvements to the plant, such as adding equipment for energy
co-generation, and changing the use of the cellulose biomass mass from the
wetlap process to another application, such as its use as a form of fuel, the
future undiscounted cash flow from its operations might cover the its
capitalized cost.
During 2007, we plan to operate primarily in the research and development mode.
Consequently, depreciation of the "steam classification" equipment may be
charged to research and development.
We capitalize leases in accordance with FASB 13.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
STOCK-BASED COMPENSATION
During the fourth quarter of 2004, we adopted SFAS No. 123 entitled, "Accounting
for Stock-Based Compensation" retroactively to our inception. Accordingly, we
have expensed the compensation cost for the options and warrants issued based on
their fair value at their grant dates. During the quarter ended March 31, 2006,
we adopted SFAS No. 123R, "Share Based Payments." The adoption had no material
effect on our financial statements.
31
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible preferred Stock which may be redeemable for cash at the
determination of the holder is classified as mezzanine equity, in accordance
with FAS 150, EITF Topic D 98 and ASR 268, and is shown net of discounts for
offering costs, warrant values and beneficial conversion features.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2006 AND 2005
We completed construction of our first facility in the second quarter of 2006.
During the second, third and fourth quarters of 2006, we have been commissioning
the equipment and performing plant start-up procedures.
REVENUES
During the year ended December 31, 2006, we recorded revenue of approximately
$94,000, from the sale of unbleached fiber, metals and aluminum separated from
the processed MSW during the start-up phase of our first facility in Anaheim,
California. Prior to the second quarter of 2006, we did not generate any
revenue.
EXPENSES
Operating expense during the year ended December 31, 2006 consisted of disposal
of rejects of $65,526, plant operating expenses of $2,720,922 and depreciation
of $1,843,615, which were related to costs incurred during the start-up phase of
our first facility in Anaheim, California and are not indicative of the plant
operating expense that we expect to incur going forward. Prior to the second
quarter of 2006, we had no operations and consequently no cost of plant
operating expense.
General and administrative expenses of $4,154,108 for the year ended December
31, 2006 increased by approximately $550,000 compared to the year end December
31, 2005, primarily due to increases in employee option expense due to grants
made to employees and directors in the fourth quarter of 2005 and legal and
accounting fees related to additional SEC filings during 2005.
During the fourth quarter of 2006, we decided not to make the capital
improvements necessary to the Anaheim plant's wetlap process which we consider
necessary in order to recover the carrying amount of the plant assets through
projected future undiscounted cash flow for its operation. Consequently, we
recorded a charge of $9,737,344 during 2006 for impairment of assets which
represented the net carrying value of the wetlap process equipment.
Interest income for the year ended December 31, 2006 of $107,810 was comprised
of interest income of approximately $482,000 due to the cash from the issuance
of our Series B Preferred Stock in May of 2006, partially offset by interest
expense $374,000 primarily from our senior debt that was issued in November 2005
and February 2006 and extinguished in May 2006.
Financing expense for the year ended December 31, 2006 was comprised of: a)
$1,647,250 attributable to the value of warrants issued to the holders of our
Series A Preferred Stock for their consent to issue additional senior secured
debt and their agreement to waive certain of their veto rights and contractual
rights to facilitate our next round of financing which occurred in the first
quarter of 2006; b) the unamortized warrant value and offering costs of
$1,593,758 related to our senior secured debt expensed upon the early
extinguishment of such debt which occurred in the second quarter of 2006; and c)
the change in the fair value of $4,201,418 of the conversion feature of our
Series A Preferred Stock due to the modification of its conversion price as a
result of the application of an anti-dilution adjustment and the change in fair
value of the associated warrants which occurred in the second quarter of 2006.
32
Change in fair value of warrant liability of a benefit of $1,079,721 relates to
the change in the fair value of warrants to purchase common stock issued with
registration rights as part of our Series A Preferred Stock offering in 2005.
The quarterly effect was as follows: first quarter charge of $120,154, second
quarter charge of $135,642, third quarter benefit of $831,297 and fourth quarter
benefit of $504,220. In accordance with SFAS 133 and EITF 00-19, the fair value
of the warrants is required to be recorded as a liability until we satisfy
specified registration requirements. The warrant liability was required to be
marked to market at the end of each reporting period. The registration statement
was declared effective on December 4, 2006, and therefore, after December 4,
2006 the warrants are no longer recorded as a liability.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2005 AND 2004
During 2005, we continued research on the licensed process and the intended use
of the products from that process, development of our business plan,
construction of our first facility in Anaheim, CA and capital raising
activities.
REVENUES
We did not generate any operating revenues in fiscal 2005 or 2004.
EXPENSES
General and administrative expenses increased by approximately $1.4 million in
2005 primarily due to increases in employee-related expenses, rent and
consulting fees. Employee-related expenses increased by approximately $1.0
million in 2005 due to salaries of approximately $650,000 related to the hiring
of additional staff as we prepared for the opening of our first facility,
amortization of employee stock option expense of approximately $350,000, travel
due to increased business activities of $90,000 and relocation expense related
to the hiring of additional staff of approximately $75,000. Rent increased by
approximately $122,000 due to the payment of 12 months' rent in 2005 versus only
four months' rent in 2004. Professional and consulting fees increased by
approximately $100,000 in 2005 due primarily to the costs associated with
complying with SEC reporting requirements as a result of becoming a reporting
company in August 2004.
INTEREST INCOME (EXPENSE)
Interest income (expense) changed by approximately $128,000, from an expense of
$65,000 in 2004 to income of $63,000 in 2005, primarily as a result of the cash
received and invested from the sale of our common stock, preferred stock and
senior debt.
CHANGE IN FAIR VALUE OF WARRANT LIABILITIES
Change in fair value of warrant liabilities of approximately $709,000 in 2005
relates to the fair value adjustment of warrants to purchase common stock issued
with registration rights as part of our preferred stock offering in 2005 in
accordance with SFAS 133 and EITF 00-19.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had cash on hand of approximately $14.3 million, which
is an increase of $11.5 million from December 31, 2005 of $2.8 million. During
fiscal 2006, we raised approximately $22.0 million from the issuance of Series B
Preferred Stock and Senior Secured Debt, net of offering costs of approximately
$2.4 million and the repayment of senior secured debt of approximately $2.8
million. We used cash during the year ended December 31, 2006 primarily for
start-up costs at our Anaheim facility of approximately $2.7 million and general
operating expenses of approximately $2.9 million and for the purchase of fixed
assets related to the completion of our first plant of approximately $4.9
million. We estimate that our cash will sustain operations through approximately
December 2008, based on our current expected burn rate, exclusive of any
significant costs to make substantial changes to our initial facility or
construct additional facilities, if we choose to do so.
33
Series B Redeemable Convertible Preferred Stock - In May 2006 we raised $19.9
million in cash from the sale of Series B Redeemable Convertible Preferred
Stock, net of offering costs of approximately $2.3 million and the repayment of
Senior Secured Debt of approximately $2.8 million. These funds were used in part
during 2006 approximately as follows: plant start-up and operating costs of $2.1
million, general administrative expenses of $1.5 million and equipment purchases
of $2.1 million.
CONTRACTUAL COMMITMENTS
As of December 31, 2006, the scheduled maturities of our long-term
contractual obligations were as follows:
Payments Due by Period
---------------------------------------------------------------------------
Less than After
1 year 1-3 Years 4-5 Years 5 Years Total
----------- ----------- ----------- ----------- -----------
Operating leases (for plant and office) $ 253,264 $ 441,381 $ 402,294 $ 519,628 $ 1,616,567
Capital leases (plant equipment) 45,615 80,351 -- -- 125,966
Redeemable Convertible Preferred Stock -- -- 52,960,000 -- 52,960,000
----------- ----------- ----------- ----------- -----------
Total $ 298,879 $ 521,732 $53,362,294 $ 519,628 $54,702,533
=========== =========== =========== =========== ===========
We are not a party to any off-balance sheet arrangements, and we do not engage
in trading activities involving non-exchange traded contracts. In addition, we
have no financial guarantees, debt or lease agreements or other arrangements
that could trigger a requirement for an early payment or that could change the
value of our assets.
We do not believe that inflation has had a material impact on our business or
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
FIN No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of
FASB Statement No. 109 Summary - On July 13, 2006, FASB Interpretation (FIN) No.
48, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The new FASB standard also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. As we provide for a 100% reserve against
our deferred tax asset, management does not believe that this statement will
have a material effect on the financial statements.
SFAS No 157, Fair Value Measurements - In September 2006, the FASB issued SFAS
No 157 which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS No 157 will
be effective for our company beginning January 1, 2008. Management is currently
in the process of assessing the provisions of SFAS No 157 and determining how
this framework for measuring fair value will affect the current accounting
policies and procedures and our financial statements. Management has not
determined whether the adoption of SFAS No 157 will have a material impact on
our consolidated financial statements.
SFAS No 159, The Fair Value Option for Financial Assets and Financial
Liabilities - The FASB issued SFAS No 159 which permits an entity to chose to
measure many financial instruments and certain other items at fair value. SFAS
No 159 will be effective for our company beginning January 1, 2008. Management
is currently in the process of assessing the provisions of SFAS No 159 and
determining how it will affect the current accounting policies and procedures
and our financial statements. Management has not determined whether the adoption
of SFAS No 159 will have a material impact on our consolidated
financial statements.
34
EITF Issue No. 06-8, Issuer's Accounting for a Previously Bifurcated Conversion
Option in Convertible Debt Instrument When the Conversion Option No Longer Meets
the Bifurcation Criteria in FASB Statement No 133, Accounting for Derivative
Instruments and Hedging Activities. This issue is effective for previously
bifurcated conversion options in convertible debt instruments that cease to meet
the bifurcation criteria in Statement 133 in interim or annual periods beginning
after December 15, 2006, regardless of whether the debt instrument was entered
into prior or subsequent to November 29, 2006. We had not bifurcated
conversion options as of March 28, 2007.
SAB 108, Interpretations in by the SEC staff regarding the process of
quantifying financial statement misstatements. In this bulletin the SEC staff
gives guidance on determining the material of misstatements in the financial
statements of the issuer. Although we are not aware of any material
misstatements in our financial statements, we may be required to restate its
financial statements in the future do to the guidelines given in this bulletin.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve our capital to
fund operations. We also seek to maximize income from our investments without
assuming significant risk. To achieve our objectives, we maintain a portfolio of
cash equivalents and investments in a variety of securities of high credit
quality. As of December 31, 2006, we had cash and cash equivalents and
short-term investments of $14.3 million. A portion of our investments may be
subject to interest rate risk and could fall in value if market interest rates
increase. However, because our investments are short-term in duration, we
believe our exposure to interest rate risk is not significant and a 1% movement
in market interest rates would not have a significant impact on the total value
of out portfolio. We actively monitor changes in interest rates.
We did not have any financial instruments sensitive to changes in interest rates
at December 31, 2006 or at December 31, 2005. We currently do not conduct any
business outside of the United States and therefore are not subject to risks
from changes in foreign currency exchange rates.
If and when we begin to generate substantive revenues from our operations, we
anticipate that we will be exposed to price changes in the commodity goods we
sell in the ordinary course of our business, which changes could have a
significant impact on our results of operations. We may in the future use
financial instruments to manage our exposure to changes in commodity prices.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Registered Public Accounting Firm 36
Financial Statements:
Consolidated Balance Sheets 37
Consolidated Statements of Income (Loss) 39
Consolidated Statements of Stockholders' Equity (Deficit) 40
Consolidated Statements of Cash Flows 41
Notes to Audited Consolidated Financial Statements 43
Schedules have been omitted since they are either not required, are not
applicable or the required information is shown in the financial statements or
the related notes.
35
Report of Independent Registered Public Accounting Firm
To: The Board of Directors and Stockholders of World Waste Technologies, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of World Waste
Technologies, Inc. and subsidiaries (a developmental stage enterprise) as of
December 31, 2006 and 2005, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of World Waste
Technologies, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the company as a going concern. As discussed in Note
2, the Company has incurred significant net losses since its inception and has
an accumulated deficit of $41,635,863 and expects to incur substantial
additional costs, losses and capital expenditures. The Company has not generated
any significant revenues to date. The foregoing matters raise substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regard to these matters are described in Note 2 of the accompanying
financial statements. These financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ Stonefield Josephson, Inc.
Los Angeles, California
March 30, 2007
36
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2006 2005
------------ ------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 14,330,840 $ 2,864,377
Accounts Receivable 12,517 --
Prepaid Expenses 174,589 181,912
Debt Offering Cost -- 453,264
------------ ------------
Total Current Assets 14,517,946 3,499,553
------------ ------------
Fixed Assets:
Machinery and Equipment, net of accumulated depreciation of
$673,201 at December 31, 2006 and $30,958 at December 31, 2005 6,460,326 12,926,284
Construction in Progress 114,238 4,094,263
Leasehold improvements, net of accumulated depreciation
of $271,164 at December 31, 2006 2,693,163 --
------------ ------------
Total Fixed Assets 9,267,727 17,020,547
------------ ------------
Other Assets:
Deposits, long term 36,519 104,839
Patent License, net of accumulated Amortization of
$88,591 at December 31, 2006 and $0 at December 31, 2005 1,266,014 556,605
------------ ------------
TOTAL ASSETS $ 25,088,206 $ 21,181,544
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable $ 503,752 $ 1,292,810
Accrued Salaries Payable 136,635 217,684
Accrued Retention Payable -- 380,572
Deposit on Senior Secured Debt -- 250,000
Capital Lease, short term 45,615 --
Other Liabilities 245,986 188,039
------------ ------------
Total Current Liabilities 931,988 2,329,105
------------ ------------
37
Capital Lease, long term 80,351 --
Senior Secured Debt (See Note 8) -- 3,191,811
Warrant Liabilities -- 618,654
------------ ------------
Total Long Term Liabilities 80,351 3,810,465
TOTAL LIABILITIES 1,012,339 6,139,570
------------ ------------
Redeemable Convertible Preferred Stock (See Note 9) 14,506,849 7,096,544
Commitments and Contingencies (Note 12)
STOCKHOLDERS' EQUITY
Common Stock - $.001 par value:
100,000,000 shares authorized, 25,412,662 and
24,686,230 shares issued and outstanding at
December 31, 2006 and December 31, 2005, respectively 25,412 24,686
Additional Paid-in Capital 51,179,469 15,961,816
Deficit Accumulated during development stage (41,635,863) (8,041,072)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,569,018 7,945,430
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,088,206 $ 21,181,544
============ ============
The accompanying notes form an integral part of these consolidated financial statements.
38
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Year Year Year June 18, 2002
Ended Ended Ended Inception to
12/31/2006 12/31/2005 12/31/2004 12/31/2006
------------ ------------ ------------ ------------
GROSS REVENUE: $ 93,784 $ -- $ -- $ 93,784
Disposal of Rejects (65,526) -- -- (65,526)
Plant Operation Cost (2,720,922) -- -- (2,720,922)
Depreciation (1,843,615) -- -- (1,843,615)
------------ ------------ ------------ ------------
Total Cost of Goods Sold (4,630,063) -- -- (4,630,063)
------------ ------------ ------------ ------------
Gross Margin (4,536,279) -- -- (4,536,279)
------------ ------------ ------------ ------------
General and Administrative Expense
Research and Development (273,894) (250,060) (284,587) (1,041,280)
General and Administrative (4,154,108) (3,601,754) (2,146,407) (10,757,399)
Impairment of Assets (9,737,344) (9,737,344)
------------ ------------ ------------ ------------
Loss from Operations (18,701,625) (3,851,814) (2,430,994) (26,072,302)
------------ ------------ ------------ ------------
Interest Income (Expense) 107,810 63,485 (65,194) 30,002
Financing Transaction Expense (7,442,426) (7,442,426)
Change in Warrant Liability 1,079,721 709,412 -- 1,789,133
------------ ------------ ------------ ------------
Net Loss before Provision for Income Tax (24,956,520) (3,078,917) (2,496,188) (31,695,593)
------------ ------------ ------------ ------------
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
Net Loss $(24,956,520) $ (3,078,917) $ (2,496,188) $(31,695,593)
------------ ------------ ------------ ------------
Preferred Stock Dividend and Amortization
Of Beneficial Conversion Feature, Warrants
And Offering Costs (Note 10) (8,638,271) (1,234,473) -- (9,872,744)
------------ ------------ ------------ ------------
Net Loss attributable to Common
Shareholders $(33,594,791) $ (4,313,390) $ (2,496,188) $(41,568,337)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1.34) $ (0.18) $ (0.15) $ (2.34)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 25,021,530 24,277,661 17,104,555 17,789,721
============ ============ ============ ============
* APPROXIMATELY $67,526 IN CONSULTING AND TRAVEL EXPENSES INCURRED PRIOR TO
INCEPTION OF THE BUSINESS ON JUNE 18, 2002 ARE NOT INCLUDED.
The accompanying notes form an integral part of these consolidated financial statements.
39
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional Common
Paid in Stock Accumulated
Shares Dollars Capital Subscription Deficit * Total
------------ ------------ ------------ ------------ ------------ ------------
Preformation Expenses -- $ -- $ -- $ -- $ (67,526) $ (67,526)
Formation - June 18, 2002 9,100,000 100 73,036 -- -- 73,136
Net Loss - 2002 -- -- -- -- (359,363) (359,363)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2002 9,100,000 $ 100 $ 73,036 -- ($ 426,889) ($ 353,753)
============ ============ ============ ============ ============ ============
Additional Paid in Capital -- -- 100 -- -- 100
Common Stock Subscribed -- -- -- 125,000 -- 125,000
Net Loss - 2003 -- -- -- -- (804,605) (804,605)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2003 9,100,000 $ 100 $ 73,136 $ 125,000 ($ 1,231,494) ($ 1,033,258)
============ ============ ============ ============ ============ ============
Merger with Waste Solutions, Inc. 7,100,000 63 2,137 -- -- 2,200
Common Stock Subscriptions 125,000 1 124,999 (125,000) -- --
Common Stock and warrants net of
offering cost prior to VPTI merger 3,045,206 31 3,952,321 -- -- 3,952,352
Shares cancelled (500,000) (5) 5 -- -- --
Warrants Issued -- -- 281,171 -- -- 281,171
Merger with VPTI 1,200,817 21,062 (21,062) -- -- --
Conversion of Promissory Notes 1,193,500 12 1,193,488 -- -- 1,193,500
Accrued Interest on Notes Forgiven -- -- 135,327 -- -- 135,327
Common Stock and warrants net of
offering cost 1,460,667 1,461 2,865,462 -- -- 2,866,923
Amortization of stock options and
warrants to employees and consultants -- -- 217,827 -- -- 217,827
Net Loss - 2004 -- -- -- -- (2,496,188) (2,496,188)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2004 22,725,190 $ 22,725 8,824,811 $ 0 ($ 3,727,682) $ 5,119,854
============ ============ ============ ============ ============ ============
Common Stock and warrants net of
offering cost 1,961,040 1,961 3,072,116 -- -- 3,074,077
Amortization of stock options and
warrants to employees and consultants -- -- 654,220 -- -- 654,220
Dividend Redeemable (Preferred Stock) -- -- 106,645 -- (671,769) (565,124)
Warrants Issued -- -- 861,853 -- -- 861,853
Bridge Financing Warrants -- -- 1,114,105 -- -- 1,114,105
Beneficial Conversion Feature on
Redeemable Preferred Stock -- -- 1,328,066 -- -- 1,328,066
Amortization of Beneficial Conversion
Feature, Warrants, and Offering Costs
on Redeemable Preferred Stock -- -- -- -- (562,704) (562,704)
Net Loss - December 2005 -- -- -- -- (3,078,917) (3,078,917)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2005 24,686,230 $ 24,686 15,961,816 $ 0 ($ 8,041,072) $ 7,945,430
============ ============ ============ ============ ============ ============
Common Stock and warrants net of
offering cost 262,851 263 9,561 -- -- 9,824
Amortization of stock options and
warrants to employees and consultants -- -- 989,252 -- -- 989,252
Dividend (Preferred Stock) -- -- 386,954 -- (2,920,893) (2,533,939)
Warrants Issued Preferred Stock (See
Note 9) -- -- 1,647,250 -- -- 1,647,250
Senior Secured Debt Warrants (See Note 8) -- -- 787,500 -- -- 787,500
Beneficial conversion feature - Series B -- -- 18,207,102 -- -- 18,207,102
Conversion of Series B Preferred Stock 296,581 296 840,716 -- -- 841,012
Series B Investor & Placement warrants -- -- 7,922,663 -- -- 7,922,663
Series A Investor warrants -- -- 3,065,931 -- -- 3,065,931
Elimination of Warrant Liabilities -- -- 674,420 -- -- 674,420
UAH Stock for Purchase of Patent 167,000 167 697,833 -- -- 698,000
Registration Filing Fees -- -- (11,529) -- -- (11,529)
Amortization of Beneficial Conversion
Feature, Warrants, and Offering Costs
on Redeemable Preferred Stock -- -- -- -- (5,717,378) (5,717,378)
Net Loss - 2006 -- -- -- -- (24,956,520) (24,956,520)
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2006 25,412,662 $ 25,412 51,179,469 $ 0 ($41,635,863) $ 9,569,018
============ ============ ============ ============ ============ ============
The accompanying notes form an integral part of these consolidated financial statements.
40
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
June 18, 2002
Year End Year End Year End (Inception) to
Dec. 31, 2006 Dec 31. 2005 Dec 31. 2004 Dec. 31, 2006
------------ ------------ ------------ ------------
Cash Flow from Operating Activities:
Net Loss $(24,956,520) $ (3,078,917) $ (2,496,188) $(31,695,593)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impairment of Assets 9,737,344 -- -- 9,737,344
Depreciation and amortization 1,937,242 14,450 8,315 1,968,200
Interest Forgiveness -- -- 135,327 135,327
Warrant and Common Stock Issued for
Consulting -- 10,000 74,566 84,566
Amortization of warrants & Options to
Employees 989,252 654,220 217,827 1,861,298
Fair Value adjustment warrant liability (1,079,722) (709,412) -- (1,789,134)
Financial transaction Expense 7,442,426 -- -- 7,442,426
Amortization of offering cost 252,277 -- -- 252,277
Changes in operating assets and liabilities:
Accounts Receivable (12,517) -- -- (12,517)
Prepaid Expenses 7,323 (87,709) -- (174,589)
Accounts Payable 324,261 64,761 102,230 503,752
Accrued Salaries (81,049) 84,981 9,873 136,635
Accrued Litigation Settlement (122,500) 122,500
Accrued Other Liabilities 69,847 61,898 (64,307) 245,986
------------ ------------ ------------ ------------
Net Cash used in Operating Activities (5,369,836) (3,108,228) (1,889,857) (11,304,022)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Construction in Progress (114,238) (3,387,621) (633,068) (4,157,443)
Deposits on Equipment -- (3,688,179) (2,560,458) (5,231,636)
Purchase Machinery & Equipment (4,767,696) (4,561,605) (518,924) (10,879,576)
Patent License (90,890) -- (167,500) (440,890)
Deposits 68,320 9,439 (114,278) (36,519)
------------ ------------ ------------ ------------
Net cash used in investing activities (4,904,503) (11,627,966) (3,994,228) (20,746,064)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Notes Receivable -- -- 12,336 --
Note Payable -- (22,368) (5,342) --
Deposit on Senior Secured Debt -- 250,000 -- --
Redeemable Convertible Preferred Stock 22,585,015 9,486,703 -- 32,071,718
Senior Secured Debt 2,000,000 4,008,353 -- 6,265,000
Senior Secured Debt Offering Cost (122,424) (298,098) -- (420,523)
Payment of Senior Secured Debt (2,785,000) -- -- (2,785,000)
Warrants, Common Stock and
Additional Paid in Capital 63,211 3,047,479 6,837,975 11,249,731
------------ ------------ ------------ ------------
Net cash provided by financing activities 21,740,802 16,472,069 6,844,969 46,380,926
------------ ------------ ------------ ------------
Net Increase in Cash 11,466,463 1,735,875 960,883 14,330,840
Cash and Cash Equivalents at beginning of year 2,864,377 1,128,502 167,619 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents at end of year 14,330,840 2,864,377 1,128,502 14,330,840
============ ============ ============ ============
Interest (Paid) Received $ 107,810 $ 63,485 $ (65,194) $ 30,002
Income Taxes Paid
41
Non-Cash Investing and Financing Activities:
* During 2002, the Company issued $67,526 of Convertible Promissory Notes
payable for preformation funds received and expended prior to inception.
* The Company issued warrants to purchase 315,354 shares of common stock to the
placement agent for services rendered in connection with the fund raising effort
during 2004 and 2005.
* The Company issued warrants to purchase 50,000 shares of common stock for
consulting services in 2004 and 100,000 shares of common stock upon the exercise
of a warrant in exchange for services rendered in 2005.
* The Company issued 1,193,500 shares of common stock upon conversion of the
Convertible Promissory notes payable and accrued interest of $135,327 during
2004.
* The Company issued warrants to purchase 250,000 shares of its common stock for
a modification to the technology license agreement during 2004.
* Accounts Payable of $1,266,060 and other liabilities of $ 114,242 at December
31, 2005 related to asset acquisitions. The impact has been adjusted in the year
ended December 31, 2006 statement of cash flow.
* During the year ended December 31, 2006, non-cash interest expense of $340,343
was capitalized in fixed assets.
* During the year ended December 31, 2006, $3,488,000 of Senior Secured Debt was
exchanged for Series B Preferred Stock.
* During the year ended December 31, 2006, the Company issued 167,000 shares of
common stock for the purchase of a patent from the University of Alabama in
Huntsville at a fair value on the date of issuance of approximately $698,000.
*During the year ended December 31, 2006, the Company transferred all of its
construction in progress to Leasehold Improvements and Machinery and Equipment.
The accompanying notes form an integral part of these consolidated financial statements.
42
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
NOTE 1. DESCRIPTION OF BUSINESS
The accompanying consolidated financial statements include the accounts of World
Waste Technologies, Inc. (Formerly World Waste of America, Inc.) and its wholly
owned subsidiaries World Waste of Anaheim, Inc., and World Waste of California,
Inc. (collectively the "Company"). All significant inter-company accounts and
transactions have been eliminated upon consolidation. World Waste Technologies,
Inc. (WWTI), a California corporation, was formed on June 18, 2002 as World
Waste of America, Inc. WWTI holds the United States license from Bio-Products
International, Inc. with respect to patented technology developed at the
University of Alabama in Huntsville, and other related intellectual property,
which technology was designed to convert a significant percent of municipal
solid waste into a cellulose biomass containing material. It is anticipated that
additional value will be realized through the capture of inorganic, recyclable
materials such as aluminum, steel, tin, and other products. The Company intends
to generate revenue from receiving the waste (tipping fees) and from selling
products produced from the cellulose biomass, recyclable materials and other
products.
In March 2004, World Waste of America, Inc. (WWA), merged with a wholly owned
subsidiary of Waste Solutions, Inc. (WSI), a California corporation, and changed
its name to World Waste Technologies, Inc. (Old WWTI). Cagan McAfee Capital
Partners and its affiliates were the controlling shareholders of WSI. Prior to
the merger WSI had 7,100,000 shares of common stock outstanding and WWA had
9,100,000 shares of common stock outstanding. The merger was transacted by WSI
issuing one of its shares for each share of WWA. After the merger there were
16,200,000 shares outstanding. The transaction was accounted for as a reverse
merger of WWA, similar to a recapitalization, because the shareholders of WWA
became the controlling shareholders of the entity after the exchange.
Accordingly, for accounting purposes, the historical financial statements
presented are those of WWA.
In March 2004, Old WWTI entered into an Agreement and Plan of Reorganization
with Voice Powered Technologies International, Inc., a California corporation
("VPTI"), to merge with and into VPTI. VPTI was a publicly traded company
trading under the stock symbol VPTI.OB. VPTI had no material assets, liabilities
or operations. The merger with VPTI was completed on August 24, 2004. Pursuant
to the merger, Old WWTI shareholders received 20,063,706 VPTI shares or
approximately 95% of the outstanding shares of VPTI in exchange for 20,063,706
Old WWTI shares, or a one for one exchange. Upon completion of the merger, VPTI
changed its name to World Waste Technologies, Inc. Because the shareholders of
Old WWTI became the controlling shareholders of VPTI after the exchange, Old
WWTI was treated as the acquirer for accounting purposes, and therefore the
transaction was accounted for as a reverse merger. Accordingly, for accounting
purposes, the historical financial statements presented are those of Old WWTI.
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company had a net loss for
the year ended December 31, 2006 of $24,956,520 compared to net losses of
$3,078,917 and $2,496,188 for the years ended December 31, 2005 and
2004,respectively, and the Company had an accumulated deficit attributable to
common shareholders of $41,635,863 at December 31, 2006. The Company expects to
43
incur substantial additional losses and costs and capital expenditures before it
can operate profitably. These issues raise substantial doubt about the Company's
ability to continue as a going concern. The ability to operate profitably is
subject to resolving significant operating issues or developing other products.
The Company's ability to accomplish this is dependent on successful research and
development, engineering and the obtaining additional funding. If the Company is
unsuccessful, it may be unable to continue as a going concern for a reasonable
period of time.
There can be no assurance that the Company's research and development and
engineering activities or any future efforts to raise additional debt and/or
equity financing will be successful. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing, and ultimately to attain successful operations.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.
The Company is a new enterprise in the development stage as defined by Statement
No. 7 of the Financial Accounting Standards Board, since it has derived no
substantial revenues from its activities to date.
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 revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company used estimates to perform the undiscounted cash flow projections
used in the impairment analysis of the Anaheim plant assets, see Fixed Assets
below. The estimates of future operating costs and future revenues and plant
alterations were derived from operating results during the last nine months and
results from research and development activities.
REVENUE RECOGNITION
Revenue for receiving Municipal Solid Waste (MSW) is recognized when the MSW is
delivered. Revenue for products sold, such as unbleached fiber, metals and
aluminum, are recognized when the product is delivered to the customer.
All shipping and handling costs are accounted for as cost of goods sold.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
44
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." In
accordance with SFAS No. 109, the Company records a valuation allowance against
net deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income and when temporary differences become deductible. The
Company considers, among other available information, uncertainties surrounding
the recoverability of deferred tax assets, scheduled reversals of deferred tax
liabilities, projected future taxable income, and other matters in making this
assessment.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased, which are not securing any corporate obligations,
to be cash equivalents. The Company has no cash equivalents at December 31,
2006.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in a financial institution. Cash
balances at the institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company has not experienced any losses in
connection with such accounts.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded gross. All trade accounts receivable are
reviewed monthly on an account-by-account basis for collectability and
appropriate reserves are made when collectability is unlikely. There have been
no reserves recorded or write offs made from inception to date.
FIXED ASSETS
Machinery and Equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful asset lives or for leasehold
improvements or equipment installed in the Anaheim plant, over the remaining
life of the lease, whichever is shorter. Due to the fact that at the time the
assets were placed into service the lease had 8 years and two months remaining,
all assets and leasehold improvements at the Anaheim facility are being
depreciated over a maximum of 8 years and two months on a straight line basis.
Maintenance and repairs are expensed as incurred.
The Company completed the construction of its initial plant in Anaheim,
California early in the second quarter of 2006. The Company capitalized all
costs directly associated with developing the plant, including interest, in
accordance with FAS34, and labor, throughout the construction period. Total
capital interest and labor during the construction period was $765,560 and
$410,895, respectively. The Company placed into service and began depreciating
the assets related to this facility in the second quarter of 2006.
The assets at the Anaheim plant are comprised of two basic technologies, the
front half of the plant consists of assets related to the Company's core
patented technology related to "steam classification" and material separation
and the back half of the plant consist of assets related to screening and
cleaning of the cellulose biomass material to prepare it for sale to paper
mills. During the plant start up phase, we confronted several issues, including
an unexpected high level of biological oxygen demand from organic waste in the
wastewater from the pulp screening and cleaning process. The Company decided not
to make the capital improvements necessary to the Anaheim plant's wetlap process
or back half which the Company considers necessary in order to recover the
carrying amount of the wetlap plant assets through projected future undiscounted
cash flow from its operation. Consequently, the Company recorded a charge of
$9,737,344 which represented the net carrying value of the wetlap process (or
"back half") equipment. The charge was equal to the carry cost of the assets of
the wetlap process, net of accumulated depreciation. The Company did not record
an impairment charge for the steam classification equipment (or "front half") of
45
the plant because the Company intends to use that equipment in research and
development activities as part of its development of alternative back end
processes such as, but not limited to, gasification and acid hydrolysis and it
also believes that by making certain improvements to the plant, such as adding
equipment for energy co-generation, and changing the use of the cellulose
biomass mass from the wetlap process to another application, such as its use as
a form of fuel, the future undiscounted cash flow from its operations might
cover the capitalized cost.
During 2007, the Company plans to operate primarily in the research and
development mode. Consequently, depreciation of the "steam classification"
equipment may be charged to research and development under FASB 2, "Accounting
for Research and Development Costs."
The Company capitalizes leases in accordance with FASB 13, "Accounting for
Leases."
INTANGIBLES
Intangible assets are recorded at cost. On May 1, 2006, pursuant to a Patent
Assignment Agreement and a Patent Assignment, both dated as of May 1, 2006 (the
"Patent Assignment Agreement and a Patent Assignment"), the Company completed
the purchase of all right, title and interest in United States Patent No.
6,306,248 (the "Patent") and related intellectual property, subject to existing
licenses, from the University of Alabama in Huntsville for $100,000 and 167,000
shares of the Company's unregistered common stock valued at approximately
$698,000, based on the market price of the stock on the date issued, May 1,
2006.
We continue to exploit the technology covered by the Patent through a sublicense
from the original licensee, Bio-Products, International, Inc. (BPI). By virtue
of our acquisition of the Patent, we now own all rights, title and interest in
the Patent, subject to BPI's existing license, which in turn continues to
sublicense the technology to us.
Prior to the purchase of the Patent, the Company's only intangible asset was the
sub-license from BPI for the patented technology and other related intellectual
property.
The Company began amortizing its intangible assets during the second quarter of
2006 upon completion of its first facility, on a straight-line basis over the
remaining life of the intellectual property. The Patent expires in 2017 and the
license expires in 2022.
The Company's policy regarding intangible assets is to review such intangible
assets for impairment whenever events or changes in circumstances indicate that
their carrying amount may not be recoverable. If the review indicates that
intangible assets are not recoverable (i.e. the carrying amounts are more than
the future projected undiscounted cash flows), their carrying amounts would be
reduced to fair value. The Company carried no goodwill on its books at either
December 31, 2006 or December 31, 2005. Further, during the years ended December
31, 2006 and December 31, 2005, the Company had no material impairment to its
intangible asset.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible preferred Stock which may be redeemable for cash at the
determination of the holder is classified as mezzanine equity, in accordance
with FAS 150 "Accounting for Certain Financial Instruments with Characteristics
of Both Debt and Equity, EITF Topic D 98 and ASR 268, and is shown net of
discounts for offering costs, warrant values and beneficial conversion features.
SEGMENT REPORTING
The Company currently operates in a single segment. In addition, financial
results are prepared and reviewed by management as a single operating segment.
The Company continually evaluates its operating activities and the method
utilized by management to evaluate such activities and will report on a segment
basis when appropriate to do so.
46
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. As of December 31, 2006, December 31, 2005 and December
31, 2004, the Company has no items that represent other comprehensive income
and, therefore, has not included a schedule of comprehensive income in the
consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, note receivable, note payable, accounts payable and
other accrued liabilities approximate fair value due to either their short-term
nature or interest rates which approximate market rates.
RECLASSIFICATION
Certain amounts for the year ended December 31, 2005 have been reclassified to
conform with the presentation of the December 31, 2006 amounts. These
reclassifications had no effect on reported net loss.
STOCK-BASED COMPENSATION
During the fourth quarter of 2004, the Company adopted SFAS No. 123 entitled,
"Accounting for Stock Based Compensation." Accordingly, the Company has expensed
the compensation cost for the options and warrants issued based on the fair
value at the warrant grant dates. During the quarter ended March 31, 2006, the
Company adopted SFAS No. 123R "Share Based Payments". Because the Company had
already been accounting for it stock-based compensation on an estimated fair
value basis, the adoption of SFAS No. 123R did not have a material impact on the
financial statements of the Company.
As of December 31, 2006, the Company had one share-based compensation plan,
which is described below. The compensation cost that has been charged against
income for the plan was $931,792, $422,708, $45,577 and $1,431,988 for the years
ended December 31, 2006, 2005 and 2004 and from inception to December 31, 2006,
respectively. Because the Company is in a net loss position, no income tax
benefit has been recognized in the income statement for share-based compensation
arrangements. As of December 31, 2006, no share-based compensation cost had been
capitalized as part of inventory or fixed assets.
The Company's 2004 Incentive Stock Option Plan (the Plan), which is
shareholder-approved, provides for the issuance by the Company of a total of up
to 2.0 million shares of common stock and options to acquire common stock to the
Company's employees, directors and consultants. The Company believes that such
awards better align the interests of its employees with those of its
shareholders. Option awards are generally granted with an exercise price equal
to the market price of the Company's stock at the date of grant; those option
awards generally vest based on 2 to 4 years of continuous service and have
10-year contractual terms. The Company granted 100,000 during 2006. Certain
option awards provide for accelerated vesting if there is a change in control
(as defined in the Plan). The Company plans to adopt a new incentive stock plan
in 2007.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
table below. Expected volatilities are based on the historical volatility of the
Company's common stock from August 24, 2004 through November 30, 2006. Although
the Company uses historical data to estimate option exercise and employee
terminations within the valuation model, because of its limited history the
Company has assumed that all options will be exercised and that there will be no
employee resignations or terminations. As and when employee resignations or
terminations occur, the Company stops amortizing the expense associated with the
options. The expected term of options granted was estimated to be the vesting
period of the respective options, which the Company believes provides a
reasonable estimation of the period of time that options granted are expected to
be outstanding. The risk-free rate for periods within the contractual life of
the option is based on the LIBOR rate at the time of grant.
47
YEAR ENDED 2006 YEAR ENDED 2005 YEAR ENDED 2004
--------------- --------------- ---------------
Expected volatility 70 % 70 % 70 %
Expected dividends 0 % 0 % 0 %
Expected term (in years) 4 2 to 4 4
Risk-free rate 4.64 % 3.7% - 4.82 % 3.60 %
A summary of option activity under the Plan as of December 31, 2006, and changes
during the year then ended is presented below:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term ($000)
- -------------------------------- ----------- --------- ----------- ---------
Outstanding at January 1, 2006 1,587,000 $ 2.42 9.4 --
Granted 100,000 2.05 10 --
Exercised
Forfeited or expired 100,000 $ 2.70 9.3 --
Outstanding at December 31, 2006 1,587,000 $ 2.36 8.1 $ (1,089)
Exercisable at December 31, 2006 896,270 $ 2.30 7.9 $ (584)
The weighted-average grant-date fair value of options granted during 2006, 2005
and 2004, was $1.50, $1.20 and $1.55, respectively. There have been no options
exercised since inception. When options are exercised, the Company will issue
new shares to the recipient.
As of December 31, 2006, there was $1,359,732 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted-average period
of 2.0 years.
Non employment stock warrants outstanding:
Weighted Weighted
Average Average Grant
Number Exercise Price Date Fair Value
- ----------------------------------------------- -------------- ---------------
Outstanding at December 31, 2005 2,212,362 $ 1.83 $ 1.84
Exercisable at December 31, 2005 2,212,362 $ 1.83 $ 1.84
Granted during the period 5,441,520 $ 2.40 $ 2.56
Vested during the period 5,441,520 $ 2.40 $ 2.56
Exercised during the period 243,175 $ 0.40 $ 2.07
Cancelled 407,560 $ 4.00 $ 3.26
Outstanding at December 31, 2006 7,003,147 $ 2.19 $ 2.31
Exercisable at December 31, 2006 7,003,147 $ 2.19 $ 2.31
48
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS No. 128). SFAS No. 128 provides for the calculation
of basic and diluted earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, such as
stock options, warrants or convertible securities. Due to their anti-dilutive
effect, common stock equivalents of 25,793,629, consisting of employee options
of 1,587,000, non employment warrants of 6,999,147, Preferred Series A of
5,554,278 and Preferred Series B of 11,653,204, were not included in the
calculation of diluted earnings per share at December 31, 2006 and common stock
equivalents of 8,101,011 were not included in the calculation of diluted
earnings per share at December 31, 2005.
NEW ACCOUNTING PRONOUNCEMENTS
FIN No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of
FASB Statement No. 109 Summary - On July 13, 2006, FASB Interpretation (FIN) No.
48, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The new FASB standard also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. As the Company provides for a 100% reserve against
its deferred tax asset, management does not believe that this statement will
have a material effect on the financial statements.
SFAS No 157, Fair Value Measurements - In September 2006, the FASB issued SFAS
No 157 which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS No 157 will
be effective for the Company beginning January 1, 2008. Management is currently
in the process of assessing the provisions of SFAS No 157 and determining how
this framework for measuring fair value will affect the current accounting
policies and procedures and our financial statements. Management has not
determined whether the adoption of SFAS No 157 will have a material impact on
the Company's consolidated financial statements.
SFAS No 159, The Fair Value Option for Financial Assets and Financial
Liabilities - The FASB issued SFAS No 159 which permits an entity to chose to
measure many financial instruments and certain other items at fair value. SFAS
No 159 will be effective for the Company beginning January 1, 2008. Management
is currently in the process of assessing the provisions of SFAS No 159 and
determining how it will affect the current accounting policies and procedures
and our financial statements. Management has not determined whether the adoption
of SFAS No 159 will have a material impact on the Company's consolidated
financial statements.
EITF Issue No. 06-8, Issuer's Accounting for a Previously Bifurcated Conversion
Option in Convertible Debt Instrument When the Conversion Option No Longer Meets
the Bifurcation Criteria in FASB Statement No 133, Accounting for Derivative
Instruments and Hedging Activities. This issue is effective for previously
bifurcated conversion options in convertible debt instruments that cease to meet
the bifurcation criteria in Statement 133 in interim or annual periods beginning
after December 15, 2006, regardless of whether the debt instrument was entered
into prior or subsequent to November 29, 2006. The Company has not bifurcated
conversion options as of March 15, 2007.
SAB 108, Interpretations in by the SEC staff regarding the process of
quantifying financial statement misstatements. In this bulletin the SEC staff
gives guidance on determining the material of misstatements in the financial
statements of the issuer. Although the Company is not aware of any material
misstatements in its financial statements, it may be required to restate its
financial statements in the future do to the guidelines given in this bulletin.
49
NOTE 4. FINANCING EXPENSE
Financing expenses for the year ended December 31, 2006 were comprised of the
following(there was no financing expense in 2005):
Year Ended
December 31,
2006
------------
Fair value of warrants issued for consent to issue
Senior Secured Debt on February 6, 2006 (see Note 8) $ 1,647,250
Early extinguishment of Senior Secured Debt -
unamortized warrant value and offering costs
(see Note 8) 1,593,758
Change in fair value of Series A Preferred due to
modification of conversion ratio and warrants upon
issuance of Series B Preferred in accordance with
anti-dilution provisions (see Note 9)
4,201,418
------------
Total $ 7,442,426
============
NOTE 5. LICENSE AGREEMENT
On June 21, 2002, the Company entered into a U.S. technology sub-license
agreement with Bio-Products International, Inc. (BPI), an Alabama corporation
with respect to certain intellectual property and patented methods and
processes. This agreement was amended on June 21, 2004 and again on August 19,
2005. The technology was designed to provide for the processing and separation
of material contained in Municipal Solid Waste (MSW). This unique process treats
MSW with a combination of time, temperature and steam pressure. Temperatures of
several hundred degrees cook the material, and the pressure and agitation causes
a pulping action. This combination is designed to result in a significant volume
reduction, yielding high-density, cellulose biomass product that is ready for
processing and/or market. The most recent patent includes the capturing of all
Volatile Organic Compounds and was granted by the United States Patent and
Trademark Office in October 2001.
Through April 30, 2006, the University of Alabama in Huntsville ("UAH") owned
the patent for this technology. On May 1, 2006, the Company acquired the patent
from UAH for $100,000 and 167,000 shares of the Company's unregistered common
stock valued at its fair value on the date of issuance of approximately
$698,000. The patent reverts to UAH in the event of bankruptcy of the Company.
This patent is licensed to BPI. The license to the patent in the United States
was assigned to the Company. BPI is required to continue to make certain
payments to the Company, as the patent owner, to maintain exclusivity to the
patent for the technology. The Company does not expect royalty income from BPI
to be material for the foreseeable future.
The Company continues to exploit the technology covered by the Patent through
the sublicense from the original licensee, BPI. By virtue of our acquisition of
the Patent, we now own all rights, title and interest in the Patent, subject to
BPI's existing license, which in turn continues to sublicense the technology to
us.
The sub-license extends for a period of 20 years from the effective date of the
agreement. The agreement is subject to automatic extension until the expiration
date of the last patent issued to BPI.
50
For the sub-license, the Company agreed to pay a one-time fee of $350,000,
payable in several installments. The Company recorded an intangible asset of
$350,000 at December 31, 2003 and recorded a payable for the outstanding balance
of $167,500 at December 31, 2003. The final installment of $167,500 was paid in
August 2004, two years after the signing of the agreement. The license is being
amortized over the remaining life of the license beginning when the Company's
plant first became operational.
During June 2004, the Company issued warrants to purchase 250,000 shares of its
common stock at $1.50 per share to the owners of BPI in consideration for their
assistance in obtaining certain modifications and amendments to the license
agreement. The fair value of the warrants of $206,605 was estimated at the date
of grant using the option valuation model. The value of the warrants was
estimated using the Black-Scholes option pricing model with the following
assumptions: average risk-free interest of 3.6%; dividend yield of 0%; average
volatility factor of the expected market price of the Company's common stock of
70%; and a term of 4 years. The Company recorded the fair value of the warrants
as an increase to the capitalized license.
In addition, the Company is obligated to pay a royalty for every ton of waste
processed using the licensed technology as follows:
Tons processed
--------------
Rate per day
---- -------
$0.50 1 - 2,000
$1.00 2,001 - 10,000
$1.50 10,001 and up
The Company is also obligated to pay a bonus to BPI of two and one half percent
(2.5%) of the gross sales price in excess of ten dollars ($10.00) per ton for
the cellulose biomass product produced from MSW, utilizing the technology.
As additional consideration and for their experience and know-how regarding the
technology, the Company agreed to pay BPI a monthly payment for technical
services of $10,000 per month from January 2003 to April 2004 and $20,000 per
month until the first plant processes or is able to process waste equal to or in
excess of the facility's design capacity, and then $15,000 per month for five
years thereafter. All amounts due were paid through January 31, 2007.
Due to the proprietary nature of the vessel design utilized in the process, the
Company granted BPI the exclusive right of vessel manufacture, and agreed to
purchase all required process vessels exclusively from Bio-Products at a fixed
purchase price of the quoted cost plus 15%.
NOTE 6. SIGNIFICANT CONTRACT
In June 2003, the Company signed a 10-year contract with Taormina Industries,
LLC (TI), a wholly owned division of Republic Services, Inc., whereby TI has
agreed to deliver residual waste to the Company for processing at its initial
facility which is located on the campus of TI in Anaheim, CA and it was designed
to be capable of processing approximately 500 tons per day. The second phase of
the contract calls for the Company to build up to a 2,000 ton per day plant in
the Orange County, California-area at a site mutually agreeable to both parties.
There is currently no estimate as to what the second phase will cost or if or
when it might be commenced. The agreement also grants TI a right of first
refusal for an additional 10 counties throughout California where TI has
operations. Under the terms of this contract, TI is obligated to pay a per ton
tipping fee to the Company. The initial tipping fee is $30 per ton (payable
monthly) of "Net Processed Waste" (defined as the total residual municipal solid
waste (RMSW) delivered to us less the total residual waste removed by Taormina
for handling and disposal by Taormina). The tipping fee is subject to increase
or decrease
51
based upon changes in certain county landfill disposal fees Taormina is required
to pay. The Company's process is also expected to mechanically sort and collect
standard recyclable materials such as scrap steel, cans, and aluminum. Under the
terms of this first contract it is anticipated that these materials will be
collected and sold to Taormina for resale to commodities buyers. The ultimate
success of the Company is highly dependent on the ability of both parties to the
contract to fulfill their obligations, of which there can be no assurance.
In the agreement, we represented to Taormina that the residual waste we deliver
to them would not exceed 40%, by weight, of the associated RMSW delivered to us
by Taormina. Currently, we are not in compliance with this representation
because the waste that we are delivering to Taormina contains too high a
quantity of residual streams of waste that Taormina must send to landfill. Due
to the start-up nature of our operations, we have not yet determined the most
efficient method of resolving this issue or any such method is economically
feasable. Potential solutions include identifying third party sources willing to
accept these residual streams, and/or making changes to our process. Until we
are able to remedy this situation, Taormina could attempt to renegotiate or
terminate the agreement or refuse to accept any waste from us.
Effective July 26, 2004, the Company entered into a ten-year operating lease
agreement, with TI for the site of the Company's initial processing facility.
This lease agreement was amended on March 17, 2005 and July 27, 2005. The lease
requires monthly rent of $15,900, subject to annual cost-of-living adjustments.
The Company paid a security deposit of $31,800.
NOTE 7. INCOME TAXES
INCOME TAXES
The components of the income tax (expense) benefit for the fiscal years
ended December 31, 2006, 2005 and 2004, and for the period from June 18, 2002
(inception) to December 31, 2006, are as follows:
JUNE 18, 2002
TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004 2006
---------- ---------- ---------- ----------
Federal (expense) benefit:
Current 0 0 0 0
Deferred 6,368,019 1,025,022 745,151 8,520,702
Valuation allowance (6,368,019) (1,025,022) (745,151) (8,520,702)
State (expense) benefit:
Current 0 0 0 0
Deferred 1,817,123 279,770 212,294 2,418,051
Valuation allowance (1,817,123) (279,770) (212,294) (2,418,051)
---------- ---------- ---------- ----------
Total income tax (expense)
benefit 0 0 0 0
========== ========== ========== ==========
52
The income tax (expense) benefit differs from the federal statutory
rate because of the effects of the following items for the fiscal years ended
December 31, 2006, 2005, and 2004, and for the period from June 18, 2002
(inception) to December 31, 2006:
JUNE 18, 2002
TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2006 2005 2004 2006
------------ ------------ ------------ --------------
Statutory rate 34.0% 34.0% 34.0% 34.0%
State income taxes,
net of federal benefit 4.8% 5.7% 5.6% 5.1%
Start-up costs 0.0% 0.0% 0.0% 0.1%
Non-deductible items 0.5% 1.6% -0.9% 0.6%
Warrant liability
adjustments 1.5% 0.0% 0.0% 1.0%
Financing transaction
costs -8.0% 0.0% 0.0% -6.3%
Change in valuation
allowance -32.8% -41.3% -38.7% -34.5%
------------ ------------ ------------ --------------
Effective tax
(expense) benefit rate 0.0% 0.0% 0.0% 0.0%
============ ============ ============ ==============
Deferred income taxes are provided to reflect temporary differences in
the basis of net assets for income tax and financial reporting purposes, as well
as available tax credits.
The tax effected temporary differences and credit carryforwards
comprising the Company's deferred income taxes as of December 31, 2006 and 2005
are as follows:
DECEMBER 31, DECEMBER 31,
2006 2005
----------- -----------
State taxes (822,137) (204,316)
Difference in basis of property 3,671,118 (85,530)
Mark-to-Market Adjustment 0 (165,346)
Capitalized Start-up costs 374,787 524,702
Reserves not currently deductible 78,886 50,709
Deferred compensation 894,558 252,727
Net operating losses 6,741,541 2,380,665
Valuation Allowance (10,938,753) (2,753,611)
----------- -----------
Net deferred income tax asset 0 0
=========== ===========
The Company has recorded a valuation allowance set forth above for
certain deferred tax assets where it is more likely than not the Company will
not realize future tax benefits related to these items. The net changes in the
valuation allowance for the fiscal years ended December 31, 2006, 2005, and
2004, and for the period from June 18, 2002 (inception) through December 31,
2006 were $8,185,142, $1,304,792, $957,445 and $10,938,753, respectively.
As of December 31, 2006, the Company has federal and state net
operating loss carryforwards available to offset future taxable income of
approximately $15,762,436 and $15,637,027, respectively. These federal and state
net operating loss carryforwards expire through 2026 and 2016, respectively.
53
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of NOLs in the event of an "ownership change" (as defined in the
Internal Revenue Code) of a corporation. The NOLs attributable to Voice Powered
Technology International before its merger with World Waste of America, Inc. are
almost completely limited according to these provisions. As such, the Company
has excluded a significant portion of them in this analysis.
NOTE 8. SENIOR SECURED DEBT
On November 1, 2005, the Company sold to accredited investors $4,015,000
aggregate principal amount of Senior Secured Notes and Warrants to purchase up
to a total of 529,980 shares of Common Stock. In February 2006, all of the notes
were exchanged for a new series of Senior Secured Debt as described below. No
material terms of the notes changed other than the maturity date. The Notes were
due and payable in full on the earlier to occur of (i) the closing of one or
more equity financings generating gross proceeds in an aggregate amount of at
least $9.0 million, or (ii) May 1, 2007. The Notes bore interest at an annual
rate of 10.00% payable quarterly in arrears, on December 31, March 31, June 30
and September 30 of each year, beginning on December 31, 2005. The Notes were
secured by a first-priority lien on substantially all of the Company's assets,
and ranked pari passu in right of payment with all existing and future senior
indebtedness of the Company, and senior in right of payment to any subordinated
indebtedness. If an event of default on the Notes had occurred, the principal
amount of the Notes, plus accrued and unpaid interest, if any, could have been
declared immediately due and payable, subject to certain conditions set forth in
the Notes. These amounts were to automatically become due and payable in the
case of certain types of bankruptcy or insolvency events of default involving
the Company.
As described below (see Note 9), in May 2006 all of these Notes were either
repaid or were exchanged for shares of the Company's Series B Preferred Stock.
The Warrants are exercisable for a period of five years commencing as of their
issuance date, at an exercise price of $0.01 per share. In connection with the
sale and issuance of these securities, the Company and the investors entered
into a Registration Rights Agreement, dated November 1, 2005, and subsequently
amended on February 10, 2006, pursuant to which the Company agreed to use best
efforts to include the shares of Common Stock issuable upon exercise of the
Warrants on a registration statement filed by the Company with the Securities
and Exchange Commission. The fair value of the Warrants was $1,187,422 on the
issuance date. The value of the Warrants was estimated using the Black-Scholes
option pricing model with the following assumptions: average risk-free interest
of 4.82%; dividend yield of 0%; average volatility factor of the expected market
price of the Company's common stock of 70%; and a term of one and a half years.
In accordance with APB Opinion 14, the fair value of the warrant issued to the
investors of $1,187,422 was shown as a discount to the face value of the Senior
Secured Notes on the balance sheet at the relative fair value of $923,450 and
was also being amortized over 18 months, the term of the notes.
Chadbourn Securities, Inc. served as the Company's placement agent in connection
with the offering in certain states in which Chadbourn is registered with the
NASD as a broker/dealer (the "Chadbourn States"), and, for serving as such,
received a cash fee from the Company of $307,340, and was issued warrants to
acquire up to 134,600 shares of Common Stock at an exercise price of $2.50 per
share and otherwise on the same terms as the Warrants sold to the investors. The
Company also agreed to reimburse Chadbourn for its reasonable expenses incurred
in connection with the offering. Chadbourn in turn has re-allowed a portion of
these fees ($267,550 in cash and warrants to acquire up to 79,300 shares of
Common Stock) to Northeast Securities, Inc., an NASD registered broker/dealer
("NES"), in connection with NES acting as a selling agent for the offering.
NES also received a cash fee from the Company equal to 8.0% of the principal
amount of Notes sold in all non-Chadbourn States (for a total cash fee of
$4,000) and warrants to acquire up to 2,000 shares of Common Stock. The Company
also agreed to reimburse NES for its reasonable expenses incurred in connection
with the offering.
54
In addition to the fees referred to above, the Company paid $10,000 in cash and
issued Warrants to acquire up to 24,000 shares of Common Stock to third party
finders.
The fair value of all of the 160,600 placement Warrants was $193,594. The value
of the Warrants was estimated using the Black-Scholes option pricing model with
the following assumptions: average risk-free interest of 4.82%; dividend yield
of 0%; average volatility factor of the expected market price of the Company's
common stock of 70%; and a term of four years.
The debt offering cost of $514,934, consisting of cash of $321,340 and warrant
value of $193,594 was shown as a current asset and was being amortized over 18
months. Upon repayment, all unamortized placement fees and warrant value was
expensed as Financing Transaction Expense (see Note 2).
The Company's chief executive officer, worked with Cagan McAfee Capital
Partners, LLC ("CMCP"); Laird Cagan, a Managing Director of CMCP, acted as a
registered representative of Chadbourn in connection with this offering.
On February 10, 2006, the Company issued and sold $2,250,000 aggregate principal
amount of its 10% Senior Secured Notes and Warrants to purchase up to an
aggregate of 297,000 shares of the Company's Common Stock, to three accredited
investors.
The Warrants are exercisable for a period of five years commencing as of their
issuance date and have an exercise price of $0.01 per share. The fair value of
the Warrants was $1,200,085 on the issuance date. The value of the Warrants was
estimated using the Black-Scholes option pricing model with the following
assumptions: average risk-free interest of 4.82%; dividend yield of 0%; average
volatility factor of the expected market price of the Company's common stock of
70%; and a term of one and a half years. The Notes were due and payable in full
on the earlier to occur of (i) the closing of one or more equity financings
generating gross proceeds in an aggregate amount of at least $9.0 million, or
(ii) August 10, 2007. The Notes bore interest at an annual rate of 10.00%
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year. The Notes were secured by a first-priority lien on substantially
all of the Company's assets, and ranked pari passu in right of payment with all
existing and future senior indebtedness of the Company, and senior in right of
payment to any subordinated indebtedness.
As described below (see Note 9), in May 2006 all of these Notes were either
repaid or were exchanged for shares of the Company's Series B Preferred Stock.
In connection with the issuance of the Notes, the Company entered into a
Registration Rights Agreement on February 10, 2006, pursuant to which the
Company agreed to use best efforts to include the shares of Common Stock
issuable upon exercise of the Warrants on a registration statement filed by the
Company with the Securities and Exchange Commission. The registration statement
was declared effective December 4, 2006.
Chadbourn Securities, Inc. served as the Company's placement agent in connection
with the offering, and, for serving as such, received a cash fee from the
Company of $27,500. The Company also agreed to reimburse Chadbourn for its
reasonable expenses incurred in connection with the offering.
In addition to the fees referred to above, the Company paid $5,000 in cash to
third party finders.
The debt offering costs of $122,424, consisting of placement agent fees, finders
fees, and legal and administrative fees was shown as a current asset and was
being amortized over 18 months. In accordance with APB Opinion 14, the fair
value of the warrants issued to the investors was shown as a discount to the
face value of the Notes on the balance sheet at its relative fair value of
$787,500 and was also being amortized over 18 months, the term of the notes.
Upon repayment, all unamortized placement fees and warrant value was expensed as
Financing Transaction Expense (see Note 4).
55
In connection with the February 6, 2006 transaction, the holders of the
Company's 10% Senior Secured Notes issued November 1, 2005 described above
exchanged their notes for debentures on a dollar-for-dollar basis. Therefore, at
the conclusion of the transaction the Company had a total of $6,265,000 of
Senior Secured Debt outstanding.
During the quarter ended March 31, 2006, the interest expense of $131,625 and
the amortization of the offering costs of $78,266 and amortization of the
warrants issued to the investors of $241,408 were capitalized as construction
cost on the Anaheim facility. As the facility was considered completed at the
beginning of the second quarter of 2006, interest expense and the amortization
of the offering costs were expensed beginning in the second quarter of 2006.
On May 30, 2006, the Company completed the placement of Series B Cumulative
Redeemable Convertible Participating Preferred Stock (Series B). Consistent with
their contractual rights of participation, certain holders of the Senior Secured
Debt elected to exchange their debt and accrued interest, or a portion thereof,
into shares of Series B. The principal and accrued interest of the Senior Debt
exchanged was $3,480,000 and $8,800, respectively. As required by the terms of
the Notes, the balance of the Senior Debt of $2,785,000 and accrued interest
thereon of $8,454 was repaid in full on May 30, 2006 with a portion of the
proceeds of the sale of the Series B. As a consequence, all unamortized debt
discount and offering costs were expensed (see Note 4).
As of December 31, 2006, no Senior Debt remained outstanding.
NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
8% SERIES A CUMULATIVE REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK
On April 28, 2005, the Company issued and sold 4,000,000 shares of its newly
created 8% Series A Cumulative Redeemable Convertible Participating Preferred
Stock (the "Series A") and warrants (the "Warrants," and, together with the
Series A Preferred, the "Securities") to purchase up to 400,000 shares of common
stock of the Company. On May 9, 2005, the Company entered into a Securities
Purchase Agreement whereby the Company issued and sold an additional 75,600
shares of Series A Preferred and Warrants to purchase up to 7,560 shares of
common stock of the Company. The gross aggregate proceeds to the Company from
the sale of the Securities was $10,189,000.
The certificate of determination governing the terms of the Series A provides
for the Series A to convert into shares of common stock at a conversion rate of
one-for one. In February 2006, however, the Company contractually agreed with
the holders of the Series A to provide for an increase in this conversion rate
upon subsequent issuances of shares of common stock (subject to specified
exceptions) at a price less than 115% of the conversion rate in effect at the
time of issuance. As a result of this agreement, on May 25, 2006 (the date the
Company first issued shares of its Series B Preferred, as described below), the
conversion rate was adjusted to approximately 1.18 shares of common stock for
each one share of Series A.
The Company was required to apply the proceeds of the sale of the Securities
primarily to the construction and operation of the Company's initial plant in
Anaheim, California. The holders of the Series A currently have the right to
elect a majority of the members of the Company's Board of Directors. This right
will terminate, however, upon the first to occur of the Operational Date
(generally defined as if and when the Company's initial plant in Anaheim,
California first generates total operating cash flow of at least $672,000 for
any consecutive three month period) or the date on which less than 50% of the
shares of Series A remain outstanding.
56
Holders of Series A are entitled to receive cumulative dividends, payable
quarterly in additional shares of Series A, at the rate of 8% per annum. This
dividend rate was increased to 9% as of January 28, 2006 pursuant to the terms
of the Series A as a result of the Company's failure to comply with certain
registration rights provisions. As of December 5, 2006, the registration
statement was declared effective and the dividend rate revered to 8%.
Each share of Series A is entitled to that number of votes equal to the number
of whole shares of Common Stock into which it is convertible. In addition, so
long as at least 50% of the shares of Series A remain outstanding, the Company
is prohibited from taking certain actions without the approval of the holders of
a majority of the outstanding shares of Series A.
The holders of a majority of the shares of Series A have the option to require
the Company to redeem all outstanding shares of Series A on April 28, 2010 at a
redemption price equal to $2.50 per share, plus accrued and unpaid dividends to
that date. This amount will be equal to approximately $15 million. In the event
the holders do not exercise this redemption right, all shares of Series A will
automatically convert into shares of Common Stock on such date, as described
below.
Because the Series A is redeemable at the end of five years, at the option of
the holder, it has been classified as "mezzanine equity" on the balance sheet,
in accordance with FAS 150, EITF Topic D 98 and ASR 268.
Each share of Series A will automatically convert into shares of Common Stock at
the stated conversion rate (i) in the event the Company consummates an
underwritten public offering of its securities at a price per share not less
than $5.00 and for a total gross offering amount of at least $10 million, (ii)
in the event of a sale of the Company resulting in proceeds to the holders of
Series A of a per share amount of at least $5.00, (iii) in the event that the
closing market price of the Common Stock averages at least $7.50 per share over
a period of 20 consecutive trading days and the daily trading volume averages at
least 75,000 shares over such period, (iv) upon the approval of a majority of
the then-outstanding shares of Series A, or (v) unless the Company is otherwise
obligated to redeem the shares as described above, on April 28, 2010.
Each holder has the right to convert its shares of Series A into shares of
Common Stock at the stated conversion rate at any time.
The Warrants are exercisable for a period of five years commencing as of their
issuance date, initially at an exercise price of $4.00 per share (which exercise
price was subsequently revised as described below). The fair value of the
Warrants was $1,328,066 on the issuance date. The value of the Warrants was
estimated using the Black-Scholes option pricing model with the following
assumptions: average risk-free interest of 6.75%; dividend yield of 0%; average
volatility factor of the expected market price of the Company's common stock of
70%; and a term of 5 years. The value of the Warrants was deducted from the face
amount of the Series A Preferred and is being amortized as dividends. In
accordance with EITF 00-19, the value of the Warrants has been recorded as a
liability until such time as the Company meets the registration obligation of
the underlying shares. In accordance with SFAS 133, the warrant liability is
adjusted at the end of each reporting period to its fair value, and the
adjustment is classified as other income (expense). The Company recognized
$1,079,721 and $709,412 of other income for the years ended December 31, 2006
and 2005, respectively. The Company met the registration obligation on December
4, 2006 and the warrant liability was eliminated through additional paid in
capital. We are required to maintain effectiveness of the registration
statement, and therefore, will analyze the need to recognize the liability in
accordance with EITF 00-19-2, "Accounting for Registration Payment Agreements."
In accordance with EITF 98-5 and 00-27 it was determined that the Series A's
effective conversion price was issued at a discount to fair value. The value of
this discount, called a beneficial conversion feature, was determined to be
$1,328,066. The beneficial conversion feature was deducted from the carrying
value of the Series A and is amortized over five years. The amortization amount
is treated consistent with the treatment of preferred stock dividends.
57
In connection with the issuance of the Securities, on April 28, 2005, the
Company entered into a registration rights agreement granting the holders
certain demand and piggyback registration rights with respect of the common
stock issuable upon conversion of the Series A and exercise of the Warrants. The
Company filed a registration statement with the SEC on August 4, 2005 to
register these shares for resale. This registration statement was withdrawn on
December 19, 2005. In May of 2006, the Company entered into an amended and
restated registrations right agreement granting the Series A holders all the
same rights received by the Series B holders. A new registration statement
covering the resale of these shares has been filed. The registration statement
was declared effective December 4, 2006. The registration rights agreement
stipulated that if the registration statement was not declared effective by
November 21, 2006, the Company had to pay 1 percent per month for a maximum of 6
months or 6 percent maximum. Between November 21, 2006 and December 4, 2006, the
Company became obligated to pay the Series A Preferred Shareholders $50,000 in
liquidated damages in the form of additional shares of Series A Preferred Stock.
In connection with this transaction, certain of the Company's officers and
significant shareholders (the "Locked Up Holders"), beneficially owning
approximately 13 million shares of Common Stock, agreed that, subject to certain
exceptions, they would not offer, sell, contract to sell, lend, pledge, grant
any option to purchase, make any short sale or otherwise dispose of any shares
of Common Stock, or any options or warrants to purchase any shares of Common
Stock with respect to which the holder has beneficial ownership until the
earlier of 90 days following the conversion into Common Stock of at least 50% of
the shares of Series A, or 90 days following the closing of a Qualified Public
Offering (as defined in the registration rights agreement).
Chadbourn Securities, Inc. served as the Company's placement agent in connection
with the offering, and for serving as such, received a cash fee from the Company
of $375,000, and was issued warrants to acquire up to 244,536 shares of Common
Stock at an exercise price of $2.50 per share and otherwise on the same terms as
the Warrants sold to the investors. Laird Cagan, a Managing Director of CMCP,
acted as a registered representative of Chadbourn in connection with this
offering. Our chief executive officer also works for CMCP.
The fair value of the placement warrants was $861,852. The value of the warrants
was estimated using the Black-Scholes option pricing model with the following
assumptions: average risk-free interest of 6.75%; dividend yield of 0%; average
volatility factor of the expected market price of the Company's common stock of
70%; and a term of four years. The value of the warrants was deducted along with
the cash placement fees paid, $321,200, from the face value of the Series A.
The accounting for the Series A is as follows:
Gross proceeds $ 10,189,000
Less: beneficial conversion feature (1,328,066)
Less: offering costs (1,564,152)
Less: warrant value at issuance date (1,328,066)
------------
Subtotal 5,968,716
Cumulative amortization of the beneficial conversion
Feature 442,687
Cumulative amortization of offering costs 521,380
Cumulative amortization of warrant costs 442,687
Cumulative in kind dividend 1,613,841
------------
Balance at December 31, 2006 $ 8,989,311
============
58
The consent of the holders of the Series A was required in order to consummate
the issuance of the Senior Secured Debt discussed in Note 6 above. On February
6, 2006, the holders of the Series A gave such consent pursuant to a letter
agreement with the Company (the "Series A Agreement"). Pursuant to the Series A
Agreement, among other things, (i) the Company agreed to call a shareholders
meeting to approve an amendment of certain provisions of the certificate of
determination governing the terms of the Series A (including the change to the
conversion rate described above), and (ii) the holders of Series A agreed to
waive certain of their veto rights and contractual rights, in order to
facilitate the Company's next round of financing. In consideration of the
foregoing, the Company agreed to deliver to the holders of Series A warrants,
("Additional Warrants")to purchase up to a total of 407,560 shares of the
Company's Common Stock at an exercise price of $0.01 per share. The Additional
Warrants are exercisable for a period of five years commencing as of their
issuance date. The fair value of the warrants, $1,647,250, was expensed during
the quarter ended March 31, 2006 as financing expense (see Note 4). The value of
the warrants was estimated using the Black-Scholes option pricing model with the
following assumptions: average risk-free interest of 4.82%; dividend yield of
0%; average volatility factor of the expected market price of the Company's
common stock of 70%; and a term of five years.
On April 12, 2006, in connection with obtaining the consent of the holders of
the Series A to the issuance of shares of the Company's Series B Preferred Stock
described below, the Company agreed to increase the number of shares issuable
upon exercise of the original Warrants from 407,560 shares to 1,018,900 shares
("New Warrants"), and to decrease the exercise price from $4.00 per share to
$2.75 per share. The change in the estimated value calculated using the
Black-Scholes option pricing model between the original Warrants and the New
Warrants of $1,135,487 was charged to other expense during the second quarter of
2006. The value of the warrants was calculated with the following assumptions:
average risk-free interest of 5.42%; dividend yield of 0%; average volatility
factor of the expected market price of the Company's common stock of 70%; and a
term of 3 years.
In addition, the conversion price of the Series A was decreased. Following the
guidance of FAS 123R, paragraph 35 for modification to equity instruments, the
incremental value of the modification, computed as the difference between the
fair value of the conversion feature at the new conversion price and conversion
feature at the old conversion price on the modification date was deducted from
earnings available to common stockholders as an effective dividend to preferred
shareholders, following the presentation guidance in EITF Topic D-42. The change
in the estimated value of the conversion feature using the Black-Scholes option
pricing model between the original conversion price to the new conversion price
was $3,065,931. The values of the conversion features were calculated with the
following assumptions: average risk-free interest of 4.97%; dividend yield of
0%; average volatility factor of the expected market price of the Company's
common stock of 70% and a term of 3 years.
8% SERIES B CUMULATIVE REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK
On May 25 and May 30, 2006, the Company issued and sold a total of 284,888
shares of its newly created 8% Series B Cumulative Redeemable Convertible
Participating Preferred Stock (the "Series B") and common stock purchase
warrants. A portion of these securities were sold for $25,000,000 in cash and a
portion were issued in exchange for the cancellation of $3,488,800 aggregate
principal amount of Senior Debt (including accrued interest). Each share of
Series B converts into 40 shares of common stock (subject to anti-dilution
adjustments). The shares of Series B are convertible into a total of 11,395,520
shares of Common Stock and the warrants provide the holders with the right to
purchase up to a total of 2,848,880 additional shares of common stock of the
Company.
Holders of Series B are entitled to receive cumulative dividends, payable
quarterly in additional shares of Series B, at the rate of 8% per annum. If the
Company does not comply with certain registration rights provisions, the Company
is subject to liquidated damages of 1% of the total purchase price for each
month that the Company fails to so comply, for a maximum of 6%.
59
Each share of Series B is entitled to that number of votes equal to the number
of whole shares of the Common Stock into which it is convertible. In addition,
so long as at least 50% of the shares of Series B remain outstanding, the
Company is prohibited from taking certain actions without the approval of the
holders of a majority of the outstanding shares of Series B.
The holders of a majority of the shares of Series B have the option to require
the Company to redeem all outstanding shares of Series B on April 28, 2010 at a
redemption price equal to $100 per share, plus accrued and unpaid dividends to
that date. This amount will be approximately $38 million. In the event the
holders do not exercise this redemption right, all shares of Series B Preferred
will automatically convert into shares of Common Stock on such date, as
described below.
Because the Series B is redeemable at the end of four years, at the option of
the holder, it has been classified as "mezzanine equity" on the balance sheet,
in accordance with FAS 150, EITF Topic D 98 and ASR 268.
Each share of Series B will automatically convert into shares of Common Stock at
the stated conversion rate (i) in the event the Company consummates an
underwritten public offering of its securities at a price per share not less
than $5.00 and for a total gross offering amount of at least $20 million, (ii)
in the event of a sale of the Company resulting in proceeds to the holders of
Series B Preferred of a per share amount of at least $200.00, (iii) in the event
that the closing market price of the Common Stock averages at least $7.50 per
share over a period of 20 consecutive trading days and the daily trading volume
averages at least 75,000 shares over such period, (iv) upon the approval of a
majority of the then-outstanding shares of Series B, or (v) unless the Company
is otherwise obligated to redeem the shares as described above, on April 28,
2010.
Each holder has the right to convert its shares of Series B into shares of
Common Stock at the stated conversion rate at any time (subject to certain
restrictions in the event such conversion would result in the holder being the
beneficial holder of more than 4.99% of the Company's outstanding shares of
common stock).
The Warrants are exercisable for a period of five years commencing as of their
issuance date, at an exercise price of $2.75 per share. The fair value of the
warrants was $7,225,630. The value of the warrants was estimated using the
Black-Scholes option pricing model with the following assumptions: average
risk-free interest of 5.42%; dividend yield of 0%; average volatility factor of
the expected market price of the Company's common stock of 70%; and a term of 3
years. In accordance with APB Opinion 14, the fair value of the warrants issued
to the investors is shown as a discount to the face value of the Series B at its
relative fair value of $5,697,760. The warrant value was deducted from the
carrying value of the Series B and is being amortized over 47 months. The
amortization amount is treated consistent with the treatment of preferred stock
dividends.
In accordance with EITF 98-5 and 00-27 it was determined that the Series B
effective conversion price was issued at a discount to fair value. The value of
this discount, called a beneficial conversion feature, was determined to be
$18,207,102. The beneficial conversion feature was deducted from the carrying
value of the Series B and is being amortized over 47 months. The amortization
amount is treated consistent with the treatment of preferred stock dividends.
In connection with the issuance of the Series B and related warrants, the
Company entered into registration rights agreements granting the holders of the
Series B certain demand and piggyback registration rights with respect to the
common stock issuable upon conversion of the Series B and exercise of the
warrants. The Company filed a registration statement with the SEC to register
these shares for resale. The registration statement was declared effective
December 5, 2006. The registration rights agreement stipulated that if the
registration statement was not declared effective by November 21, 2006, the
Company had to pay 1 percent per month for a maximum of 6 months or 6 percent
maximum. Per paragraph 16 of EITF 00-19, this was determined to be an economic
settlement alternative. Therefore, the warrants have been classified as equity.
Between November 21, 2006 and December 4, 2006, the Company became obligated to
pay the Series B Preferred Shareholders approximately $134,000 in liquidated
damages paid in The form of additional shares of Series B Preferred Stock.
60
In connection with this transaction, certain of the Locked-Up Holders agreed
that, subject to certain exceptions, they would not offer, sell, contract to
sell, lend, pledge, grant any option to purchase, make any short sale or
otherwise dispose of any shares of Common Stock, or any options or warrants to
purchase any shares of Common Stock with respect to which the holder has
beneficial ownership until the earlier of 90 days following the conversion into
Common Stock of at least 50% of the shares of Series B, or 90 days following the
closing of a Qualified Public Offering (as defined in the applicable
registration rights agreement).
The Company used three placement agents in connection with the offerings of the
Series B. The placement agents received cash fees from the Company of
$2,275,043, and were issued warrants to acquire up to 869,180 shares of Common
Stock at an exercise price of $2.75 per share and otherwise on the same terms as
the Warrants sold to the investors.
Chadbourn Securities, Inc. served as one of three of the Company's placement
agents in connection with the offering , and for serving as such, received a
cash fee from the Company of $446,050, and was issued warrants to acquire up to
210,980 shares of Common Stock at an exercise price of $2.75 per share and
otherwise on the same terms as the Warrants sold to the investors. These
placement fees are included in the Fees discussed in the paragraph above. Laird
Cagan, a Managing Director of CMCP, acted as a registered representative of
Chadbourn in connection with this offering. Our chief executive officer also
works for CMCP.
The fair value of the placement warrants was $2,224,903. The value of the
warrants was estimated using the Black-Scholes option pricing model with the
following assumptions: average risk-free interest of 5.42%; dividend yield of
0%; average volatility factor of the expected market price of the Company's
common stock of 70%; and a term of 4 years. The value of the warrants was
deducted along with the cash placement fees paid and expenses, $2,359,035, from
the face value of the Series B, and is being amortized over 47 months. The
amortization amount is treated consistent with the treatment of preferred stock
dividends.
The accounting for the Series B is as follows:
Gross proceeds $ 28,488,800
Less: beneficial conversion feature (18,207,102)
Less: offering costs (4,583,938)
Less: warrant value at issuance date (5,697,760)
------------
Subtotal --
Cumulative amortization of the beneficial conversion
feature 3,126,303
Cumulative amortization of offering costs 787,098
Cumulative amortization of warrant costs 959,927
Cumulative in kind dividend 1,485,222
Converted to common stock (841,012)
------------
Balance at December 31, 2006 $ 5,517,538
============
NOTE 10. SHAREHOLDERS' EQUITY
Prior to the merger with Waste Solutions, Inc (WSI), WSI received $750,000 for
the issuance of a promissory note and obtained a commitment for an additional
$250,000 from an investor. The investor also received a warrant for the purchase
of 133,333 shares of common stock for $0.01 per share in connection with these
additional funds. These warrants were exercised in March of 2004. After the
merger, the promissory note was exchanged for 500,000 shares of common stock in
World Waste Technologies, Inc. In April 2004, the Company received the
additional $250,000 for the purchase of an additional 166,667 shares of common
stock. The relative fair value allocated to the warrant was $170,844 using the
Black-Scholes calculation. The value of the warrant was estimated using the
Black Scholes option pricing model with the following assumptions:
61
average risk free interest of 3.6%; dividend yield of 0%; average volatility
factor of the expected market price of the Company's common stock of 70%; and a
term of 4 years.
Prior to the merger of the Company with Voice Powered Technologies, Inc (VPTI),
500,000 shares of common stock were contributed to the Company by the founder of
VPTI in connection with an agreement in which the founder sold approximately
1,000,000 other shares of common stock to accredited investors in a private
sale.
During the second and third quarters ended June 30, 2004 and September 30, 2004
respectively, the Company obtained through a private placement an additional
$3,093,910 from the sale of 2,311,872 shares of common stock, net of fees paid
of $273,890 (2,245,206 of these shares were issued prior to the merger with VPTI
on August 24, 2004). Under a Registration Rights Agreement, the Company agreed
to use commercially reasonable efforts to prepare and file a registration
statement to register the resale of such shares within ninety days of completion
of the Merger, August 23, 2004, and use commercially reasonable efforts to cause
such registration statement to be declared effective by the SEC as soon as
practicable. The registration statement was declared effective December 5, 2006.
During July 2004, the Company issued a warrant to a consultant for the purchase
of 50,000 shares of common stock at an exercise price of $0.01 per share in
consideration for investment banking, financial structuring and advisory
services provided. The fair value of the warrant was $74,567. The value of the
warrant was estimated using the Black-Scholes option pricing model with the
following assumptions: average risk-free interest of 3.6%; dividend yield of 0%;
average volatility factor of the expected market price of the Company's common
stock of 26.4%; and a term of 4 years. The fair value of the warrant was
expensed during the year ended December 31, 2004. The warrant was exercised in
full in September 2004.
Effective August 24, 2004, World Waste Technologies, Inc. was merged into VPTI.
Prior to the merger with VPTI, the holders of the convertible promissory notes
converted these notes into 1,193,500 shares of common stock of World Waste
Technologies, Inc.
Subsequent to the merger with VPTI, during the third and fourth quarters of the
year ended December 31, 2004, in connection with a private placement of
securities, the Company sold 1,192,000 units; each unit comprised of one (1)
share of common stock in the Company and warrants exercisable for 0.25 shares
(298,000 shares) of common stock of the Company at an exercise price of $0.01
per share for 5 years. The fair value of the warrants was $742,222. The value of
the warrants was estimated using the Black-Scholes option pricing model with the
following assumptions: average risk-free interest of 3.6%; dividend yield of 0%;
average volatility factor of the expected market price of the Company's common
stock of 70%; and a term of 1 to 4 years. The consideration paid for the units
was $2.50 per unit, for aggregate net proceeds to the Company of $1,879,770. As
of December 31, 2004, 152,000 of these warrants had been exercised for net
proceeds to the Company of $1,520. Under the Registration Rights Agreement, the
Company has agreed to use commercially reasonable efforts to prepare and file a
registration statement within ninety days of completion of the private placement
and use commercially reasonable efforts to cause such registration statement to
be declared effective by the SEC as soon as practicable registering the resale
of the shares and shares underlying the warrants. The registration statement was
declared effective December 5, 2006.
During the quarter ended June 30, 2005, in connection with private placements of
unregistered securities, the Company raised gross proceeds of $3,387,000 by
issuing 1,354,800 units (each unit comprised of one (1) share of common stock in
the Company (1,354,800 shares of common stock) and warrants exercisable for 0.25
shares (338,700 warrants)) at a purchase price of $2.50 per unit. The warrants
expire five years after the date of the sale of the shares and are exercisable
at $0.01 per share, subject to adjustment. All of the warrants were exercised
during the quarter ended March 31, 2005. The fair value of the warrants was
$843,487. The value of the warrants was estimated using the Black-Scholes option
pricing model with the following assumptions: average risk-free interest of
3.75%; dividend yield of 0%; average volatility factor of the expected market
62
price of the Company's common stock of 70%; and a term of one year. Under the
Registration Rights Agreement, the Company has agreed to use commercially
reasonable efforts to prepare and file a registration statement within ninety
days of completion of the private placement and use commercially reasonable
efforts to cause such registration statement to be declared effective by the SEC
as soon as practicable registering the resale of shares and the shares
underlying the warrants. The registration statement was declared effective
December 5, 2006.
NOTE 11. CAPITAL LEASE OBLIGATION
Capital Lease obligation is comprised as follows:
December 31, December 31,
2006 2005
----------- -----------
Capital Lease for Front End Loader, 34 monthly
installments of $4,526, 31 payments were remaining
at December 31, 2006, interest was imputed at 8.25% $ 125,966 $ --
Less: Current portion 45,615 --
----------- -----------
$ 80,351 $ --
=========== ===========
NOTE 12. COMMITMENT AND CONTINGENCIES
The Company is obligated to pay BPI for technical services $20,000 per month
until the first plant processes or is able to process waste equal to or in
excess of the facility's design capacity and then $15,000 per month for five
years. The Company has operating lease obligations for plant and office space of
approximately:
Less than 1 year $ 253,000
more than 1 less than 3 $ 441,000
more than 3 less than 5 $ 402,000
after 5 years $ 519,000
As of December 31, 2006, the Company had in place two employment agreements,
pursuant to which, the total annual salaries of the two contracts was $430,000.
Each officer is entitled to receive 12 months salary and continuation of
benefits in the event the Company terminates his agreement for other than "good
cause" or the officer resigns from the Company for "good reason" (as such terms
are defined in the agreements). In addition, each officer is entitled to 12
months salary and continuation of benefits in the event of disability or death
during the term of his agreement. In February 2007, the contract with one of the
officers was terminated but he continues to serve the Company in a consulting
capacity. The Company's CEO is not under an employment contract.
NOTE 13. RELATED PARTY TRANSACTIONS
In December 2003, the Company entered into an agreement, amended in March 2004,
with Cagan McAfee Capital Partners, LLC ("CMCP"). The agreement provides for
CMCP to provide advisory and consulting services and for NASD broker dealer,
Chadbourn Securities Inc. ("Chadbourn"), to provide investment banking services
to the Company.
63
The agreement calls for, among other things, the Company to pay to CMCP a
monthly advisory fee of $15,000, increased to $20,000 beginning in September
2004. The total professional fees paid to CMCP for the year ended December 31,
2004 for advisory services was $200,000. In May 2005, the agreement was amended
to provide for the payment to CMCP of a monthly advisory fee of $5,000 and the
Company entered into a separate agreement with John Pimentel to pay him a
monthly advisory fee of $15,000. In September 2005, John Pimentel was hired to
serve as the Company's Chief Executive Officer, at which time his advisory
agreement was terminated. We are no longer paying CMCP an advisory fee. CMCP's
total monthly advisory fees for the year ended December 31, 2005 was $120,000.
Prior to May 2005, John Pimentel was paid by CMCP to provide services to the
Company. Subsequent to May 2005 and prior to his hiring as CEO, Mr. Pimentel was
paid $60,000 for consulting services by the Company.
Chadbourn and Laird Q. Cagan, a registered representative of Chadbourn, acted as
the placement agent (collectively, the "Placement Agent") for us in connection
with the private placement of 3,923,370 shares of our common stock in 2004. In
connection with those private placements, we paid the Placement Agent a
commission of 8% of the price of all shares sold by it, or approximately
$487,200. In addition, we paid the Placement Agent a non-accountable expense
allowance (equal to 2% of the purchase price of the shares or approximately
$90,000) and issued the Placement Agent, or its affiliates, warrants to purchase
392,337 of our common shares, at exercise prices between $1.00 and $2.50.
The values of the warrants, $369,245,were estimated using the Black-Scholes
option pricing model with the following assumptions: average risk-free interest
of 3.6%; dividend yield of 0%; average volatility factor of the expected market
price of the Company's common stock of 70%; and a term of 4 years.
During 2005, the Placement Agent acted as the placement agent for us in
connection with the private placement of 1,354,800 shares of our common stock
and warrants to purchase 338,700 shares of our common stock, the private
placement of 4,075,600 shares of our Series A Preferred Stock and warrants to
purchase 407,560 shares of our common stock, and $4,015,000 aggregate principal
amount of our senior secured promissory notes and warrants to purchase up to a
total of 529,980 shares of Common Stock. In connection with those private
placements, we paid the Placement Agent a commission of approximately $961,550.
In addition, we paid the Placement Agent a non-accountable expense allowance of
$267,740 and issued the Placement Agent, or its affiliates, warrants to purchase
548,486 of our common shares, at exercise price of $2.50. The values of the
warrants, $756,247, were estimated using the Black-Scholes option pricing model
with the following assumptions: average risk-free interest rate 3.6% to 6.75%;
dividend yield of 0%; average volatility factor of the expected market price of
the Company's common stock of 70%; and a term of 4 years (see Note 9).
During the quarter ended March 31, 2006, the Placement Agent acted as the
placement agent for the Company in connection with the private placement of the
Company's senior secured promissory notes and warrants to purchase up to a total
of 297,000 shares of Common Stock. In connection with this private placement,
the Company paid the Placement Agent a commission of $27,500 (see Note 8).
Chadbourn served as one of three of the Company's placement agents in connection
with the offering of the Company's Series B Preferred Stock, and for serving as
such, received a cash fee from the Company of $446,050, and was issued warrants
to acquire up to 210,980 shares of Common Stock at an exercise price of $2.75
per share and otherwise on the same terms as the Warrants sold to the investors
(see Note 9).
64
NOTE 14. UNAUDITED QUARTERLY FINANCIAL INFORMATION
QUARTER ENDED TOTAL
----------------------------------------------------------- ---------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2006 2006 2006 2006
---------- ---------- ------------ -------------
(in thousand of dollars)
Revenue -- $ 14 $ 44 $ 36 $ 94
Gross Margin -- $ (1,260) $ (1,683) $ (1,593) $ (4,536)
Loss from operations $ (1,028) $ (2,358) $ (2,688) $ (12,628) $ (18,702)
Net loss $ (2,780) $ (8,579) $ (1,638) $ (11,960) $ (24,957)
Net loss attributable to
common shareholders $ (3,321) $ (10,086) $ (4,869) $ (15,319) $ (33,595)
Basic and diluted net loss
per share attributable
to common shareholders $ (0.14) $ (0.41) $ (0.19) $ (0.60) $ (1.34)
QUARTER ENDED TOTAL
----------------------------------------------------------- ---------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2005 2005 2005 2005
---------- ---------- ------------ -------------
Revenue -- -- -- -- 0
Gross Margin -- -- -- -- 0
Loss from operations $ (721) $ (978) $ (1,037) $ (1,116) $ (3,852)
Net loss $ (722) $ (561) $ (589) $ (1,207) $ (3,079)
Net loss attributable to
common shareholders $ (722) $ (921) $ (1,010) $ (1,660) $ (4,313)
Basic and diluted net loss
per share attributable
to common shareholders $ (0.04) $ (0.04) $ (0.04) $ (0.06) $ (0.18)
See management discussion and analysis for explanations of signification
quarterly items effecting the quarterly fluctuations.
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure required pursuant to Item 304 of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC
and that such information is accumulated and communicated to the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. As required by SEC Rule 13a-15(b), the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report.
Based on the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures were effective in
ensuring that the information required to be disclosed in 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 Chief Executive Officer and the Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Controls
There was no change in the Company's internal control over financial reporting
during the quarter that ended December 31, 2006 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our board of directors currently consists of five members. Each of our
directors is elected annually by our stockholders to serve until the next annual
meeting or until his or her successor is duly elected and qualified. Our
executive officers all serve at the pleasure of our board.
DIRECTORS
The following table sets forth certain information concerning our
current directors.
NAME AGE POSITION
- ----------------------- ------- ----------------------------------------
John Pimentel 41 Chairman of the Board and Chief Executive
Officer
James L. Ferris, Ph.D. 63 Director, President and Chief Operating
Officer
Ross M. Patten 62 Director
Sam Pina Cortez 43 Director
David Gutacker 53 Director
JOHN PIMENTEL has been the chief executive officer of our company since
September 1, 2005, and he has served as a director of our company since February
2004. From 1993-1996, Mr. Pimentel served as Deputy Secretary for Transportation
for the State of California where he oversaw a $4.5 billion budget and 28,000
employees including the Department of Transportation, the California Highway
Patrol, and parts of the Department of Motor Vehicles. From 1998 to 2002, he
worked with Bain & Company in the firm's Private Equity Group and the general
consulting practice. Since 2003, Mr. Pimentel has worked with Cagan McAfee
Capital Partners, LLC where he is responsible for business development,
investment structuring and portfolio company management. Mr. Pimentel has an
M.B.A. from Harvard Business School and a B.A. from University of California at
Berkeley. From 2004 to 2005, Mr. Pimentel also served as a member of the board
of directors of Pacific Ethanol, Inc. (PEIX), a company he co-founded.
JAMES L. FERRIS, PH.D. joined our board of directors in 2004. On
November 4, 2006, Dr. Ferris was appointed to serve as our chief operating
officer and president. In 2006, and prior to his appointment as an officer, Dr.
Ferris provided us with consulting services. Dr. Ferris served as a member of
the board of directors of Albany International from 2000 - 2004. Dr. Ferris has
been a trustee of the Institute of Paper Chemistry Foundation since 2003 and
prior to that he was the president and chief executive officer of the Institute
of Paper Science and Technology from 1996 to 2003. Prior to that, he was vice
president of research for the Pulp, Paper, and Packaging Sector of Weyerhaeuser
Corporation, where he was employed for 30 years in various business,
manufacturing and research positions. Dr. Ferris completed the Advanced
Management Program at Harvard Business School in 1992, received his Ph.D. (1972)
and M.S. (1969) from the Institute of Paper Chemistry at Lawrence University,
and obtained his B.S. in Chemical Engineering from the University of Washington
in 1966.
ROSS M. PATTEN joined our board of directors in 2005. Mr. Patten is
Chairman of the Board and a Vice President of Synagro Technologies, Inc., a
residuals management company. Mr. Patten served as the Chief Executive Officer
of Synagro Technologies, Inc. from February 1998 until September 2003. Prior to
joining Synagro Technologies, Inc., Mr. Patten served at Browning-Ferris
Industries for 17 years, where he last served as Divisional Vice
President-Corporate Development. He also served as Executive Vice President for
Development of Wheelabrator Technologies, a Waste Management, Inc. subsidiary,
and director and Vice President-Business Development at Resource NE, Inc. prior
67
to its acquisition by Waste Management, Inc. Mr. Patten was a founder, principal
and Managing Director of Bedford Capital, an investment firm specializing in
environmental companies, and of Bedford Management, which provides consulting
services to publicly held waste management and environment-related companies in
the areas of growth and acquisition strategy, formation and implementation.
Pursuant to a contractual right granted to the holders of our Series A preferred
stock, Mr. Patten was initially designated by the holders of our Series A
preferred stock to fill a board vacancy.
SAM PINA CORTEZ joined our board of directors in 2005. Mr. Cortez has
been a principal at KCL Development, LLC since 2003, where he provides business
consulting and financial advisory services, primarily to growth companies and
new business ventures. Prior to KCL Development, Mr. Cortez spent over 12 years
in investment banking, focused primarily in the environmental industry. From
2000 to 2003, Mr. Cortez was a Senior Vice President of Investment Banking at
Lehman Brothers, and prior to that he worked as an investment banker at
Donaldson, Lufkin & Jenrette, Alex. Brown & Sons Incorporated and Morgan Stanley
International. Mr. Cortez received an M.B.A. from the Harvard Graduate School of
Business Administration and a B.S. in Chemical Engineering from the University
of California, Berkeley. Pursuant to a contractual right granted to the holders
of our Series A preferred stock, Mr. Cortez was initially designated by the
holders of our Series A preferred stock to fill a board vacancy.
MR. GUTACKER joined our board of directors in December 2006. Mr.
Gutacker provided consulting services to our company in 2006, prior to his
appointment as a director. Mr. Gutacker has served as the chief executive
officer of the Gutacker Group, a consulting firm specializing in evaluating and
improving energy, waste-to-energy and other industrial projects, since 2004.
>From 2005 to 2006 he served as president and chief executive officer of Agrifos
Fertilizer, a phosphate fertilizer company, and from 1987 to 2001 worked for
American Re-fuel, a waste-to-energy company, his most recent position being
president and chief operating officer. Mr. Gutacker obtained his B.S. in
Industrial Technology from the University of New York at Buffalo and his MBA
from Canisius College.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our
current executive officers.
NAME AGE POSITION
----------------------- ------ ------------------------------------
John Pimentel 41 Chairman of the Board and Chief
Executive Officer
James L. Ferris, Ph.D. 63 Chief Operating Officer and President
Thomas L. Collins 66 Executive Vice President
David A. Rane 53 Senior Vice President and Chief
Financial Officer
Information for Mr. Pimentel and Dr. Ferris is set forth above under
"Directors."
THOMAS L. COLLINS has been an executive vice president of our company
since September 1, 2005. Prior to serving in that capacity, Mr. Collins was our
chief executive officer since February 2004. Mr. Collins served as a director of
our company from February 2004 to December 2006. He worked with Waste
Management, Inc. from 1972 to 1995, including serving as the Vice President and
Controller for the Western Region. After retiring from Waste Management in 1995,
Mr. Collins was an independent consultant for the waste industry until joining
our predecessor company in January 2003 as Executive Vice President. Mr. Collins
has a B.A. in Business Administration and Accounting from Quincy University and
is a certified public accountant. Mr. Collins has informed us that he intends to
retire from our company in May 2007.
DAVID A. RANE joined our company in November 2004 as a senior vice
president and chief financial officer. Mr. Rane provided consulting services to
our company from April 2004 to November 2004. Mr. Rane served as Executive Vice
President and Chief Financial Officer for Callaway Golf Company from 1994 to
2000. Prior to that, Mr. Rane worked at PricewaterhouseCoopers for 14 years in
their San Diego, Brussels and National Offices. Since leaving Callaway Golf, Mr.
Rane has served as Executive Vice President of two development stage companies,
StoreRunner Network Inc. (from 2000 to 2001) and SureBeam Corporation (from 2001
to 2004), and most recently served as Vice Chancellor for Financial Management
for The National University System (from May 2004 to November 2004). SureBeam
Corporation filed for protection under Chapter 7 of the United States Bankruptcy
Code in January 2004. Mr. Rane is a certified public accountant and has a B.A.
in Accounting from Brigham Young University.
68
AUDIT COMMITTEE
In August 2004, our board of directors established an audit committee.
Our board of directors has instructed the audit committee to meet periodically
with our management and independent accountants to, among other things, review
the results of the annual audit and quarterly reviews and discuss the financial
statements, select the independent accountants to be retained, and receive and
consider the accountants' comments as to controls, adequacy of staff and
management performance and procedures in connection with audit and financial
controls. The audit committee is also authorized to review related party
transactions for potential conflicts of interest. Messrs. Patten and Cortez
(chairman) served as members of the audit committee in 2006 (with Mr. Gutacker
replacing Dr. Ferris as a member in December 2006).
While our board of directors believes that our audit committee members
are financially literate and have a level of financial sophistication necessary
to serve on the audit committee, it has determined that we do not have an "audit
committee financial expert," as defined under Item 401(h)(2) of Regulation S-K
of the Securities Act of 1933, serving on the audit committee. Given the limited
scope of our operations to date, our board of directors believes that we do not
currently need to have an audit committee financial expert serving on the audit
committee.
CODE OF ETHICS
We have adopted a "Code of Ethics" within the meaning of Section 406 of
the Sarbanes-Oxley Act of 2002 and applicable SEC rules that applies to our
officers, directors and employees. Our board of directors will not permit any
waiver of any ethics policy for any director or executive officer. A copy of the
Code of Ethics will be made available to our shareholders without charge upon
request by contacting us at (858) 391-3400.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than 10% of the
outstanding shares of our common stock to file reports of common stock ownership
and changes in ownership with the SEC. Reporting persons are required by SEC
regulations to furnish us with copies of all Section 16(a) forms that they file.
Based solely on our review of the copies of such forms received or written
representations from the reporting persons, we believe that, with respect to the
fiscal year ended December 31, 2006, all of the reporting persons complied with
all applicable Section 16 filing requirements on a timely basis, except that
reports were not filed by Trellus Partners, LP.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION PHILOSOPHY AND OBJECTIVES
Our compensation committee is committed to an executive compensation
philosophy that attracts and retains executive officers, motivates executive
officers to achieve our company's business objectives, and aligns the interests
of key leadership with the long-term interests of our company's shareholders.
The current objectives of our compensation program are to pay cash compensation
at approximately market levels typical for an early stage company, and to
supplement cash compensation with stock options. Stock options are granted with
a strike price equal to the closing market price of our common stock on the date
of grant. Stock options vest over time and are linked to the goals of our
company and the performance of our executive officers.
69
SETTING EXECUTIVE COMPENSATION
Executive compensation is intended to support our company's performance
goals. Accordingly, the committee believes that a high percentage of
compensation should be equity linked and therefore tied to the performance of
our company and the individual's contribution to our company's performance.
The committee generally commences its review of our executive officer
compensation for each year during the fourth quarter of the preceding year with
the final determination of base salary and equity incentives made in April of
such year following completion of the audit of our financial statements for the
prior fiscal year. Changes in annual base compensation, if any, may be
implemented retroactive to the beginning of the fiscal year.
COMPENSATION POLICIES
EMPLOYMENT AGREEMENTS: We do not have an employment agreement with our
chief executive officer. We have entered into an employment agreement with our
chief financial officer and our executive vice president. These agreements are
summarized elsewhere in this report. We are not parties to employment agreements
with any other employees.
CHANGE-IN-CONTROL AGREEMENTS: Some of the awards issued under our 2004
Stock Option Plan provide that such awards will fully vest in the event of a
change in control, as defined in such plan. We do not maintain any other
change-in-control policies or plans.
SEVERANCE POLICY: The above-referenced employment agreement contain
provisions related to severance payments upon termination of employment. We do
not maintain any other severance policies or plans.
RECOUPMENT POLICY RELATING TO UNEARNED INCENTIVE COMPENSATION: It is
the committee's policy to seek to make retroactive adjustments to any cash or
equity based incentive compensation paid to executive officers where the payment
was predicated upon the achievement of certain financial results that were
subsequently the subject of a restatement. Where applicable, our company may
seek to recover any amount determined to have been inappropriately received by
the individual executive.
IMPACT OF TAX AND ACCOUNTING TREATMENT ON COMPENSATION DECISIONS: The
committee makes reasonable efforts to ensure that compensation paid to our
executive officers is deductible, provided it determines that application of
applicable limits are consistent with our needs and executive compensation
philosophy. Our income tax deduction for executive compensation is limited by
Section 162(m) of the Internal Revenue Code to $1 million per executive per
year, unless compensation above that amount is "performance-based." This limit
applies to our chief executive officer and our other named executive officers.
We have not had any deductions limited by Section 162(m) of the Internal Revenue
Code to date.
COMPONENTS OF EXECUTIVE OFFICER COMPENSATION
BASE SALARY: Executive officers receive a base salary in cash to
compensate them for services rendered throughout the year. Base salary is
intended to recognize each officer's responsibilities, role in the organization,
experience level, and contributions to the success of our company. The committee
sets base salaries for the executive officers based on negotiations with the
executive officer and our experience with similarly situated early stage
companies.
70
STOCK OPTION AWARDS: The committee grants stock options to provide
additional incentives to maximize our company's share value, and to make equity
ownership an important component of executive compensation. Stock option award
levels are determined based on market data, and vary based on an individual's
position within our company, time at our company, and contributions to our
company's performance. Stock options are granted with a strike price equal to
the closing market price of our common stock on the date of grant. Stock options
vest over time and are linked to the goals of our company and the performance of
the executive officers. Although we did not make any stock option grants to our
executive officers in 2006, we plan to make grants in 2007 and in future
periods.
EXECUTIVE PERQUISITES AND GENERALLY AVAILABLE BENEFIT PROGRAMS: Our
executive officers are eligible to receive medical, dental and vision insurance
that is generally available to our other employees. Although we do not currently
offer any perquisites to any of our executive officers, we may do so in the
future based upon the growth and success of our company.
COMPENSATION COMMITTEE REPORT
THE INFORMATION CONTAINED IN THIS REPORT SHALL NOT BE DEEMED TO BE
"SOLICITING MATERIAL" OR "FILED" WITH THE SEC OR SUBJECT TO THE LIABILITIES OF
SECTION 18 OF THE EXCHANGE ACT, EXCEPT TO THE EXTENT THAT THE COMPANY
SPECIFICALLY INCORPORATES IT BY REFERENCE INTO A DOCUMENT FILED UNDER THE
SECURITIES ACT OR THE EXCHANGE ACT.
The Compensation Committee of the Board of Directors has reviewed and
discussed the above Compensation Discussion and Analysis with management and,
based upon such review and discussion, has recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in the Company's
Annual Report.
THE COMPENSATION COMMITTEE:
Ross Patten, Chairman Sam Pina Cortez David Gutacker
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation
of our chief executive officer, chief financial officer and the next most highly
compensated executive officers whose total compensation in 2006 was in excess of
$100,000. There were no bonuses, restricted stock awards, stock options, stock
appreciation rights or any other compensation paid any of the named executive
officers in 2006.
SALARY TOTAL
NAME AND PRINCIPAL POSITION YEAR ($) ($)
- ------------------------------- ---------- ------------------ --------------
John Pimentel 2006 176,539(1) 176,539
Chief Executive Officer
David Rane 2006 224,000(2) 224,000
Senior Vice President and
Chief Financial Officer
Thomas L. Collins 2006 221,846(3) 221,846
Executive Vice President
Fred Lundberg 2006 200,057(4) 200,057
Senior Vice President
(1) Does not include $30,115 paid in 2006 representing salary earned and
deferred in 2005.
(2) Does not include $6,461 paid in 2006 representing salary earned and
deferred in 2005.
(3) Does not include $15,077 paid in 2006 representing salary earned and
deferred in 2005.
(4) Does not include $13,596 paid in 2006 representing salary earned and
deferred in 2005. Mr. Lundberg resigned as an executive officer effective
as of February 23, 2007, but continues to be available to serve our company
in a consulting capacity.
71
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2006
The following table provides information on the current holdings of
stock option awards by our named executive officers. This table includes
unexercised and unvested option awards. Each equity grant is shown separately
for each named executive officer. There were no equity or non-equity awards
granted to any of our named executive officers in 2006, nor did any named
executive officer exercise any awards in 2006.
OPTION AWARDS
---------------------------------------------------------------------------------------------
NUMBER OF SECURITIES NUMBER OF SECURITIES
UNDERLYING UNDERLYING OPTION
UNEXERCISED OPTIONS UNEXERCISED OPTIONS EXERCISE
(#) (#) PRICE
NAME EXERCISABLE UNEXERCISABLE ($) OPTION EXPIRATION DATE
- ----------------------- ---------------------- ---------------------- ------------- ------------------------
David Rane 112,500 37,500 2.70 December 23, 2015
David Rane (1) 145,833 204,167 2.70 December 23, 2015
Tom Collins (2) 75,000 25,000 1.50 May 1, 2014
Fred Lundberg (3) 54,608 20,392 1.50 May 1, 2014
(1) On April 18, 2005, Mr. Rane was granted an option to purchase up to 350,000
shares of our common stock that would have become exercisable as to
12/48ths on April 18, 2006 and 1/48th per month thereafter. This option was
cancelled on December 23, 2005 in conjunction with the issuance of another
option resulting in what was effectively a repricing. Our compensation
committee determined to grant Mr. Rane a stock option with an exercise
price of $2.70 per share in substitution for his previously granted stock
option with an exercise price of $4.45 per share based upon its
determination that the exercise price of $4.45 per share was substantially
in excess of the fair market value of our common stock on the grant date,
after taking into account the limited trading market for our common stock.
Our compensation committee determined that an option with an exercise price
of $2.70 per share bore a closer relationship to the fair market value of
our common stock and would provide a more realistic incentive to Mr. Rane
to maximize shareholder value.
(2) Represents a warrant to purchase up to 100,000 shares of our common stock
granted on May 1, 2004 that became exercisable as to 12/48ths on January
10, 2005 and vests 1/48th per month thereafter.
(3) Represents a warrant to purchase up to 75,000 shares of our common stock
granted on May 1, 2004 that became exercisable as to 12/48ths on January
10, 2005 and vests 1/48th per month thereafter. So long as Mr. Lundberg
continues to be available to provide us with consulting services, this
warrant will continue to vest.
COMPENSATION OF DIRECTORS
The following table summarizes the compensation that we paid to our
non-employee directors (as well as to our president and chief operating officer,
who was a non-employee director for a portion of 2006) for the year ended
December 31, 2006:
FEES EARNED OR ALL OTHER TOTAL
NAME PAID IN CASH ($) COMPENSATION ($) ($)
- --------------------------- -------------------- --------------------- -------------
Dr. James L. Ferris 16,781 33,956(1) 50,757
Sam Pina Cortez 15,500 - 15,500
Ross M. Patten 19,000 - 19,000
David Gutacker 2,000 30,050(2) 32,050
72
(1) Includes $12,633 paid to Dr. Ferris for consulting fees and $21,323 paid as
compensation for services as our president and chief operating officer.
(2) Represents consulting fees paid to the Gutacker Group Inc., a firm owned by
Mr. Gutacker, prior to his appointment to our board of directors.
Our non-employee directors (as well as Dr. Ferris) held the following
options as of December 31, 2006:
OPTION AWARDS
---------------------------------------------------------------------------------------------
NUMBER OF SECURITIES NUMBER OF SECURITIES
UNDERLYING UNDERLYING OPTION
UNEXERCISED OPTIONS UNEXERCISED OPTIONS EXERCISE
(#) (#) PRICE
NAME EXERCISABLE UNEXERCISABLE ($) OPTION EXPIRATION DATE
- ----------------------- ---------------------- ---------------------- ------------- ------------------------
Dr. James L. Ferris 7,000 -- 3.70 December 23, 2014
Dr. James L. Ferris 60,000 30,000 2.25 November 1, 2015
Dr. James L. Ferris 40,000 50,000 2.70 December 23, 2015
Sam Pina Cortez 90,000 20,000 2.25 November 1, 2015
Sam Pina Cortez 60,000 50,000 2.70 December 23, 2015
Ross M. Patten 75,000 25,000 2.25 November 1, 2015
Ross M. Patten 15,000 5,000 2.70 December 23, 2015
Ross M. Patten 60,000 60,000 2.70 December 23, 2015
David Gutacker -0- 200,000 1.55 January 17, 2017
In 2006, each non-employee member of our board of directors (as well as
Dr. Ferris) was compensated at the rate of $500 per day for attending board or
committee meetings or otherwise working on company business. Non-employee
directors were also eligible to receive grants of options in the discretion of
the compensation committee. Except with respect to Dr. Ferris, directors who are
also our employees receive no additional compensation for serving on our board.
In 2007, based upon the recommendation of our compensation committee, our board
of directors adopted a new compensation plan for our non-employee directors
pursuant to which such directors will receive an annual retainer of $24,000 per
year, $1,000 per meeting for attending board meetings ($500 for attending
telephonically), $2,000 per year for each committee on which the director serves
($4,000 for service on the audit committee), an additional $2,000 per year for
serving as the chairman of a committee and $1,000 per day for attending other
meetings at the request of the chairman of our board. Directors are also
entitled to reimbursement for reasonable expenses incurred on behalf of our
company. The compensation committee is presently evaluating alternative means of
continuing to provide equity awards to non-employee directors.
EMPLOYMENT AND CONSULTING AGREEMENTS
John Pimentel is employed as our chief executive officer on an at-will
employment basis. He currently receives a monthly salary of $15,000.
Thomas L. Collins is employed by us under an employment agreement that
provides a base annual salary of $224,000. Mr. Collins' employment is at-will.
This agreement was entered into with Mr. Collins on April 28, 2005 and
superseded Mr. Collins' prior agreement with us. Mr. Collins was originally
hired to act as an executive vice president and, in February 2004, our board of
directors elected Mr. Collins to serve as our chief executive officer. Mr.
Collins resigned as chief executive officer in September 2005. The agreement
provides discretion for our board of directors to increase the annual salary
based upon Mr. Collins' performance and to provide bonuses as it deems
appropriate. The agreement also provides for salary and benefit continuance for
one year after death or permanent disability and severance equal to one year of
salary ($224,000 as of December 31, 2006), plus a continuation of benefits in
the event that Mr. Collins is terminated without cause or resigns for good
73
reason (as such terms are defined in the agreement) (in each case, with payments
being made over a one-year period). As consideration for receiving the foregoing
payments, Mr. Collins would need to be available to provide us with consulting
services on projects identified by our board, and enter into a severance
agreement and general release with our company. While any such payments are
being made Mr. Collins would be prohibited from engaging in any activities that
would compete with our business or from interfering or disrupting any of our
business relationships with any of our customers or suppliers or soliciting any
of our employees to leave employment with our company. Any of these requirements
may be waived by our company. The agreement also amended the terms of Mr.
Collins' previously issued warrant to acquire up to 100,000 shares of our common
stock to provide for acceleration upon a change-in-control (as defined in our
2004 Stock Option Plan). The agreement provides for indemnification of Mr.
Collins for decisions made in good faith while performing services for us. Mr.
Collins also entered into our standard indemnification agreement for officers of
our company, which provides, among other things, that we will indemnify Mr.
Collins, under the circumstances set forth therein, for defense expenses,
damages, judgments, fines and settlements incurred by him in connection with
actions or proceedings to which he may be a party as a result of his position as
an officer, employee, agent or fiduciary of our company, and otherwise to the
full extent permitted under our bylaws and California law. Mr. Collins has
informed us that he intends to retire from our company in May 2007.
On October 1, 2006, we entered into a three-month consulting agreement
with Dr. James L. Ferris, a member of our board of directors. The agreement
required Dr. Ferris to provide us with management consulting services and to
assist with certain management initiatives designed to achieve full operation of
our plant in Anaheim, California. The agreement provided for the payment to Dr.
Ferris of a monthly fee of $12,633, plus an expense reimbursement of $150 per
day. On November 4, 2006, Dr. Ferris terminated his consulting agreement with us
and entered into an at-will employment agreement with us, effective as of
November 1, 2006, pursuant to which he was appointed to serve as our chief
operating officer and president for a salary of $14,000 per month plus paid
vacation, health benefits and other employee benefits in accordance with our
employee practices (which currently include dental and vision insurance). This
agreement can be terminated by either party at any time without notice. Mr.
Ferris will continue to be compensated for serving as a member of our board of
directors as if he were a non-employee director.
Fred Lundberg was employed by us under an employment agreement that
provided a base annual salary of $202,000 plus benefits (which at December 31,
2006 included dental and vision insurance). Mr. Lundberg's employment was
at-will. This agreement was entered into with Mr. Lundberg on April 28, 2005 and
superseded Mr. Lundberg's prior agreement with our company. The agreement
provided discretion for our board of directors to increase the annual salary
based upon Mr. Lundberg's performance and to provide bonuses as it deemed
appropriate. The agreement also provided for salary and benefit continuance for
one year after death or permanent disability and severance equal to one year of
salary ($202,000 as of December 31, 2006), plus a continuation of benefits in
the event that Mr. Lundberg were terminated without cause or resigned for good
reason (as such terms were defined in the agreement) (in each case, with
payments being made over a one-year period). As consideration for receiving the
foregoing payments, Mr. Lundberg would have needed to be available to provide us
with consulting services on projects identified by our board, and to have
entered into a severance agreement and general release with our company. While
any such payments are being made Mr. Lundberg would be prohibited from engaging
in any activities that would compete with our business or from interfering or
disrupting any of our business relationships with any of our customers or
suppliers or soliciting any of our employees to leave employment with our
company. Any of these requirements may be waived by our company. The agreement
provided for indemnification of Mr. Lundberg for decisions made in good faith
while performing services for us. Mr. Lundberg also entered into our standard
indemnification agreement for officers of our company, which provided, among
other things, that we would indemnify Mr. Lundberg, under the circumstances set
forth therein, for defense expenses, damages, judgments, fines and settlements
incurred by him in connection with actions or proceedings to which he may be a
party as a result of his position as an officer, employee, agent or fiduciary of
our company, and otherwise to the full extent permitted under our bylaws and
California law.
74
Effective February 23, 2007, Mr. Lundberg ceased to be employed by us
and began to provide us services on a consulting basis pursuant to a separation
agreement and release. Pursuant to this agreement, we agreed to pay Mr. Lundberg
severance pay equal to one year's base salary ($202,000) payable in 12 equal
monthly installments, and benefit continuation (dental and vision insurance) for
the one-year period commencing as of February 23, 2007. In consideration for
receipt of the severance amount, Mr. Lundberg confirmed that so long as he was
being provided with severance payments, he would be bound by the consulting,
non-competition and non-solicitation provisions of his employment agreement (the
"Employee Obligations"), as well as the confidentiality provisions of a
confidentiality agreement previously entered into with us. Our company and Mr.
Lundberg also agreed not to make any disparaging comments about each other. Mr.
Lundberg may voluntarily terminate his right to receive severance payments at
any time, in which case the Employee Obligations will cease.
David A. Rane is employed by us under an employment agreement that
provides a base annual salary of $224,000 plus benefits (which at December 31,
2006 included health, dental and vision insurance). Mr. Rane's employment is
at-will. This agreement was entered into with Mr. Rane on April 28, 2005 and
superseded Mr. Rane's prior agreement with us. The agreement provides discretion
for our board of directors to increase the annual salary based upon Mr. Rane's
performance and to provide bonuses as it deems appropriate. The agreement also
provides for salary and a continuance of benefits for one year after death or
permanent disability and severance equal to one year of salary ($224,000 as of
December 31, 2006), plus a continuation of benefits in the event that Mr. Rane
is terminated without cause or resigns for good reason (as such terms are
defined in the agreement) (in each case, with payments being made over a
one-year period). As consideration for receiving the foregoing payments, Mr.
Rane would need to be available to provide us with consulting services on
projects identified by our board, and enter into a severance agreement and
general release with our company. While any such payments are being made Mr.
Rane would be prohibited from engaging in any activities that would compete with
our business or from interfering or disrupting any of our business relationships
with any of our customers or suppliers or soliciting any of our employees to
leave employment with our company. Any of these requirements may be waived by
our company. The agreement provides for indemnification of Mr. Rane for
decisions made in good faith while performing services for us. Mr. Rane also
entered into our standard indemnification agreement for officers of our company,
which provides, among other things, that we will indemnify Mr. Rane, under the
circumstances set forth therein, for defense expenses, damages, judgments, fines
and settlements incurred by him in connection with actions or proceedings to
which he may be a party as a result of his position as an officer, employee,
agent or fiduciary of our company, and otherwise to the full extent permitted
under our bylaws and California law.
In October 2006, we entered into a consulting agreement with the
Gutacker Group Inc., a consulting firm owned by David Gutacker. Pursuant to the
agreement, we agreed to pay the Gutacker Group a fixed daily rate (ranging from
$800 to $1,800/day) for making its personnel (including Mr. Gutacker) available
to us to assist us in executing our business plan and defining our business
model. We also agreed to reimburse the Gutacker Group for air travel and other
expenses it incurs in providing us services. We paid the Gutacker Group total
consulting fees of $30,500 in 2006. This agreement was terminated when Mr.
Gutacker joined our board of directors in December 2006.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2006 with
respect to shares of our common stock that may be issued under our equity
compensation plans, which include individual compensation arrangements.
75
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES UNDER EQUITY
T0 BE OSSIED UPON WEIGHTED-AVERAGE COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS (a))
- ------------------------------------------ ---------------------------------------------- ------------------------
(a) (b) (c)
Equity compensation plans approved by 1,337,000 $ 2.52 663,000
security holders
Equity compensation plans not approved 250,000 $ 1.50 0
by security holders
Total 1,587,000 $ 2.36 663,000
The only equity compensation plan approved by our shareholders is our
2004 Stock Option Plan. Except as described below with respect to the issuance
of certain warrants, we have not adopted without the approval of our
shareholders any equity compensation plans under which our securities are
authorized for issuance.
On May 10, 2004, our board of directors granted warrants to each of
Thomas L. Collins, our then-chief executive officer and Fred Lundberg, our
then-senior vice president, to acquire up to 100,000 and 75,000 shares,
respectively, of our common stock. The warrants, which were all issued in
connection with services rendered to our company and vest through January 2008,
each have a strike price of $1.50 per share (the fair market value of our common
stock at the time of grant), a term of seven years and a cashless exercise
provision.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Cortez and Patten and Dr. Ferris served as members of our
compensation committee during 2006 (until Mr. Gutacker replaced Dr. Ferris as a
member in December 2006). On October 1, 2006, Dr. Ferris entered into a
consulting agreement with us. On November 4, 2006, this agreement was terminated
and Dr. Ferris was appointed to serve as our chief operating officer and
president. We entered into a consulting agreement with a company owned by Mr.
Gutacker in October 2006, which agreement was terminated when Mr. Gutacker
joined our board in December 2006. None of the other members of our compensation
committee at any time has been one of our officers or employees. None of our
executive officers currently serves, or in the past year has served, as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving on our board of directors or compensation
committee.
INDEMNIFICATION
Our articles of incorporation provide that no officer or director shall
be personally liable to our corporation or our stockholders for monetary damages
except as provided pursuant to California law. Our bylaws and articles of
incorporation also provide that we shall indemnify and hold harmless each person
who serves at any time as a director, officer, employee or agent of our company
from and against any and all claims, judgments and liabilities to which such
person shall become subject by reason of the fact that he is or was a director,
officer, employee or agent of our company, and shall reimburse such person for
all legal and other expenses reasonably incurred by him or her in connection
with any such claim or liability. We also have the power to defend such person
from all suits or claims in accord with California law. The rights accruing to
any person under our bylaws and articles of incorporation do not exclude any
other right to which any such person may lawfully be entitled, and we may
indemnify or reimburse such person in any proper case, even though not
specifically provided for by our bylaws or articles of incorporation.
76
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of our
company pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 30, 2007 by (i) each person
who is known by us to own beneficially more than five percent of our outstanding
common stock; (ii) each of our directors; (iii) each of our named executive
officers; and (iv) all current executive officers and directors as a group. The
number of shares and the percentage of shares beneficially owned by each such
person or group, as set forth below, include shares of common stock that such
person or group has the right to acquire on or within 60 days after March 30,
2007 pursuant to the exercise of options or warrants. As of March 30, 2007,
26,257,122 shares of our common stock were issued and outstanding.
Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and/or investing power with respect to securities. We
believe that, except as otherwise noted and subject to applicable community
property laws, each person named in the following table has sole investment and
voting power with respect to the shares of common stock shown as beneficially
owned by such person.
Number of Shares Percent of
Name and Address of Beneficial Owner (1) Beneficially Owed (1) Class (1)
- ------------------------------------------------------------------- ---------------------------------------------
John Pimentel(2) 1,362,500 5.19%
Thomas L. Collins(3) 1,150,000 4.36%
David A. Rane (4) 650,000 2.43%
Fred Lundberg(5) 735,000 2.79%
James L. Ferris (6) 197,800 *
Ross M. Patten (7) 240,000 *
Sam Pina Cortez (8) 232,500 *
David Gutacker (9) 200,000 *
Steven Racoosin (10) 2,361,910 8.98%
One World Zero Waste, LLC (10) 2,361,910 8.98%
Laird Q. Cagan (11) 2,446,275 9.09%
Trellus Partners, LP (12) 6,726,200 20.87%
All directors and executive officers as a group (8 persons) 4,767,800 17.11%
_________________
* Indicates beneficial ownership of less than 1% of the total outstanding common
stock.
77
(1) Shares of common stock subject to options, warrants or other convertible
securities (including approximately 17 million shares of common stock
issuable upon conversion of our preferred stock) that are currently
exercisable or convertible or exercisable or convertible within 60 days of
March 30, 2007 are deemed to be outstanding and to be beneficially owned by
the person or group holding such options, warrants or other convertible
securities for the purpose of computing the percentage ownership of such
person or group but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person or group. Unless
otherwise indicated, the address for each of the individuals listed in the
table is care of World Waste Technologies, Inc., 13500 Evening Creek Drive,
Suite 440, San Diego, California, 92128.
(2) Includes 350,000 shares owned by Mr. Pimentel's spouse. Includes 12,500
shares issuable upon conversion of preferred stock and upon exercise of
warrants.
(3) Includes 1,050,000 shares beneficially owned by a family trust and over
which Mr. Collins has voting and dispositive power and 100,000 shares
issuable upon exercise of a warrant.
(4) Includes 500,000 shares issuable upon exercise of stock options.
(5) Includes 75,000 shares issuable upon exercise of a warrant.
(6) Includes 187,000 shares issuable upon exercise of a stock option which is
immediately exercisable but subject to repurchase by us in the event that
optionee's service to our company terminates. Our repurchase right lapses
as follows: with respect to the option to purchase (i) 7,000 shares granted
on December 21, 2004, our repurchase right has fully lapsed; (ii) 90,000
shares granted on November 1, 2005, our repurchase right lapses with
respect to 1/24ths of the shares upon the passing of each month of
continuance service to us after July 1, 2005; and (iii) 90,000 shares
granted on December 23, 2005, our repurchase right lapses with respect to
1/24ths of the shares upon the passing of each month of continuance service
to us after January 1, 2006. Our repurchase right also fully lapses in the
event that we are subject to a change in control. Also includes 10,800
shares of common stock issuable upon the conversion of preferred stock and
the exercise of warrants.
(7) Represents 240,000 shares issuable upon exercise of a stock option which is
immediately exercisable but subject to repurchase by us in the event that
optionee's service to our company terminates. Our repurchase right lapses
as follows: with respect to the option to purchase (i) 100,000 shares
granted on November 1, 2005, our repurchase right lapses with respect to
1/24ths of the shares upon the passing of each month of continuance service
to us after July 1, 2005; (ii) 120,000 shares granted on December 23, 2005,
our repurchase right lapses with respect to 1/24ths of the shares upon the
passing of each month of continuance service to us after January 1, 2006;
and (ii) 20,000 shares granted on December 23, 2005, our repurchase right
lapses with respect to 1/24ths of the shares upon the passing of each month
of continuance service to us after July 1, 2005. Our repurchase right also
fully lapses in the event that we are subject to a change in control.
(8) Includes 220,000 shares issuable upon exercise of stock options which are
immediately exercisable but subject to repurchase by us in the event that
optionee's service to our company terminates. Our repurchase right lapses
as follows: with respect to the option to purchase (i) 110,000 shares
granted on November 1, 2005, our repurchase right lapses with respect to
1/24ths of the shares upon the passing of each month of continuance service
to us after July 1, 2005; and (ii) 110,000 shares granted on December 23,
2005, our repurchase right lapses with respect to 1/24ths of the shares
upon the passing of each month of continuance service to us after January
1, 2006. Our repurchase right also fully lapses in the event that we are
subject to a change in control. Also includes 12,500 shares of common stock
issuable upon conversion of preferred stock and exercise of warrants.
(9) Represents 200,000 shares issuable upon exercise of a stock option which is
immediately exercisable but subject to repurchase by us in the event that
optionee's service to our company terminate. Our repurchase right lapses
with respect to 1/24th of the shares upon the passing of each month of
continuing service to us after December 31, 2006. Our repurchase right also
fully lapses in the event that we are subject to a change in control.
(10) Address: 3849 Pala Mesa Drive, Fallbrook, CA 92028. Mr. Racoosin has voting
and dispositive power over the shares that are owned of record by One World
Zero Waste, LLC, and such shares are also included in the table opposite
Mr. Racoosin's name. Includes 51,563 shares issuable upon exercise of a
warrant. Does not include 23,437 shares issuable upon exercise of a warrant
that are not currently exercisable or exercisable within 60 days of March
30, 2007.
78
(11) Includes (i) 1,585,000 shares owned of record by Laird Q. Cagan, (ii)
200,000 shares owned of record by the KQC Trust, of which Mr. Cagan is the
sole trustee, (iii) 426,122 shares that Mr. Cagan currently has the right
to acquire pursuant to warrants, (iv) 95,000 shares out of a total of
190,000 shares that Cagan McAfee Capital Partners, LLC, an entity in which
Mr. Cagan holds a 50% interest and shares voting and dispositive power,
currently has the right to acquire pursuant to warrants, and (v) 126,400
shares of common stock issuable upon the conversion of preferred stock and
the exercise of warrants held by Cagan Capital Private Equity Fund II, LLC,
an entity that Mr. Cagan controls. Excludes the remaining 95,000 shares
that Cagan McAfee Capital Partners, LLC has the right to acquire pursuant
to warrants and as to which Mr. Cagan disclaims beneficial ownership. Mr.
Cagan also disclaims beneficial ownership over the shares held by Cagan
Capital Private Equity Fund. Address is c/o Cagan McAfee Capital Partners,
LLC, 10600 N. De Anza Blvd., Suite 250, Cupertino, CA 95014.
(12) Includes 4,573,200 shares of common stock issuable upon conversion of
shares of our Series A preferred stock and 1,400,000 shares of our common
stock issuable upon exercise of warrants held by Trellus Offshore Fund
Ltd., Trellus Partners II and Trellus Partners, L.P. Address: 350 Madison
Ave, New York, NY 10017. Trellus Partners has designated Sam Pina Cortez
and Ross M. Patten to serve as members of our board of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Our full board of directors is responsible for reviewing and approving
or ratifying all related party transactions. Although there is no written policy
in this regard, it is the practice of our board to review all material facts of
interested transactions and take into account, among other factors it determines
appropriate, whether the interested transaction is on terms no less favorable
than terms generally available to any similarly situated, unrelated third
parties under the same or similar circumstances and the extent of the person's
interest in the transaction. Additionally, board approval of any interested
party transaction must include the affirmative vote of at least a majority of
our non-employee directors. The following related party transactions were
reviewed and approved by our full board of directors in accordance with the
foregoing policy.
In December 2003, we entered into an agreement, amended in March 2004,
with Cagan McAfee Capital Partners, LLC ("CMCP"). The agreement provided for
CMCP to provide us with advisory and consulting services and for an NASD broker
dealer, Chadbourn Securities Inc. ("Chadbourn"), to provide investment banking
services to us. We paid CMCP fees totally $60,000 in 2006. John Pimentel, our
chief executive officer and chairman of our board of directors, is employed by
CMCP. The agreement with CMCP was terminated effective December 31, 2006.
In 2006, Chadbourn and Laird Q. Cagan (a significant shareholder of our
company and a director of CMCP), a registered representative of Chadbourn, acted
as the placement agents for us in connection with the private placement of our
senior secured promissory notes and warrants to purchase up to a total of
297,000 shares of our common stock and one of three placement agents for a
private placement of 250,000 shares of our Series B preferred stock and warrants
to purchase up to 2,500,000 shares of our common stock. In connection with these
private placements, we paid Chadbourn's total cash fees of $73,550 and we issued
them warrants to acquire up to a total of 210,980 shares of our common stock at
an exercise price of $2.75 per share and otherwise on the same terms as the
warrants sold to the investors in the offering.
DIRECTOR INDEPENDENCE
Our board is comprised of a majority of "independent" directors as
defined in Rule 4200(a)(15) of the Marketplace Rules of the NASDAQ Stock Market.
Our independent directors are Sam Pina Cortez, David Gutacker and Ross M.
Patten. Our board determined that the consulting fee we paid to Mr. Gutacker
during 2006 did not prevent it from reaching a determination that Mr. Gutacker
is independent. John Pimentel, our chief executive officer, and Dr. James
Ferris, our president and chief operating officer, are not independent
directors. Thomas L. Collins, who served as one of our directors through
December 2006, was not an independent director.
79
Our board of directors has an audit committee, compensation committee
and finance committee. The audit and compensation committees consist solely of
members who are independent as defined in Rule 4200(a)(15) of the Marketplace
Rules of the NASDAQ Stock Market. In addition, each member of the audit and
compensation committees (other than Mr. Gutacker) is independent as defined in
Exchange Act Rule 10a-3.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees billed to us by Stonefield Josephson, Inc. and Levitz,
Zacks & Ciceric, our principal accountants, for professional services rendered
with respect to our 2005 and 2006 fiscal years were as follows:
2006 2005
------------ ------------
Audit Fees $222,911 $ 16,964
Audit-Related Fees -- 39,146
Tax Fees -- --
All Other Fees -- --
Total $222,911 $ 56,110
(a) Audit Fees -- Consist of professional services rendered in connection with
the annual audit of our consolidated financial statements on Form 10-K,
quarterly reviews of our interim financial statements on Form 10-Q and
services performed in connection with our compliance with the
Sarbanes-Oxley Act. Audit fees also include fees for services performed by
our accountants that are closely related to the audit and in many cases
could only be provided by our independent accountants. Such services
include the issuance of consents related to our registration statement and
assistance with and review of other documents filed by us with the SEC.
(b) Audit Related Fees -- Consist of services related to due diligence services
and accounting consultations.
(c) Tax Fees -- There were no tax compliance services rendered by our
independent accounting firms during the years ended December 31, 2006 or
December 31, 2005.
(d) All Other Fees -- There were no other professional services rendered by our
independent accounting firms during the years ended December 31, 2006 or
December 31, 2005.
PRE-APPROVAL POLICIES AND PROCEDURES
All services provided by our independent registered public accounting
firm, Stonefield Josephson, Inc., are subject to pre-approval by our audit
committee. Before granting any approval, the audit committee gives due
consideration to whether approval of the proposed service will have a
detrimental impact on the independence of our independent registered public
accounting firm. The audit committee pre-approved all services provided by
Stonefield Josephson, Inc. during the fiscal year ended December 31, 2006.
80
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Amendment No. 1 to
our Annual Report on Form 10-K:
(1) Financial Statements:
Report of Independent Registrant Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income (Loss)
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Audited Consolidated Financial Statements
(2) Financial Statement Schedules: Schedules have been omitted since
they are either not required, are not applicable or the required information is
shown in the financial statements or the related notes.
(3) Exhibits:
The exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Amendment No. 1 to our Annual Report
on Form 10-K.
(b) Exhibits: The following exhibits are filed as part of this Annual
Report on Form 10-K:
81
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Reorganization between Voice Powered Technology
International, Inc., V-Co Acquisition, Inc. and World Waste
Technologies, Inc., dated as of March 25, 2004. (1)
2.2 Amendment No. 1 dated August 24, 2004 to Agreement and Plan of
Reorganization dated as of March 25, 2004 among Voice Powered
Technology International, Inc., V-CO Acquisition, Inc. and World Waste
Technologies, Inc. (2)
3.1 Amended and Restated Articles of Incorporation of the Registrant. (3)
3.2 Bylaws of the Registrant, as amended. (4)
3.3 Certificate of Determination of Rights, Preferences and Privileges of
the Registrant's 8% Series A Cumulative Redeemable Convertible
Participating Preferred Stock. (5)
3.4 Certificate of Determination of Rights, Preferences and Privileges of
the Registrant's 8% Series B Cumulative Redeemable Convertible
Participating Preferred Stock. (6)
4.1 Specimen Stock Certificate. (3)
4.2 Form of the Registrant's Warrant Agreement. (7)
10.1 Form of Indemnity Agreement entered into among the Registrant and its
directors and officers. (8)
10.2 Form of Registration Rights Agreement. (2)
10.3 2004 Stock Option Plan. (3)
10.4 Form of Stock Option Agreement. (3)
10.5 Lease between World Waste of Anaheim, Inc., a wholly owned subsidiary
of the Registrant, and Legacy Sabre Springs, LLC, dated as of March 10,
2004. (3)
10.6 Lease Agreement between World Waste of Anaheim, Inc. and Taormina
Industries, LLC, dated as of July 14, 2004. (2)
10.7 Amendment No. 1 to Lease Agreement between World Waste of Anaheim, Inc.
and Taormina Industries, LLC, dated as of March 17, 2005. (3)
10.8 Amendment No. 2 to Lease Agreement between World Waste of Anaheim, Inc.
and Taormina Industries, LLC, dated as of July 27, 2005. (9)
10.9 Waste Recycle Agreement dated as of June 27, 2003 between World Waste
of Anaheim, Inc. and Taormina Industries, LLC. (2)
10.10 Stock Purchase Warrant issued on May 10, 2004 by the Registrant to
Thomas L. Collins. (2)
10.11 Stock Purchase Warrant issued on May 10, 2004 by the Registrant to
Steve Racoosin. (2)
10.12 Stock Purchase Warrant issued on May 10, 2004 by the Registrant to Fred
Lundberg. (2)
10.13 Stock Purchase Warrant issued on June 21, 2004 by the Registrant to Dr.
Michael Eley. (2)
10.14 Stock Purchase Warrant issued on June 21, 2004 by the Registrant to Don
Malley. (2)
10.15 Senior Promissory Note in favor of Trellus Management, LLC, dated April
11, 2005. (10)
10.16 Securities Purchase Agreement dated as of April 28, 2005 among the
Registrant, Trellus Offshore Fund Limited, and Trellus Partners, LP,
Trellus Partners II, LP. (5)
10.17 Form of Stock Purchase Warrant issued by the Registrant on April 28,
2005. (5)
10.18 Registration Rights Agreement dated as of April 28, 2005 among the
Registrant, Trellus Offshore Fund Limited, Trellus Partners, LP, and
Trellus Partners II, LP, a Delaware limited partnership and the
individuals and entities set forth on the signature pages thereto. (5)
10.19 Employment Agreement dated as of April 28, 2005 between the Registrant
and Thomas L. Collins. (5)
82
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.20 Employment Agreement dated as of April 28, 2005 between the Registrant
and Fred Lundberg. (5)
10.21 Employment Agreement dated as of April 28, 2005 between the Registrant
and Steve Racoosin. (5)
10.22 Employment Agreement dated as of April 28, 2005 between the Registrant
and David Rane. (5)
10.23 Engagement Agreement dated as of April 28, 2005 between the Registrant
and John Pimentel. (5)
10.24 Engagement Agreement dated as of April 28, 2005 between the Registrant
and Cagan McAfee Capital Partners, LLC. (5)
10.25 Engagement Agreement dated as of April 28, 2005 between the Registrant
and Chadbourn Securities, Inc. and Addendum dated April 29, 2005. (5)
10.26 Letter, dated as of May 26, 2005, from Trellus Offshore Fund Limited,
Trellus Partners, LP, and Trellus Partners II, LP (the "Investors") to
the Registrant, amending the terms of that certain Securities Purchase
Agreement dated as of April 28, 2005 by and among the Investors and the
Registrant. (11)
10.27 Patent Assignment Agreement dated as of May 1, 2006 between the
Registrant and the University of Alabama in Huntsville. (12)
10.28 Assignment of Patent dated as of May 1, 2006 between the Registrant and
the University of Alabama in Huntsville. (12)
10.29 Revised Amended and Restated Technology License Agreement dated August
19, 2005 between Bio-Products International, Inc. and the Registrant.
(13)
10.30 Subscription Package dated October 7, 2005. (14)
10.31 Stock Purchase Warrant issued on November 1, 2005 by the Registrant to
various investors. (14)
10.32 Form of Non-Qualified Stock Option Agreement. (14)
10.33 Form of Incentive Stock Option Agreement. (14)
10.34 Letter Agreement dated December 2, 2005 between the Registrant and
Steve Racoosin. (15)
10.35 Amended and Restated Securities Purchase Agreement dated as of January
23, 2006 among the Registrant and the investors identified therein.
(16)
10.36 Form of Common Stock Purchase Warrant dated February 10, 2006 issued by
the Registrant. (16)
10.37 Form of 10% Senior Secured Debenture dated February 10, 2006 issued by
the Registrant. (16)
10.38 Registration Rights Agreement dated as of February 10, 2006 among the
Registrant and the investors identified therein. (16)
83
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.39 Security Agreement dated as of February 10, 2006 entered into among the
Registrant and the investors identified therein. (16)
10.40 Form of Subsidiary Guarantee dated as of February 10, 2006 given by
subsidiaries of the Registrant. (16)
10.41 Letter agreement dated February 6, 2006 among the Registrant and the
investors identified therein. (16)
10.42 Securities Purchase Agreement dated as of May 25, 2006 between the
Registrant and the purchasers named therein. (Series B - first
offering) (20)
10.43 Securities Purchase Agreement dated as of May 25, 2006 between the
Registrant and the purchasers named therein. (Series B - second
offering) (20)
10.44 Form of Warrant issued to Placement Agents as partial compensation for
acting as placement agent for the Registrant's April and May 2005
offerings of Series B Preferred Stock. (20)
10.45 Form of Warrant issued to Purchasers in Series B Preferred Stock
offering. (20)
10.46 Amended and Restated Registration Rights Agreement dated as of May 25,
2006. (20)
10.47 Consulting Project Agreement dated as of October 1, 2006 between the
Registrant and James Ferris. (18)
10.48 Employment Agreement dated as of November 4, 2006 between the
Registrant and James Ferris. (19)
21.1 Subsidiaries of the Registrant. (17)
31.1 Certification of Chief Executive Officer Pursuant to 15 U.S.C. ss.
7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial Officer Pursuant to 15 U.S.C. ss.
7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss.
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss.
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- -------------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed on March 29, 2004.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 30, 2004.
84
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed on March 31, 2005.
(4) Incorporated by reference to Company's Registration Statement on Form
SB-2, File No. 33-50506, effective October 20, 1993.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 4, 2005.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 2, 2006.
(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed on September 30, 2004.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
filed on November 5, 2004.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 2, 2005.
(10) Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 15, 2005.
(11) Incorporated by reference to the Company's Current Report on Form 8-K
filed on June 1, 2005.
(12) Incorporated by reference to the Company's Current Report on Form 8-K
filed on May 5, 2006.
(13) Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 23, 2005.
(14) Incorporated by reference to the Company's Current Report on Form 8-K
filed on November 7, 2005.
(15) Incorporated by reference to the Company's Current Report on Form 8-K
filed on December 9, 2005.
(16) Incorporated by reference to the Company's Current Report on Form 8-K
filed on February 16, 2006.
(17) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed on March 30, 2006.
(18) Incorporated by reference to the Company's Current Report on Form 8-K
filed on October 12, 2006.
(19) Incorporated by reference to the Company's Current Report on Form 8-K
filed on November 7, 2006.
(20) Incorporated by reference to Amendment No. 2 to Form SB-2 to the
Company's Registration Statement on Form S-1 filed on October 13, 2006.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 3, 2007 World Waste Technologies, Inc.
By: /s/ John Pimentel
------------------------------
John Pimentel
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ John Pimentel Chief Executive Officer May 3, 2007
- -------------------------
John Pimentel
/s/ David Rane Chief Financial Officer May 3, 2007
- ------------------------- (Principal Accounting and Financial Officer)
David Rane
/s/ James L. Ferris President, Chief Operating Officer and Director May 3, 2007
- -------------------------
James L. Ferris
/s/ Sam Pina Cortez Director May 3, 2007
- -------------------------
Sam Pina Cortez
/s/ Ross M. Patten Director May 3, 2007
- -------------------------
Ross M. Patten
/s/ David Gutacker Director May 3, 2007
- -------------------------
David Gutacker