<Page>
================================================================================
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 June 30, 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: 26,924,968 shares issued and
outstanding as of June 30, 2007.
================================================================================
<Page>
WORLD WASTE TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Stockholders' Equity (Deficit) 4
Consolidated Statements of Cash Flow 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risks 24
Item 4 Controls and Procedures 24
PART II OTHER INFORMATION 25
Item 1A Risk Factors 25
Item 6 Exhibits 26
SIGNATURES 27
<Page>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2007 2006
----------------------------------
ASSETS: (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 1,893,855 $ 14,330,840
Short-term investments 9,811,183 -
Accounts receivable - 12,517
Prepaid expenses 183,364 174,589
----------------------------------
Total Current Assets 11,888,402 14,517,946
----------------------------------
Fixed Assets:
Machinery, equipment net of accumulated depreciation of $1,089,507
on 6/30/07 and $673,201 on 12/31/06. 6,282,624 6,460,326
Construction in Progress - 114,238
Leasehold Improvements net of accumulated depreciation of $483,686
on 6/30/07 and $271,164 on 12/31/06. 2,486,863 2,693,163
----------------------------------
Total Fixed Assets 8,769,487 9,267,727
Other Assets:
Deposit L/T 36,519 36,519
Patent license, net of accumulated amortization of $145,757 on
6/30/07 and $88,591 on 12/31/06 1,208,848 1,266,014
----------------------------------
TOTAL ASSETS $ 21,903,256 $ 25,088,206
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
LIABILITIES:
Current Liabilities:
Accounts payable $ 446,654 $ 503,752
Accrued salaries payable 113,225 136,635
Capital lease S/T 47,530 45,615
Accrued liabilities 196,179 222,803
Other liabilities - 23,183
----------------------------------
Total Current Liabilities 803,588 931,988
----------------------------------
Long Term Liabilities:
Capital lease L/T 56,097 80,351
----------------------------------
Total Long Term Liabilities 56,097 80,351
----------------------------------
TOTAL LIABILITIES 859,685 1,012,339
----------------------------------
Convertible Redeemable preferred stock (See Note 5) 18,575,969 14,506,849
----------------------------------
Commitments and Contingencies (See Note 7)
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock - $.001 par value: 100,000,000 shares
authorized, 26,924,968 and 25,412,662 shares
issued and outstanding at June 30, 2007 and December 31, 2006,
respectively. 26,924 25,412
Additional paid-in-capital 55,052,560 51,179,469
Deficit accumulated during development stage (52,609,579) (41,635,863)
Accumulated comprehensive income (loss) (2,303) -
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,467,602 9,569,018
----------------------------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY $ 21,903,256 $ 25,088,206
==================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1
<Page>
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
June 30, 2007 June 30, 2006
-------------------------------------
GROSS REVENUE: $ - $ 14,327
Disposal of rejects (14,247)
Plant operation cost (664,809)
Depreciation (595,346)
-------------------------------------
Total cost of goods sold - (1,274,402)
-------------------------------------
Gross Margin - (1,260,075)
G&A Expense
Research and development (804,018) (60,000)
General and administrative (1,425,176) (1,037,451)
-------------------------------------
Loss from operations (2,229,194) (2,357,526)
-------------------------------------
Interest income (expense) 105,717 (290,190)
Financing transaction expense - (5,795,176)
Change in fair value of warrant liability - (135,642)
-------------------------------------
Net loss before provision for income tax (2,123,477) (8,578,564)
-------------------------------------
Income taxes - -
-------------------------------------
Net loss (2,123,477) (8,578,564)
-------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (3,347,388) (1,507,775)
-------------------------------------
Net loss attributable to common shareholders $ (5,470,865) $ (10,086,339)
=====================================
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (0.20) $ (0.41)
=====================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 26,723,264 24,893,023
=====================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
2
<Page>
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Six Months June 18, 2002
Ended Ended Inception to
June 30, 2007 June 30, 2006 June 30, 2007*
----------------------------------------------------------
GROSS REVENUE: $ - $ 14,327 $ 93,784
Disposal of rejects (14,247) (65,526)
Plant operation cost (664,809) (2,720,922)
Depreciation (595,346) (1,843,615)
---------------------------------------------------------
Total cost of goods sold - (1,274,402) (4,630,063)
---------------------------------------------------------
Gross Margin - (1,260,075) (4,536,279)
G&A Expense
Research and development (1,749,875) (120,000) (2,791,155)
General and administrative (2,408,667) (2,006,117) (13,166,066)
Asset impairment (9,737,344)
---------------------------------------------------------
Loss from operations (4,158,542) (3,386,192) (30,230,844)
---------------------------------------------------------
Interest income (expense) 235,854 (274,616) 265,856
Financing transaction expense - (7,442,426) (7,442,426)
Change in fair value of warrant liability - (255,796) -
Other income (expense) - - 1,789,133
---------------------------------------------------------
Net loss before provision for income tax (3,922,688) (11,359,030) (35,618,281)
---------------------------------------------------------
Income taxes - - -
---------------------------------------------------------
Net loss $ (3,922,688) $ (11,359,030) $ (35,618,281)
---------------------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (7,051,028) (2,048,261) (16,923,772)
---------------------------------------------------------
Net loss attributable to common shareholders $ (10,973,716) $ (13,407,291) $ (52,542,053)
=========================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.42) $ (0.54) $ (2.82)
=========================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 26,273,342 24,809,174 18,638,083
=========================================================
*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.
3
<Page>
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional Accumulated
Paid in Common Stock Accumulated Comprehensive
Shares Dollars Capital Subscription Deficit * Income (Loss) 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 (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 (8,041,072) 7,945,430
====================================================================================
4
<Page>
Additional Accumulated
Paid in Common Stock Accumulated Comprehensive
Shares Dollars Capital Subscription Deficit * Income (Loss) Total
------------------------------------------------------------------------------------
Common stock and warrants net of offering
cost 262,85 263 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 (41,635,863) 9,569,018
====================================================================================
Common stock for services 103,340 103 259,397 259,500
Warrant exercises 199,320 199 1,795 1,994
Amortization of stock options and warrants to
employees and consultants 631,198 631,198
Dividend (Preferred Stock) (1,608,523) (1,608,523)
Conversion of Series B preferred stock 1,209,646 1,210 2,980,701 2,981,911
Amortization of beneficial conversion
feature, warrant discount and offering costs
on redeemable preferred stock (5,442,505) (5,442,505)
Net loss - March 2007 (Unaudited) (3,922,688) (3,922,688)
Unrealized gain (loss) on short term
Investments held for sale (2,303) (2,303)
------------------------------------------------------------------------------------
June 30, 2007 (Unaudited) 26,924,968 $26,924 $55,052,560 $ 0 $(52,609,579) $(2,303) $2,467,602
====================================================================================
* 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.
5
<Page>
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Six Months June 18, 2002
Ended Ended (Inception) to
June 30, 2007 June 30, 2006 June 30, 2007
-----------------------------------------------------------
Cash Flow from operating activities: $ $ $
Net loss (3,922,688) (11,359,030) (35,618,281)
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment of assets 9,737,344
Depreciation and amortization 686,314 633,871 2,654,514
Interest forgiveness 135,327
Warrant and common stock Issued for consulting 84,566
Amortization of warrants & options to employees 631,198 520,867 2,492,496
Fair value adjustment warrant liability 255,796 (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 -
Prepaid expenses/Emp. receivable (8,775) (23,837) (183,364)
Accounts payable (57,098) 148,905 446,654
Accrued salaries (23,410) (12,302) 113,225
Accrued other liabilities 209,694 (53,133) 455,679
-----------------------------------------------------------
Net Cash used in operating activities (2,472,248) (2,194,160) (13,776,272)
-----------------------------------------------------------
Cash flows from investing activities:
Construction in progress (4,043,205)
Leasehold improvements (6,222) (2,970,549)
Deposits on equipment (5,231,636)
Purchase machinery & equipment (147,025) (3,109,258) (8,176,512)
Patient license (20,000) (440,890)
Deposits 57,595 (36,519)
Purchase of Short-term investments (9,813,486) (9,813,486)
-----------------------------------------------------------
Net Cash used in investing activities (9,966,733) (3,071,663) (30,712,797)
-----------------------------------------------------------
Cash flows from financing activities:
Redeemable preferred stock 22,649,764 32,070,511
Senior secured debt 2,000,000 6,265,000
Repayment of senior secured debt (2,785,000)
Senior secured debt offering cost (122,424) (420,523)
Payment of senior secured debt (2,785,000)
Warrants, common stock and
Additional paid in capital 1,996 9,627 11,252,936
-----------------------------------------------------------
Net Cash provided by financing activities 1,996 21,751,967 46,382,924
-----------------------------------------------------------
Net increase in cash and cash equivalents (12,436,985) 16,486,142 1,893,855
Beginning cash and cash equivalents 14,330,840 2,864,377
-----------------------------------------------------------
Ending cash and cash equivalents 1,893,855 19,350,519 1,893,855
===========================================================
Non-cash investing and financing activities:
Interest (Paid) Received $ 236,207 $ (153,964) $ 266,209
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 six months ended June 30, 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 six months ended June 30, 2007, the Company issued 103,340 shares in exchange for services rendered in 2006.
*During the six months ended June 30, 2007, the Company issued 1,209,646 shares of common stock in exchange for conversion of
$1,609,731 of Preferred Series B stock.
*Short-term investments have been adjusted for unrealized losses of $2,303.
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6
<Page>
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 six
months ended June 30, 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 June 30, 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.
7
<Page>
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.
SHORT TERM INVESTMENTS
The Company determines the appropriate classification of its investments
at the time of acquisition and reevaluates such determination at each balance
sheet date. All investments held at June 30, 2007 are short-term available for
sale securities. They are carried at quoted fair value, with unrealized gains
and losses reported in shareholders' equity as a component of accumulated
comprehensive income. The net unrealized loss of $2,303 recorded in
shareholders' equity during the quarter ended June 30, 2007 was comprised of
unrealized gains of $67 and unrealized losses of $2,370. Maturity dates of
investments classified as available for sale securities range from February of
2008 to December of 2008.
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 the remainder of 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."
8
<Page>
INTANGIBLES
Intangible assets are recorded at cost.
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. 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 six months ended June
30, 2007 or 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 June 30, 2007, the Company had two share-based compensation plans,
which are described below. The compensation cost that has been charged against
income for the plans was $446,090 and $231,703 for the three months ended June
30, 2007 and 2006 , respectively, and $631,198, $463,406 and $2,063,186 for the
six months ended June 30, 2007 and 2006 and for the period from inception to
June 30, 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 June 30, 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 2004 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 granted options to
acquire 475,000 shares during the six months ended June 30, 2007 to employees,
members of the board of directors and consultants. At June 30, 2007, there were
1,987,000 options outstanding under the Plan.
In May of 2007 the board of directors approved the Company's 2007
Incentive Stock Plan (the 2007 Plan), which is not shareholder-approved. The
2007 plan provides for the issuance by the Company of a total of up to 6.0
million shares of common stock and options to acquire common stock to the
Company's employees, directors and consultants. The Company granted options to
acquire 2,856,000 shares during the quarter ended June 30, 2007 to employees,
members of the board of directors and consultants. At June 30, 2007 they all
were outstanding.
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. Certain option awards
provide for accelerated vesting if there is a change in control (as defined in
each Plan).
9
<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.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2007 DECEMBER 31, 2006
------------------- -------------------
Expected volatility 75 % 70 %
Expected dividends 0 % 0 %
Expected term (in years) 5.5 - 9.9 4
Risk-free rate 4.98% - 5.1% 4.64 %
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 28,526,234, consisting of employee options of 4,843,000, investor
warrants of 6,803,827, Preferred Series A of 5,777,119 and Preferred Series B of
11,102,288, were not included in the calculation of diluted earnings per share
at June 30, 2007 and common stock equivalents of 25,364.807 were not included in
the calculation of diluted earnings per share at June 30, 2006.
RECENT ACCOUNTING PRONOUNEMENTS
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
157, "Fair Value Measurements". This new standard provides guidance for using
fair value to measure assets and liabilities and information about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. This framework is intended to provide increased consistency in how
fair value determinations are made under various existing accounting standards
which permit, or in some cases require, estimates of fair market value. SFAS 157
also expands financial statement disclosure requirements about a company's use
of fair value measurements, including the effect of such measures on earnings.
The provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007. While the Company is currently evaluating the provisions of
SFAS 157, the adoption is not expected to have a material impact on its
consolidated financial statements.
The FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities-Including an Amendment of FASB Statement No. 115(SFAS
No. 159). This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. The accounting provisions of
SFAS No. 159 are effective for financial statements issued for fiscal years
beginning after November 15, 2007. While the Company is currently evaluating the
provisions of SFAS 159, the adoption is not expected to have a material impact
on its consolidated financial statements.
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 six months ended June 30, 2007 of $3,922,688 and an accumulated
deficit of $52,609,579 at June 30, 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.
10
<Page>
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 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.
11
<Page>
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 relates 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.
12
<Page>
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 as and if declared by the Board of Directors. The
holders of a majority of each 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
and Series B 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 2,087,379 2,623,425 4,710,804
Converted to common stock -- (3,822,923) (3,822,923)
--------------- --------------- ---------------
Total outstanding 12,276,379 27,289,302 39,565,681
Unamortized beneficial conversion feature (838,412) (11,686,928) (12,525,340)
Unamortized offering costs (987,455) (3,696,128) (4,683,583)
Unamortized warrant value (838,412) (2,942,377) (3,780,789)
--------------- --------------- ---------------
Balance at June 30, 2007 $ 9,612,100 $ 8,963,869 $ 18,575,969
=============== =============== ===============
NOTE 6. CAPITAL LEASE OBLIGATION
Capital Lease obligation is comprised as follows:
JUNE 30, 2007 DECEMBER 31, 2006
-------------------- --------------------
Capital Lease for Front End Loader, 35 monthly $103,627 $125,966
installments of $4,526, 24 payments were remaining at
June 30, 2007, interest was imputed at 8.25%
Less: Current portion 47,530 45,615
-------------------- --------------------
$ 56,097 $ 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 $428,000
more than 3 less than 5 $402,000
after 5 years $469,000
13
<Page>
As of June 30, 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.
The Company's CEO is not under an employment contract.
14
<Page>
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 design, build, own and
operate facilities which employ systems and technologies designed to profitably
convert municipal solid waste (MSW) and other waste streams, such as green
waste, into usable commodities and products. These products are expected to
include renewable energy, recyclable commodities, fuel alcohols, specialty
chemicals and paper pulp. We plan to concentrate our efforts on producing
renewable electricity from MSW through the use of gasification technology in
order to meet the rapidly growing demand for renewable power. We believe that
this increased demand is being driven, to a large extent, by the adoption of
Renewable Portfolio Standards by a number of states, which require or encourage
utilities to have a specific percentage of their electricity sales come from
renewable sources.
To accelerate implementation of our renewable energy platform, we plan to
pursue the development of facilities in targeted markets where we believe we
will be able to earn a "tipping" fee for accepting wastes and a premium for the
sale of renewable energy products. In this regard, we were recently short-listed
by a California utility on three projects totaling 60 megawatts. Also, we plan
to work in parallel to install a small-scale gasifier in our Anaheim, California
facility, and/or to acquire similar gasification demonstration facilities to
gain operating experience with the unique aspects of gasifying biomass derived
from municipal solid waste and other waste streams, to develop detailed design
criteria for our larger scale systems, and to demonstrate our various
gasification technologies and systems which we are developing, acquiring and
licensing. In our Anaheim facility we are also evaluating the feasibility to
design, build, own and operate additional systems and technologies related to
the Company's provisional patent for the production of fuel alcohols, primarily
ethanol, through the catalytic conversion of syngas.
We anticipate that the development of projects using our systems and
technologies 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 beverage containers,
aluminum, steel, plastics, and glass) that our process recovers and which
otherwise would be interred in landfills, and (c) revenue from the sale of our
end products, anticipated to be primarily renewable electricity, ethanol and
other fuel alcohols. We believe that the ability to receive fees from waste
generators or handlers provides us with a low cost fuel source which we believe
is an important and beneficial characteristic of our business model.
15
<Page>
MARKET OVERVIEW
We believe there is a large and growing market for the production and sale
of renewable energy in the United States, driven by: (1) high costs of
hydrocarbon based fuels ; (2) high political and economic costs to obtain energy
from unstable foreign countries; (3) harder to reach (therefore more expensive)
locations for exploration and development of new oil and gas reserves; (4)
increasing competition from developing countries such as China and India for
finite amounts of hydrocarbon based energy; and (5) a growing public awareness
of the environmental damages brought on by increasing levels of greenhouse
gasses in the atmosphere created by carbon-based energy fuels which may be
contributing to global warming. These factors have led to state and federal
legislation. For example, the California Renewable Portfolio Standard
established in 2002 requires certain retail electricity sellers to have 20% of
their retail sales come from renewable energy sources by the year 2010.
Twenty-two other states have some form of Renewable Portfolio Standard and
popular support for such requirements appears to be growing.
We believe that our existing and future technologies will potentially
create value for various constituencies, including solid waste companies (by
reducing transportation costs and increasing diversion of waste from landfills),
communities and regulators (by increasing recycling rates, gaining a renewable
energy source, lengthening landfill life, 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).
Furthermore, we plan to design our systems and processes to 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.
ELECTRICITY OPPORTUNITIES
We plan to focus our efforts on the development of various renewable
energy products which can be produced from MSW and other waste streams. The
process which we believe has the most potential for successful commercialization
involves using gasification technologies to produce a synthetic gas (or
"syngas") from the cellulose biomass fraction of MSW derived from our materials'
separation and classification process. Green waste, sewage sludge and other
commercial waste streams are also potential feedstocks. The resulting syngas can
be used to fire either a boiler driving a steam turbine, or, after a gas
clean-up process we believe it may be possible to put the syngas directly into a
gas-fired turbine. In either case, we believe the process has the potential to
produce sufficient energy to satisfy all the energy needs of our own facilities
and leave a significant amount of renewable electricity for sale to utilities.
Consistent with this new direction, we recently were short-listed in the
selection process to provide a total of 60 megawatts of renewable electric power
to a major California utility. We made a good faith deposit to the utility of
$60,000 for each of three sites in order to continue negotiations toward
completing power purchase agreements (PPAs) with the utility. Each of the three
projects is expected to process 1,000 tons per day of residual MSW destined for
landfills resulting in the production of greater than 20 megawatts of
electricity for sale to utilities. If selected for these projects, we would
still need to raise significant additional financing and accomplish many other
tasks, including: completion of contracts for the supply of municipal solid
waste, establishment of site control, securing the necessary permits, and
designing, financing and constructing the facilities.
Ethanol / Specialty Chemicals Research
We are continuing research on production of ethanol and specialty
chemicals using municipal solid waste and green waste as a feedstock. Research
and development has been performed using gasification, enzymatic and acid
hydrolysis processes to produce liquid fuels and small-scale production has been
demonstrated by our R & D partner, Applied Power Concepts, Inc (APC). The
economics of larger scale production for this process are being analyzed, and we
are analyzing the feasibility of converting the Anaheim facility to a facility
for the production of renewable energy, specialty chemicals and liquid fuels.
16
<Page>
We also have experimented with directing syngas through a catalyst
environment to produce fuel grade alcohols, primarily ethanol and other
specialty chemicals, and we believe this may become a commercially viable way to
produce renewable transportation fuels and specialty chemicals. In this area we
recently filed a provisional patent covering a process and certain operating
conditions, which we believe may maximize the yield of such alcohols and
chemicals. A by-product of the catalyst process is a residual producer gas that
we believe has the potential to be used for the beneficial co-generation of
renewable electricity. In the future, we believe this same basic process has the
potential to be used to produce hydrogen for industrial applications and for
fuel cells.
Pulp Production
Our original facility in Anaheim has processed over 2,500 tons of MSW and
has produced over 400 tons of wetlap pulp. Papermaking customers reported that
our Quadra-C pulp met their specifications and we did successfully sell the
product as a raw material for the manufacture of packaging grade paper. However,
as previously disclosed, we concluded that the Anaheim facility was not viable
for commercial scale pulp production due to several factors, including: the
small scale of the physical plant, the need to install expensive wastewater
treatment equipment on site, and mechanical issues related to equipment supplied
by specific vendors which did not support sustained continuous operation of the
facility. These factors resulted in higher operating costs and lower yields than
initially expected. We wrote off the assets related to the paper making
equipment at the end of 2006 and we began liquidating some of that equipment to
clear floor space for the other projects and to generate additional working
capital.
STRATEGY
Our goal is to utilize a design, build, own and operate model to develop
full-scale commercial facilities which profitably transform residual MSW, green
waste and other waste streams into usable renewable energy including electricity
and synthetic gas, transportation fuels such as ethanol, specialty chemicals and
paper pulp.
Pursuit of this strategy entails work in the following areas:
DEVELOP, TEST, AND PILOT CORE PROCESS TECHNOLOGIES AT OUR ANAHEIM FACILITY
Technical feasibility and process characterization of our RMSW-to-pulp
process has been achieved at our facility in Anaheim. To support the design of a
new plant to produce renewable energy and specialty chemicals from RMSW and
other waste streams, we are currently operating the facility in a research mode.
We are also investigating the installation of a small-scale gasification unit in
Anaheim, or elsewhere, to test and demonstrate our core process of MSW
gasification.
In conjunction with our research partner, Applied Power Concepts, we are
also developing conversion technologies to transform post-recycled MSW into
renewable electricity and fuel alcohols, through acid hydrolysis/fermentation as
well as proprietary catalytic syngas conversion technologies for the production
of ethanol. We anticipate that this phase of our strategy will continue through
at least 2008.
SEEK AND SECURE COMPETITIVE SITES FOR NEW FACILITIES
We are engaged in a process of identifying expansion sites at which,
subject to our ability to raise sufficient financing, we intend to build
full-scale commercial operations. We are in the process of identifying high
priority sites and targeting locations with advantageous MSW tip fees and
utilities offering power purchase agreements with premiums for renewable
electricity. We have a strategic relationship with Republic Services, the third
largest waste hauler in the U.S., with whom we intend to build additional
facilities beyond our Anaheim plant. We also have relationships with many
independent waste haulers who have a strong interest in finding conversion
technologies which reduce their transportation and disposal costs and increase
their rate of diversion from landfills.
We recently were short-listed in the selection process to provide a total
of 60 megawatts of renewable electric power to a major California utility. We
have made a good faith deposit to the utility of $60,000 for each of three sites
in order to continue negotiations toward completing power purchase agreements
(PPAs) with the utility. Even if selected for these projects, we would still
need to raise significant additional financing and accomplish many other tasks,
including: completion of contracts for the supply of municipal solid waste,
establishment of site control, securing the necessary permits, and designing,
financing and constructing the facilities. Each of the three projects is
expected to produce in excess of 20 megawatts of electricity for sale to
utilities.
17
<Page>
REPLICATE AND ROLLOUT NEW FACILITIES WITH TECHNOLOGIES, PRODUCTS, AND FINANCING
TAILORED TO THE LOCATION
We anticipate using a suite of technologies, each of which will be
specifically applied on a site by site basis to profitably meet the needs of a
particular local market. We expect that these needs will change from market to
market and will be influenced by many factors, including the materials
composition of feedstock at that facility, local permitting and land use
requirements, and local political considerations. We plan to seek to develop
additional facilities, implementing the most profitable end product platforms on
a site by site basis, and to develop facilities in the most favorable locations
within the United States. We also anticipate exploring licensing opportunities
to accelerate the rollout inside the U.S. and internationally. We plan to
leverage experienced engineering and construction partners for the most
effective utilization of our resources. Also, we expect each project to operate
independently and to possibly have different financial partners and ownership
structures.
SEEK OUT POTENTIAL ACQUISITIONS WHICH STRENGTHEN OUR EFFORTS AND ACCELERATE
IMPLEMENTATION
As part of the implementation of our strategy, we may pursue acquisitions.
In general, we may seek acquisition candidates with characteristics that
include: (a) technology, strategy, or people which complement our specific
focus, (b) projects which can be accelerated through participation by us, or
(c) established and growing revenue and cash flow.
Our ability to implement these strategies will be dependent upon our
ability to raise significant additional capital. While the market demand for
renewable energy is high, and many investors are seeking quality investments in
this sector, there can be no assurance that we will be able to raise the
financing necessary to execute this business plan.
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 renewable
electricity, synthetic gas, aluminum, steel, plastic, pulp and glass will be
tied to commodity markets. The market demand for these materials can be
volatile, which can significantly impact our results of operations.
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.
18
<Page>
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 June 30, 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 six
months ended June 30, 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.
SHORT TERM INVESTMENTS
The Company determines the appropriate classification of its investments
at the time of acquisition and reevaluates such determination at each balance
sheet date. All investments held at June 30, 2007 are short-term available for
sale securities. They are carried at quoted fair value, with unrealized gains
and losses reported in shareholders' equity as a component of accumulated
comprehensive income.
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
19
<Page>
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 the remainder 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.
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 June 30, 2007 or
December 31, 2006.
20
<Page>
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 two quarters 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 June 30, 2007 amounts.
These reclassifications had no effect on reported net loss.
STOCK-BASED COMPENSATION
The Company accounts for stock based compensation in accordance with SFAS
No 123R, "Share Based Payments."
RECENT ACCOUNTING PRONOUNEMENTS
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
157, "Fair Value Measurements". This new standard provides guidance for using
fair value to measure assets and liabilities and information about the extent to
which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. This framework is intended to provide increased consistency in how
fair value determinations are made under various existing accounting standards
which permit, or in some cases require, estimates of fair market value. SFAS 157
also expands financial statement disclosure requirements about a company's use
of fair value measurements, including the effect of such measures on earnings.
The provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007. While the Company is currently evaluating the provisions of
SFAS 157, the adoption is not expected to have a material impact on its
consolidated financial statements.
21
<Page>
The FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities-Including an Amendment of FASB Statement No. 115(SFAS
No. 159). This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. The accounting provisions of
SFAS No. 159 are effective for financial statements issued for fiscal years
beginning after November 15, 2007. While the Company is currently evaluating the
provisions of SFAS 159, the adoption is not expected to have a material impact
on its consolidated financial statements.
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED JUNE 30, 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 second quarter of 2007. All cash received for tip fees and
the sale of recyclables was netted against research and development costs.
Revenue and cost of goods sold during the second quarter of 2006 represented
revenues earned and the costs incurred during the start-up phase of the Anaheim
plant.
EXPENSES
Research and development expense increased from $60,000 during the quarter
ended June 30, 2006 to approximately $800,000 during the comparable quarter in
2007. This was primarily due to the cost of research and development activities
related to gasification of approximately $130,000,Anaheim plant costs of
approximately $260,000, property tax of approximately $90,000 and plant
depreciation of $320,000 in the 2007 period being classified as research and
development expense due to the current nature and intent of the plant
operations.
General and administrative expense increase from $1,037,451 during the
quarter ended June 30, 2006 to $1,425,176. This $387,725 increase was primarily
the result of an increase in employee stock option expense of approximately
$260,000, and professional and consulting fees of approximately $127,000
primarily related to consulting fees related to new technologies and new sites
and to the costs of the annual shareholders meeting.
The interest income of $105,717 for the second quarter of 2007 represents
the interest earned on the cash received for the issuance of the Series B
Preferred Stock in May of 2006. Interest expense of $290,190 for the three month
period ended June 30, 2006 related to interest on the Senior Secured Debt which
was issued in November of 2005 and February of 2006. All of the Senior Secured
Debt was extinguished in May of 2006.
Financing expense in the second quarter of 2006 was comprised of the
unamortized warrant value and offering costs of $1,593,758 related to the Senior
Secured Debt expensed upon the early extinguishment of the Debt which occurred
in the second quarter of 2006 and the change in the fair value of $4,201,418 of
the conversion feature of the Series A Preferred 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 Series A Warrants which occurred in the
second quarter of 2006.
Change in fair value of warrant liability in the second quarter of 2006 of
$135,642 relates to the fair value of warrants to purchase common stock issued
with registration rights as part of our Series A Preferred Stock offering in
2005. In accordance with SFAS 133 and EITF 00-19, the fair value of the warrants
was required to be recorded as a liability until the Company satisfies specified
registration requirements. The registration rights requirements were met by the
Company in December 2006; therefore, there is no warrant liability expense in
2007.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs increased to $3,347,388 in the
quarter ended June 30, 2007 from $1,507,775 during the comparable period in 2006
due to the issuance of the Series B Preferred Stock at the end of May 2006.
22
<Page>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2007 TO THE SIX MONTHS ENDED JUNE 30,
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 six months of 2007. All cash received for tip fees and
the sale of recyclables was netted against research and development costs.
Revenue and cost of goods sold during the six months ended June 30, 2006
revenues earned and the costs incurred during the start-up phase of the Anaheim
plant which began in April 2006.
EXPENSES
Research and development expense increased from $120,000 for the six
months ended June 30, 2006 to $1,722,952 for the six months ended June 30, 2007.
This was primarily due to the cost of research and development activities
related to gasification of approximately $150,000, Anaheim plant costs of
approximately $750,000, and plant depreciation of $630,000 in the 2007 period
being classified as research and development expense due to the current nature
and intent of the plant operations.
General and administrative expense increased from $2,006,117 for the six
months ended June 30, 2006 to $2,408,667 for the comparable period in 2007. This
$402,550 increase was primarily the result of an increase in employee stock
option expense of $170,000 and consulting fees of approximately $220,000
primarily related to technologies and new sites and to the costs of the annual
shareholders meeting.
The interest income of approximately $235,000 for the six months ended
June 30, 2007 represents the interest earned on the cash received for the
issuance of the Series B Preferred Stock in May of 2006. Interest expense of
approximately $275,000 for the six month period ended June 30, 2006 related to
interest on the Senior Secured Debt which was issued in November of 2005 and
February of 2006. All of the Senior Secured Debt was extinguished in May of
2006.
Financing expense during the six month period ended June 30, 2006 was
comprised of: a) $1,647,250 attributable to the value of warrants issued to the
holders of the Series A Preferred Stock for their consent to issue 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 which
occurred in the first quarter of 2006; b)the unamortized warrant value and
offering costs of $1,593,758 related to the Senior Secured Debt expensed upon
the early extinguishment of the 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 the Series A Preferred 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 Series A Warrants which occurred in the second
quarter of 2006. Change in fair value of warrant liability for the six month
period ended June 30, 2006 of approximately $255,000 relates to the fair value
of warrants to purchase common stock issued with registration rights as part of
our Series A Preferred Stock offering in 2005. In accordance with SFAS 133 and
EITF 00-19, the fair value of the warrants was required to be recorded as a
liability until the Company satisfies specified registration requirements. The
registration rights requirements were met by the Company in December 2006;
therefore, there is no warrant liability expense in 2007.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs increased to $7,051,028 for the
first six months ended June 30, 2007 from $2,048,261 from the comparable period
in 2006 due to the issuance of the Series B Preferred Stock in May
of 2006.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2007, we had cash and cash equivalents on hand of
$1,893,855 and short term investments of approximately $9,811,183,
a decrease of approximately $2.6 million from December 31, 2006.
23
<Page>
During the first six months of 2007, net cash used for operating
activities was approximately $2,500,000. The use of cash was primarily for (i)
research and development activities of approximately $900,000 net of non cash
items primarily comprised of depreciation, and (ii)general and administrative
expenses of approximately $1,600,000 net of non cash items primarily comprised
of the amortization of employee options and warrants and accrued expenses for
consulting.
During the first six months of 2007, net cash used for investing
activities was approximately $9,965,000. This was primarily due to $9,815,000
used to purchase short-term marketable securities and approximately $150,000 for
the purchase of equipment.
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 install gasification equipment in our Anaheim facility for
research and development purposes, if we choose to do so.
As of June 30, 2007, the only long-term debt obligations, capital lease
obligations, operating lease obligations, purchase obligations, or other similar
long-term liabilities, were our agreement with Taormina, 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 June 30, 2007, we had cash and short term investments of
$11.7 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 June 30, 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.
24
<Page>
There was no change in the Company's internal control over financial
reporting during the six months ended June 30, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
The following risk factors, which were disclosed in Form 10-K/A for the year
ended December 31, 2006 (the "2006 Form 10-K"), have been modified to provide
additional disclosure related to changes since we filed the 2006 Form 10-K and
the Form 10-Q for the quarter ended March 31, 2007. Please refer to the 2006
Form 10-K for a discussion of other risks facing our company.
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 may 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. We also need to develop or
identify and acquire other technologies to enable us to continue to pursue our
updated strategy. The successful application of technology at a large scale and
high volumes to create commercially usable cellulose fiber, electricity, ethanol
or other products has yet to be proven. In particular, most of the gasification
technologies that we are aware of are in the very early stages of
commercialization. Any inability to operate in a manner that will produce large
volumes of commercially usable products would 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, and higher than expected contamination levels
of the water discharge to the sewer. Unforeseen difficulties in the development
or market acceptance of any products we may produce 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, leading to our determination not to expend
any additional funds to address this problem and thus resulting in the
refocusing of our efforts to research and development activities and acquisition
of technologies to enable us to produce other products. In any event we will
need to raise additional financing which, if not available, could force us to
curtail or cease operations altogether.
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 plan to develop and acquire technologies designed to enable us to execute our
updated business strategy. 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. In this regard, for
example, we hope to build a demonstration-scale gasifier at our existing
facility. Inability to successfully implement commercially viable waste
processing technologies, as a result of insufficient capital or otherwise, will
have a material adverse effect on our business and results of operation.
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, (c)
requirements that businesses operating in the solid waste industry comply with
applicable land, water and air emission regulations, and (d) regulations
surrounding the production of renewable energy. 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.
25
<Page>
OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY CHANGING RESALE PRICES OR
MARKET REQUIREMENTS FOR OUR PRODUCTS.
The resale price for our recycled products, including our unbleached fiber
product, aluminum and steel, as well as for our renewable energy products, will
be tied to commodity pricing. Our results of operations may be adversely
affected by changing resale prices or market requirements for these products.
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.
THE HOLDERS OF OUR PREFERRED STOCK HAVE CERTAIN RIGHTS THAT COULD ADVERSELY
AFFECT THE VALUE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE ADDITIONAL
CAPITAL.
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 holders
of a majority of the shares of each such series of Preferred Stock have the
option to require our company to redeem all outstanding shares of each such
series on April 10, 2010, at a price equal to the original issuance price (with
accrued but unpaid dividends being treated as outstanding for purposes of
calculating the total redemption price). Based on the number of shares of
Preferred Stock outstanding as of June 30, 2007, the total redemption payment
obligation would equal approximately $50.0 million. In addition, certain
issuances by our company of equity at below specified prices will trigger the
"anti-dilution" provisions in the Preferred Stock that would result in
adjustments in the conversion ratios. These adjustments could result in
significant dilution to our common stockholders. The foregoing provisions of the
Preferred Stock will likely have a material impact on our company's ability to
raise additional capital. The rights, preferences and privileges of our
preferred stock are described in more detail in note 9 to our 10-K/A.
26
<Page>
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
27
<Page>
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: August 14, 2007 WORLD WASTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ David Rane
------------------------------
David Rane
Chief Financial Officer
28
<Page>
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
29