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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2007
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 TECHOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3977501
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13500 EVENING CREEK DRIVE, SUITE 440,
SAN DIEGO, CALIFORNIA 92128
(Address of Principal Executive Offices)
(858) 391-3400
(Registrant's Telephone Number, Including Area Code)
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 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 whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act):
Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 26,255,662 shares issued and
outstanding as of March 31, 2007.
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WORLD WASTE TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets F-1
Consolidated Statements of Operations F-2
Consolidated Statements of Stockholders' Equity (Deficit) F-3
Consolidated Statements of Cash Flow F-5
Notes to Consolidated Financial Statements F-6
PART II OTHER INFORMATION
Item 1A Risk Factors 1
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 1
Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risks 9
Item 4 Controls and Procedures 9
Item 6 Exhibits 10
SIGNATURES 11
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2007 2006
----------------------------------
ASSETS: (UNAUDITED)
Current Assets:
Cash $ 13,033,032 $ 14,330,840
Accounts receivable - 12,517
Prepaid expenses 144,044 174,589
----------------------------------
Total Current Assets 13,177,076 14,517,946
----------------------------------
Fixed Assets:
Machinery, equipment net of accumulated depreciation of $894,643 on
3/31/07 and $673,201on 12/31/06. 6,107,193 6,187,065
Construction in Progress - 114,238
Leasehold Improvements net of accumulated depreciation of $361,718
on 3/31/07 and $271,164 on 12/31/06. 2,970,549 2,966,424
----------------------------------
Total Fixed Assets 9,077,742 9,267,727
Other Assets:
Deposit L/T 36,518 36,519
Patent license, net of accumulated amortization of $107,896 on
3/31/07 1,237,432 1,266,014
And $88,591 on 12/31/06
----------------------------------
TOTAL ASSETS $ 23,528,768 $ 25,088,206
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
LIABILITIES:
Current Liabilities:
Accounts payable $ 405,288 $ 503,752
Accrued salaries payable 85,197 136,635
Capital lease S/T 46,563 45,615
Accrued liabilities 192,106 222,803
Other liabilities 10,000 23,183
----------------------------------
Total Current Liabilities 739,154 931,988
----------------------------------
Long Term Liabilities:
Capital lease L/T 68,349 80,351
----------------------------------
Total Long Term Liabilities 68,349 80,351
----------------------------------
TOTAL LIABILITIES 807,503 1,012,339
----------------------------------
Redeemable preferred stock (See Note 5) 16,347,912 14,506,849
----------------------------------
Commitments and Contingencies (See Note 7)
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock - $.001 par value: 100,000,000 shares
authorized, 26,257,122 and 25,412,662 shares
issued and outstanding at March 31, 2007 and December 31, 2006,
respectively. 26,256 25,412
Additional paid-in-capital 53,485,811 51,179,469
Deficit Accumulated during development stage (47,138,714) (41,635,863)
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,373,353 9,569,018
----------------------------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY $ 23,528,768 $ 25,088,206
==================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-1
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WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarter For the Quarter June 18, 2002
Ending Ending Inception to
March 31, 2007 March 31, 2006 March 31, 2007*
-----------------------------------------------------
GROSS REVENUE: $ 93,784
Disposal of rejects (65,526)
Plant operation cost (2,720,922)
Depreciation (1,843,615)
-----------------------------------------------------
Total cost of goods sold (4,630,063)
-----------------------------------------------------
Gross Margin (4,536,279)
G&A Expense
Research and development $ (918,934) $ (60,000) (1,960,214)
General and administrative (983,491) (968,668) (11,740,890)
-----------------------------------------------------
Loss from operations (1,902,425) (1,028,668) (18,237,383)
-----------------------------------------------------
Interest income 130,490 15,575 160,492
Financing transaction expense - (1,647,250) (7,442,426)
Asset impairment (9,764,267)
Other income (expense) (27,276) (120,154) 1,788,780
-----------------------------------------------------
Net loss before provision for income tax (1,799,211) (2,780,497) (33,494,804)
-----------------------------------------------------
Income taxes - - -
-----------------------------------------------------
Net loss $ (1,799,211) $ (2,780,497) $ (33,494,804)
-----------------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (3,703,640) (540,486) (13,576,484)
-----------------------------------------------------
Net loss attributable to common shareholders $ (5,502,851) $ (3,320,983) $ (47,071,288)
=====================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.21) $ (0.13) $ (2.58)
=====================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 25,830,809 24,724,833 18,212,936
=====================================================
*APPROXIMATELY $67,526 IN CONSULTING AND TRAVEL EXPENSES INCURRED PRIOR TO INCEPTION OF THE BUSINESS
ON JUNE 18, 2002 ARE NOT INCLUDED.
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
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WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional Common Stock Accumulated
Shares Dollars Paid in 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, warrant discount 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
=====================================================================================
F-3
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Additional Common Stock Accumulated
Shares Dollars Paid in Capital Subscription Deficit * Total
-------------------------------------------------------------------------------------
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 1,647,250 1,647,250
Bridge financing warrants 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, warrant discount 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
=====================================================================================
Common stock for services 103,340 103 259,397 259,500
Amortization of stock options and warrants to
employees and consultants 185,108 185,108
Dividend (Preferred Stock) (810,842) (810,842)
Conversion of Series B preferred stock 741,120 741 1,861,837 1,862,578
Amortization of beneficial conversion
feature, warrant discount and offering costs
on redeemable preferred stock (2,892,798) (2,892,798)
Net loss - March 2007 (Unaudited) (1,799,211) (1,799,211)
-------------------------------------------------------------------------------------
March 31, 2007 (Unaudited) 26,257,122 $ 26,256 $ 53,485,811 $ 0 ($47,138,714) $6,373,353
=====================================================================================
* During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and
expended prior to Inception.
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
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WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
June 18, 2002
Quarter ended Quarter ended (Inception) to
March 31,2007 March 31, 2006 March 31, 2007
-----------------------------------------------------------
Cash Flow from operating activities: $ $ $
Net loss (1,799,211) (2,780,497) (33,494,804)
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment of assets 9,737,344
Depreciation and amortization 340,579 3,455 2,308,779
Interest forgiveness 135,327
Warrant and common stock Issued for consulting 84,566
Amortization of warrants & options to employees 185,108 289,164 2,046,406
Fair value adjustment warrant liability 120,154 (1,789,134)
Financial transaction expense 1,647,250 7,442,426
Amortization of offering cost 252,277
Changes in operating assets and liabilities:
Accounts receivable 12,517 -
Prepaid expenses/Emp. receivable 30,545 72,713 (144,044)
Accounts payable (98,463) (1,861) 405,288
Accrued salaries (51,438) 15,554 85,197
Accrued other liabilities 215,620 (40,479) 461,606
-----------------------------------------------------------
Net Cash used in operating activities (1,164,743) (674,547) (12,468,766)
-----------------------------------------------------------
Cash flows from investing activities:
Construction in progress (4,043,205)
Leasehold improvements (94,679) (3,332,267)
Deposits on equipment (5,231,636)
Purchase machinery & equipment (38,386) (2,301,511) (7,794,612)
Patient license (440,890)
Deposits 4,719 (36,519)
-----------------------------------------------------------
(133,065) (2,296,792) (20,879,129)
-----------------------------------------------------------
Cash flows from financing activities:
Redeemable preferred stock 32,071,719
Senior secured debt 2,000,000 6,265,000
Senior secured debt offering cost (122,425) (420,523)
Payment of senior secured debt (2,785,000)
Warrants, common stock and
Additional paid in capital 8,208 11,249,731
-----------------------------------------------------------
0 1,885,783 46,380,927
-----------------------------------------------------------
Net increase in cash (1,297,808) (1,085,556) 13,033,032
Beginning cash 14,330,840 2,864,377
-----------------------------------------------------------
Ending cash 13,033,032 1,778,821 13,033,032
===========================================================
Non-cash investing and financing activities:
Interest (Paid) Received $ 130,490 $ 15,575 $ 160,492
Income Taxes Paid -- -- --
*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.
*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.
*The Company issued 1,193,500 shares of common stock upon conversion of the Convertible Promissory notes payable
and accrued interest of $135,327.
*The Company issued warrants to purchase 250,000 shares of its common stock for a modification to the technology
license agreement.
*During the quarter ended March 31, 2006, upon completion of the plant in Anaheim, CA. all construction in progress was
transferred to leasehold improvements and all deposits on equipment was transferred to machinery and equipment.
*During the quarter ended March 31, 2007, the Company issued 103,340 shares in exchange for services rendered in 2006.
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-5
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WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
NOTE 1. 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 not
derived substantial revenues from its activities to date.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements include all adjustments
(consisting of only normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation. Operating results for the quarter
ended March 31, 2007 are not necessarily indicative of the results to be
expected for a full year. The consolidated financial statements should be read
in conjunction with the Company's amended consolidated financial statements for
the year ended December 31, 2006.
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.
RECLASSIFICATION
Certain amounts for the year ended December 31, 2006 have been
reclassified to conform with the presentation of the March 31, 2007 amounts.
These reclassifications had no effect on reported net loss.
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.
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.
The Company adopted FIN 48 on January 1, 2007. There was no material
impact on the Company's financial statements as a result of the adoption.
F-6
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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 had no cash equivalents at
March 31, 2007.
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.
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 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 in 2006 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 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 because 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 continue 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."
F-7
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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.
The Company continues to exploit the technology covered by the Patent
through a sublicense from the original licensee, Bio-Products, International,
Inc. (BPI). By virtue of the acquisition of the Patent, the Company now owns all
rights, title and interest in the Patent, subject to BPI's existing license,
which in turn continues to sublicense the technology to the Company.
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.
In April 2007, the Company filed a lawsuit against BPI alleging, among
other things, breach of contract and negligence with respect to the construction
of the vessels. See Note 3 and 8. The Company does not believe that this lawsuit
affects the carrying value of the patent or sub-license. Therefore, the Company
had no material impairment to its intangible assets during the quarter ended
March 31, 2007 and the year ended December 31, 2006.
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.
STOCK-BASED COMPENSATION
As of March 31, 2007, 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 $185,108, $463,406 and $1,617,096 for the quarters ended
March 31, 2007 and 2006 and for the period from inception to March 31, 2007,
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 March 31, 2007 and 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 475,000 options during the
quarter ended March 31, 2007 to employees, members of the board of directors and
consultants. At March 31, 2007, there were 1,987,000 options outstanding under
the Plan. There were no grants made during the quarter ended March 31, 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.
F-8
<Page>
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 the date of the
respective grant. The Company uses historical data to estimate option exercise
and employee terminations within the valuation model. The expected term of
options granted was estimated using the simple method 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.
QUARTER ENDED YEAR ENDED
MARCH 31, 2007 DECEMBER 31, 2006
------------------- -------------------
Expected volatility 77 % 70 %
Expected dividends 0 % 0 %
Expected term (in years) 5.5 - 10.0 4
Risk-free rate 4.64% - 5.07 % 4.64 %
A summary of option activity under the Plan as of March 31, 2007, and
changes during the quarter then ended is presented below:
AVERAGE
REMAINING AGGREGATE
WEIGHTED-AVERAGE CONTRACTUAL INTRINSIC
OPTIONS SHARES EXERCISE PRICE TERM VALUE
- -------------------------------------- ------------ ------------------ ------------- ------------
Outstanding at January 1, 2007 1,587,000 $ 2.44 $ 26,250
Granted 475,000 1.29 --
Exercised -- -- --
Forfeited or expired 75,000 $ 1.50 --
Outstanding at March 31, 2007 1,987,000 $ 2.16 8.65 --
Exercisable at March 31, 2007 824,500 $ 1.76 8.64 $ --
The aggregate intrinsic value represents the total pretax intrinsic value,
based on options with an exercise price less than the Company's closing stock
price of $1.11 as of March 31, 2007 which would have been received by the option
holders had those option holders exercised their options as of that date. The
weighted-average grant-date fair value of options granted during the three
months ended March 31, 2007 was $0.82. There were no options granted during the
three months ended March 31, 2006. There have been no options exercised since
inception. When options are exercised, the Company will issue new shares to the
recipient.
F-9
<Page>
WEIGHTED-AVERAGE
NON-VESTED STOCK OPTIONS OPTIONS GRANT DATE FAIR VALUE
----------------------- -----------------------
Non-vested at beginning of period 912,500 1.56
Granted 475,000 0.82
Vested 218,750 0.83
Forfeited -- --
Non-vested at end of period 1,168,750 1.40
As of March 31, 2007, there was approximately $1.31 million of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Plan. That cost is expected to be recognized over
a weighted-average period of 1.87 years.
Non employment stock warrants outstanding:
WEIGHTED-
WEIGHTED AVERAGE AVERAGE GRANT
NUMBER EXERCISE PRICE DATE FAIR VALUE
- ----------------------------------------- ------------- ------------------ -----------------
Outstanding at December 31, 2006 7,003,147 $ 2.19 $ 2.31
Exercisable at December 31, 2006 7,003,147 $ 2.19 $ 2.31
Granted during the period 0 $ - $ -
Vested during the period 0 $ - $ -
Exercised during the period 0 $ - $ -
Cancelled 0 $ - $ -
Outstanding at March 31, 2007 7,003,147 $ 2.19 $ 2.31
Exercisable at March 31, 2007 7,003,147 $ 2.19 $ 2.31
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 25,981,222, consisting of employee options of 1,987,000, investor
warrants of 7,003,147, Preferred Series A of 5,663,842 and Preferred Series B of
11,327,234, were not included in the calculation of diluted earnings per share
at March 31, 2007 and common stock equivalents of 8,809,752 were not included in
the calculation of diluted earnings per share at March 31, 2006.
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 quarter ended March 31, 2007 of $1,799,211 and an accumulated
deficit of $47,138,714 at March 31, 2007.
The Company expects to incur substantial additional losses and costs and capital
expenditures before it can operate profitably. 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 obtaining of additional funding. If
the Company is unsuccessful, it may be unable to continue as a going concern for
a reasonable period of time. These issues raise substantial doubt about the
Company's ability to continue as a going concern.
F-10
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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. 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 the
acquisition of the Patent, the Company 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 the Company.
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.
For the sub-license, the Company agreed to pay a one-time fee of $350,000.
The license is being amortized over the remaining life of the license beginning
when the Company's plant first became operational.
In addition, the Company is obligated to pay a royalty for every ton of
waste processed using the licensed technology as follows:
RATE TONS PROCESSED 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.
F-11
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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.
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 BPI at a fixed
purchase price of the quoted cost plus 15%.
During the start-up phase of the initial plant in Anaheim, California, the
Company became aware of design issues related to the steam classification
vessels that the Company intends to use in its operations. The steam vessels
were designed and fabricated on the Company's behalf by BPI pursuant to a
contract entered into with BPI in July 2004 and the sub-license agreement
discussed above. The agreement also provides the Company with the rights to
certain technology used in its process. The Company has been dissatisfied with
the remediation of these issues by BPI and has proceeded to resolve them itself.
Consequently, in April, 2007, the Company filed a lawsuit against BPI in the
Superior Court of the State of California alleging, among other things, breach
of contract and negligence with respect to the construction of the vessels. The
Company is seeking monetary damages, among other relief sought.
NOTE 4. INCOME TAXES
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. (FAS)
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.
We adopted FIN 48 effective January 1, 2007. As defined by Fin 48,
unrecognized tax benefits related to expenses that are recognized for
determining income for financial statement purposes but have not been included
as expenses in the Company's tax provision, as the Company believes these
expenses will be disallowed for tax purposes. As of the date of adoption, the
Company had a total amount of unrecognized tax benefits of $8,626,344. Virtually
all of this balance related to Federal net operating losses the Company acquired
in connection with its merger with Voice Powered Technology International, Inc.
These losses are subject to significant limitations under Internal Revenue Code
Section 382 that will impact the Company's ability to utilize the net operating
losses before they expire. As we provided for a 100% reserve against our
deferred tax asset, the adoption of FIN 48 did not have a material effect on the
financial statements. We have always excluded these net operating losses from
the total available net operating losses we disclosed in our tax footnote.
As of January 1, 2007, the amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate was $2,165. The recognition of
this amount would be offset by a corresponding tax provision adjustment for an
increase to the valuation allowance for deferred taxes related to net operating
losses.
We have historically classified interest and penalties on income tax liabilities
as additional income tax expense and will continue to do so after the adoption
of FIN 48. As of January 1, 2007, our statement of financial position did not
include any accrued interest or penalties.
As of January 1, 2007, it was reasonably possible that the total amount of our
unrecognized tax benefits would decrease by approximately $500,000 to $600,000
within the following twelve months. This would result from the expiration of a
Federal net operating loss carryforward from the 1994 tax year. This net
operating loss carryforward is subject to the limitations mentioned above.
F-12
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As of January 1, 2007, we were not under examination by any major tax
jurisdiction.
NOTE 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has outstanding two classes of Preferred Stock, Series A and
Series B. Holders of both series of preferred stock are entitled to receive
cumulative dividends, payable quarterly in additional shares of preferred stock,
at the rate of 8% per annum. The holders of a majority of reach class of
preferred shares have the option to require the Company to redeem all
outstanding shares on April 28, 2010. 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.
The warrant values, offering costs and beneficial conversion features of
both classes of preferred stock have been treated as discounts to the carrying
value of the preferred stock, and are being accreted through their redemption
date under an acceptable method in accordance with EITF Topic D-98. For the
Series B Preferred Stock the Company deemed the straight-line method was a
preferable method, giving rise to a more appropriate distribution of the
dividend recognition over the accretion period. The amortization costs are
treated consistent with the treatment of preferred stock dividends.
THE SUMMARY FOR THE SERIES A AND B IS AS FOLLOWS:
SERIES A SERIES B TOTAL
--------------- --------------- ---------------
Gross proceeds $ 10,189,000 $ 28,488,800 $ 38,677,800
Cumulative in kind dividends 1,846,665 2,066,457 3,913,122
Converted to common stock -- (2,703,590) (2,703,590)
--------------- --------------- ---------------
Total outstanding 12,035,665 27,851,667 39,887,332
Unamortized beneficial conversion feature (898,585) (13,191,041) (14,089,626)
Unamortized offering costs (1,058,326) (3,321,062) (4,379,388)
Unamortized warrant value (898,585) (4,171,821) (5,070,406)
--------------- --------------- ---------------
Balance at March 31, 2007 $ 9,180,169 $ 7,167,743 $ 16,347,912
=============== =============== ===============
NOTE 6. CAPITAL LEASE OBLIGATION
Capital Lease obligation is comprised as follows:
MARCH 31, 2007 DECEMBER 31, 2006
-------------------- --------------------
Capital Lease for Front End Loader, 31 monthly $114,912 $125,966
installments of $4,526, 31 payments were remaining at
March 31, 2007, interest was imputed at 8.25%
Less: Current portion 46,563 45,615
-------------------- --------------------
$68,349 $80,351
==================== ====================
NOTE 7. 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. Due to contract disputes with BPI, the Company suspended payments in
January 2007 to BPI until the disputes are resolved. 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
F-13
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As of March 31, 2007, the Company had in place one employment agreement,
pursuant to which, the total annual salary was $224,000. The 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, the officer is entitled to 12 months salary and
continuation of benefits in the event of disability or death during the term of
his agreement. Also at March 31, 2007, the Company had in place one employment
agreement in which the employee has announced his retirement effective May 2007
at which time the agreement will terminate with no additional obligations to the
Company.
The Company's CEO is not under an employment contract.
NOTE 8. SUBSEQUENT EVENTS
During the start-up phase of the initial plant in Anaheim, California, the
Company became aware of design issues related to the steam classification
vessels that the Company intends to use in its operations. The steam vessels
were designed and fabricated on the Company's behalf by BPI pursuant to a
contract entered into with BPI in July 2004 and the sub-license agreement
discussed above. The agreement also provides the Company with the rights to
certain technology used in its process. The Company has been dissatisfied with
the remediation of these issues by BPI and has proceeded to resolve them itself.
Consequently, in April, 2007, the Company filed a lawsuit against BPI in the
Superior Court of the State of California alleging, among other things, breach
of contract and negligence with respect to the construction of the vessels. The
Company is seeking monetary damages, among other relief sought.
F-14
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PART II
ITEM 1A.
THERE HAVE BEEN NO MATERIAL CHANGES TO THE RISK FACTORS FROM THOSE FILED IN THE
COMPANY'S FORM 10-K/A FILED MAY 3, 2007.
ITEM 2. 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 described under "Item 1A - Risk Factors" in our annual report on
Form 10-K/A for the year ended December 31, 2006.
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.
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.
MARKET OVERVIEW
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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Several companies are producing 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,
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.
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 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.
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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 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.
In addition, we recently entered into a memorandum of understanding with
Ensyn Corporation relating to a proposed technology development agreement under
which the companies would collaborate to develop technologies for production of
energy products and bio-fuels from MSW cellulose biomass.
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.
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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.
POTENTIAL ACQUISITIONS
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.
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.
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 plan
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.
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Our significant accounting policies are summarized in Note 1 to our
audited financial statements for the year ended December 31, 2006 and our
unaudited financial statements dated March 31, 2007. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements:
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 not
derived substantial revenues from its activities to date.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements include all adjustments
(consisting of only normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation. Operating results for the quarter
ended March 31, 2007 are not necessarily indicative of the results to be
expected for a full year. The consolidated financial statements should be read
in conjunction with the Company's amended consolidated financial statements for
the year ended December 31, 2006.
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.
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 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
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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
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 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.
In April 2007, the Company filed a lawsuit against BPI alleging, among
other things, breach of contract and negligence with respect to the construction
of the vessels. See Note 3 to the accompanying notes to consolidated financial
statements. The Company does not believe that this lawsuit affects the carrying
value of the patent or sub-license. Therefore, the Company had no material
impairment to its intangible assets during the period ended March 31, 2007 and
December 31, 2006.
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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.
In January of 2007, the Company changed its plan of operation to focus
entirely on research and development projects and consequently recognized no
revenue during the first quarter of 2007. All cash received for tip fees and the
sale of recyclables was netted against disposal costs.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
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.
The Company adopted FIN 48 on January 1, 2007. There was no material
impact on the Company's financial statements as a result of the adoption.
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.
RECLASSIFICATION
Certain amounts for the year ended December 31, 2006 have been
reclassified to conform with the presentation of the March 31, 2007 amounts.
These reclassifications had no effect on reported net loss.
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.
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RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 31, 2007 AND 2006
REVENUES AND COST OF GOODS SOLD
During the plant start up phase of our Anaheim plant, 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. In January 2007, we decided not to make the capital improvements
necessary to the Anaheim plant's wetlap process which the Company considers
necessary to operate the plant with the expectation of being profitable.
Therefore, beginning in January 2007, we began to operate the plant only as part
of research and development projects including but not limited to the
development of alternative back end processes such as gasification and acid
hydrolysis for the production of ethanol. Consequently, we did not recognize any
revenue during the first quarter of 2007. All cash received for tip fees and the
sale of recyclables was netted against disposal costs. We also did not recognize
any revenue during the first quarter of 2006 because the plant did not start
operations until the second quarter of 2006.
EXPENSES
Research and development expense increased from $60,000 during the quarter
ended March 31, 2006 to $918,934 during the comparable quarter in 2007. This was
primarily due to the cost of operating the Anaheim plant of $497,380 and plant
depreciation of $309,948 in the 2007 period being classified as research and
development expense due to the current nature and intent of the plant
operations. As part of its shift from operations to research and development,
the Company reduced expenditures at the plant by approximately $500,000 for the
fourth quarter of 2006 to the first quarter of 2007. The plant was not
operational during the comparable quarter in 2006.
General and administrative expense increase from $968,668 during the
quarter ended March 31, 2006 to $983,491. This $14,823 increase was primarily
the result of an increase in professional and consulting fees of approximately
$275,000 offset by the allocation of payroll costs to the plant upon completion
of construction.
Finance expense in 2006 represents the value of warrants issued to the
holder of the Series A Preferred Stock for their consent to our issuance of
additional senior secured debt and agreement to waive certain of their veto
rights and contractual rights to facilitate the Company's next round of
financing.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs increased to $3,953,403 in the
quarter ended March 31, 2007 from $540,486 during the comparable period in 2006
due to the issuance of the Series B Preferred Stock in the second quarter of
2006. See Note 5 to the accompanying unaudited consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2007, we had cash on hand of approximately $13.0 million, a
decrease of approximately $1.3 million from December 31, 2006. During the first
quarter of 2007, we used cash primarily for research and development activities
of approximately $600,000 net of non cash items primarily depreciation, general
and administrative expenses of approximately $600,000 net of non cash items
primarily the amortization of employee options and warrants and accrued expenses
for consulting, and the purchase of equipment of approximately $100,000. 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.
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As of March 31, 2007, the only long-term debt obligations, capital lease
obligations, operating lease obligations, purchase obligations, or other similar
long-term liabilities, were the Taormina agreement described in "Business"
above, the monthly payment due BPI as part of the license agreement, and the one
capital lease described in Note 6 to the unaudited consolidated financial
statements. Due to contract disputes, the Company suspended payments to BPI in
January 2007. 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.
ITEM 3. 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 March 31, 2007, we had cash and short
term investments of $13.0 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 March 31, 2007 or December 31, 2006. 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 4. 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.
There was no change in the Company's internal control over financial
reporting during the quarter that ended March 31, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II-- OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2007 WORLD WASTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ David Rane
------------------------------
David Rane
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act
12