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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 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: 27,182,606 shares issued and
outstanding as of September 30, 2007.
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WORLD WASTE TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1 Condensed Financial Statements:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Stockholders' Equity (Deficit) 4
Condensed Consolidated Statements of Cash Flow 6
Condensed 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 5 Other information 25
Item 6 Exhibits 27
SIGNATURES 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2007 2006
----------------------------------
ASSETS: (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 1,574,760 $ 14,330,840
Short-term investments 8,975,530 -
Accounts receivable - 12,517
Prepaid expenses 312,831 174,589
----------------------------------
Total Current Assets 10,863,121 14,517,946
----------------------------------
Fixed Assets:
Machinery, equipment net of accumulated depreciation of $20,962
on 9/30/07 and $673,201 on 12/31/06. 22,057 6,460,326
Construction in Progress - 114,238
Leasehold Improvements net of accumulated depreciation
of $271,164 on 12/31/06. - 2,693,163
----------------------------------
Total Fixed Assets 22,057 9,267,727
Other Assets:
Deposit L/T 36,519 36,519
Patent license, net of accumulated amortization of $174,340 on
9/30/07 and $88,591 on 12/31/06 1,180,265 1,266,014
----------------------------------
TOTAL ASSETS $ 12,101,962 $ 25,088,206
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
LIABILITIES:
Current Liabilities:
Accounts payable $ 246,884 $ 503,752
Accrued salaries payable 84,422 136,635
Capital lease S/T 48,517 45,615
Accrued liabilities 172,538 222,803
Other liabilities - 23,183
----------------------------------
Total Current Liabilities 552,361 931,988
----------------------------------
Long Term Liabilities:
Capital lease L/T 43,592 80,351
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Total Long Term Liabilities 43,592 80,351
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TOTAL LIABILITIES 595,953 1,012,339
----------------------------------
Convertible Redeemable preferred stock (See Note 6) 20,797,921 14,506,849
----------------------------------
Commitments and Contingencies (See Note 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock - $.001 par value: 100,000,000 shares
authorized, 27,182,606 and 25,412,662 shares
issued and outstanding at September 30, 2007 and December 31, 2006,
respectively. 27,182 25,412
Additional paid-in-capital 56,277,840 51,179,469
Deficit accumulated during development stage (65,606,352) (41,635,863)
Accumulated comprehensive income (loss) 9,418 -
----------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (9,291,912) 9,569,018
----------------------------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT) $ 12,101,962 $ 25,088,206
==================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
September 30, 2007 September 30, 2006
-------------------------------------------
GROSS REVENUE: $ - $ 44,288
Disposal of rejects (31,292)
Plant operation cost (1,075,427)
Depreciation (620,881)
-------------------------------------------
Total cost of goods sold - (1,727,600)
-------------------------------------------
Gross Margin - (1,683,312)
G&A Expense
Research and development (418,707) (60,000)
General and administrative (1,395,486) (944,584)
Impairment of assets (Note 1) (8,454,106)
-------------------------------------------
Loss from operations (10,268,299) (2,687,896)
-------------------------------------------
Interest income 188,726 218,303
Change in fair value of warrant liability - 831,297
-------------------------------------------
Net loss before provision for income tax (10,079,573) (1,638,296)
-------------------------------------------
Income taxes - -
-------------------------------------------
Net loss (10,079,573) (1,638,296)
-------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (2,917,201) (3,230,435)
-------------------------------------------
Net loss attributable to common shareholders $ (12,996,774) $ (4,868,731)
============================================
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (0.48) $ (0.19)
============================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 27,115,117 25,283,040
============================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Nine Months June 18, 2002
Ended Ended Inception to
September 30, 2007 September 30, 2006 September 30, 2007*
-----------------------------------------------------------------
GROSS REVENUE: $ - $ 58,615 $ 93,784
Disposal of rejects (45,539) (65,526)
Plant operation cost (1,740,237) (2,720,922)
Depreciation (1,216,227) (1,843,615)
-----------------------------------------------------------------
Total cost of goods sold - (3,002,003) (4,630,063)
-----------------------------------------------------------------
Gross Margin - (2,943,388) (4,536,279)
G&A Expense
Research and development (2,168,582) (180,000) (3,209,862)
General and administrative (3,804,153) (2,950,701) (14,561,552)
Impairment of assets (Note 1) (8,454,106) (18,191,450)
-----------------------------------------------------------------
Loss from operations (14,426,841) (6,074,089) (40,499,143)
-----------------------------------------------------------------
Interest income (expense) 424,580 (56,312) 454,582
Financing transaction expense - (7,442,426) (7,442,426)
Change in fair value of warrant liability - 575,501 -
Other income (expense) - - 1,789,133
-----------------------------------------------------------------
Net loss before provision for income tax (14,002,261) (12,997,326) (45,697,854)
-----------------------------------------------------------------
Income taxes - - -
-----------------------------------------------------------------
Net loss $ (14,002,261) $ (12,997,326) $ (45,697,854)
-----------------------------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (9,968,229) (5,278,696) (19,840,973)
-----------------------------------------------------------------
Net loss attributable to common shareholders $ (23,970,490) $ (18,276,022) $ (65,538,827)
=================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.90) $ (0.73) $ (3.44)
=================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 26,561,235 24,946,629 19,042,794
=================================================================
*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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED 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)
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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)
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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
Additional Accumulated
Paid in Common Stock Accumulated Comprehensive
Shares Dollars Capital Subscription Deficit * Income (Loss) Total
------------------------------------------------------------------------------------
Common stock and warrants net of offering
cost 262,851 263 9,561 9,824
Amortization of stock options and warrants to
employees and consultants 989,252 989,252
Dividend (Preferred Stock) 386,954 (2,920,893) (2,533,939)
Warrants issued preferred stock 1,647,250 1,647,250
Bridge financing warrants 787,500 787,500
Beneficial conversion feature - Series B 18,207,102 18,207,102
Conversion of Series B preferred stock 296,581 296 840,716 841,012
Series B Investor & placement warrants 7,922,663 7,922,663
Series A Investor warrants 3,065,931 3,065,931
Elimination of warrant liabilities 674,420 674,420
UAH stock for purchase of patent 167,000 167 697,833 698,000
Registration filing fees (11,529) (11,529)
Amortization of beneficial conversion
feature, warrant discount and offering costs
on redeemable preferred stock (5,717,378) (5,717,378)
Net loss - 2006 (24,956,520) (24,956,520)
------------------------------------------------------------------------------------
December 31, 2006 25,412,662 25,412 51,179,469 (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 1,161,490 1,161,490
Dividend (Preferred Stock) (2,391,885) (2,391,885)
Conversion of Series B preferred stock 1,467,284 1,468 3,675,689 3,677,157
Amortization of beneficial conversion
feature, warrant discount and offering costs
on redeemable preferred stock (7,576,344) (7,576,344)
Net loss - September 2007 (Unaudited) (14,002,261) (14,002,261)
Unrealized gain (loss) on short term
Investments held for sale 9,418 9,418
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September 30, 2007 (Unaudited) 27,182,606 $27,182 $56,277,840 $ 0 $(65,606,353) $9,418 $(9,291,912)
====================================================================================
* 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Nine Months June 18, 2002
Ended Ended (Inception) to
September 30, 2007 September 30, 2006 September 30, 2007
--------------------------------------------------------------
Cash Flow from operating activities: $ $ $
Net loss (14,002,261) (12,997,326) (45,697,854)
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment of assets 8,454,106 18,191,450
Depreciation and amortization 1,048,595 1,276,078 3,016,795
Interest forgiveness 135,327
Warrant and common stock Issued for consulting 84,566
Amortization of warrants & options to employees 1,161,490 752,570 3,022,788
Fair value adjustment warrant liability (575,501) (1,789,134)
Financial transaction expense 7,485,547 7,442,426
Amortization of offering cost 252,277 252,277
Changes in operating assets and liabilities:
Accounts receivable 12,517 (11,279) -
Prepaid expenses/Emp. receivable (138,242) 57,056 (312,831)
Accounts payable (256,868) 261,944 246,884
Accrued salaries (52,213) (114,044) 84,422
Accrued other liabilities 186,053 (83,950) 432,038
--------------------------------------------------------------
Net Cash used in operating activities (3,586,823) (3,696,638) (14,890,846)
--------------------------------------------------------------
Cash flows from investing activities:
Construction in progress (4,043,205)
Leasehold improvements (6,221) (2,970,549)
Deposits on equipment (5,231,636)
Purchase machinery & equipment (198,917) (4,516,937) (8,228,404)
Patient license (20,000) (440,890)
Deposits 68,320 (36,519)
Purchase of Short-term investments (8,966,112) (8,966,111)
--------------------------------------------------------------
Net Cash used in investing activities (9,171,250) (4,468,617) (29,917,314)
--------------------------------------------------------------
Cash flows from financing activities:
Capital Lease 153,874
Redeemable preferred stock 22,526,135 31,375,262
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 1,993 78,969 11,948,181
--------------------------------------------------------------
Net Cash provided by financing activities 1,993 21,851,554 46,382,920
--------------------------------------------------------------
Net increase in cash and cash equivalents (12,756,080) 13,686,299 1,574,760
Beginning cash and cash equivalents 14,330,840 2,864,377
--------------------------------------------------------------
Ending cash and cash equivalents 1,574,760 16,550,676 1,574,760
==============================================================
Non-cash investing and financing activities:
Interest (Paid) Received $ 424,580 $ 169,034 $ 454,935
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 nine months ended September 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 nine months ended September 30, 2007, the Company issued 103,340 shares in exchange for services rendered in 2006.
*During the nine months ended September 30, 2007, the Company issued 1,467,284 shares of common stock in exchange for
conversion of $3,675,689 of Preferred Series B stock.
*Short-term investments have been adjusted for unrealized gains of $9,418.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine
months ended September 30, 2007 are not necessarily indicative of the results to
be expected for a full year. December 31, 2006 balances were derived from
audited financial statements. 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 three and nine month periods ended September 30,
2006 and for the December 31, 2006 balance sheet have been reclassified to
conform with the presentation of the September 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 this adoption.
7
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 September 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 gain of $9,418 recorded in
shareholders' equity during the quarter ended September 30, 2007 was comprised
of unrealized gains of $11,037 and unrealized losses of $1,619. 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 were 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 at that time because the
Company intended 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 believed 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 third quarter of 2007, the Company determined that the ongoing
research and development work would more efficiently be carried out at the
location of Applied Power Concepts, the Company's research and development
partner. Consequently, in order to reduce costs and focus management attention
and cash resources on the Company's renewable energy process, the Company
initiated conversations with Taormina Industries, Inc., the lessor of the
Company's Anaheim Facility regarding termination of such lease and the
cancellation of the associated recycling agreement with Taormina. On October 29,
2007, Taormina terminated the lease and the recycling agreement, effective as of
October 31, 2007. Consequently, the Company recorded a charge of $8,454,106 in
the third quarter of 2007 which represented the net carrying value of the assets
at the Anaheim plant, net of estimated fair value of the equipment and estimated
costs of the equipment removal and scrap. (See Note 4)
The Company capitalizes leases in accordance with FASB 13, "Accounting for
Leases."
8
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 Bio-Products
International, Inc., the entity from which we sub-license certain technology
alleging, among other things, breach of contract and negligence with respect to
the construction of the steam classification vessels that the Company had
intended to use in its operations. The Company does not believe that this
lawsuit affects the carrying value of the patent (which we currently own) or the
sub-license. In October 2007, the Company received a termination notice of the
lease of the Anaheim facility and is in the process of removing and selling its
equipment from that location. At this time, the Company believes that the future
cash flows from the patent license fees and sublicense agreement from future
operations will exceed the carrying amount of the intangibles. Therefore, the
Company had no material impairment to its intangible assets during the nine
months ended September 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 September 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 $530,292 and $231,703 for the three months
ended September 30, 2007 and 2006 , respectively, and $1,161,490, $695,110 and
$2,594,088 for the nine months ended September 30, 2007 and 2006 and for the
period from inception to September 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 September 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 nine months ended September 30, 2007 to
employees, members of the board of directors and consultants. At September 30,
2007, there were 1,987,000 options outstanding under the 2004 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 nine months ended September 30, 2007 to
employees, members of the board of directors and consultants. At September 30,
2007, there were 2,856,000 options outstanding under the 2007 plan.
The Company believes that such awards better align the interests of its
Employees, directors and consultants 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
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.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2007 DECEMBER 31, 2006
-------------------- -------------------
Expected volatility 78.2 % 70 %
Expected dividends 0 % 0 %
Expected term (in years) 5.5 - 9.9 4
Risk-free rate 3.30 - 4.58% 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 28,418,245, consisting of employee options of 4,843,000, investor
warrants of 6,829,828, Preferred Series A of 5,892,662 and Preferred Series B of
10,852,755, were not included in the calculation of diluted earnings per share
at September 30, 2007 and common stock equivalents of 25,509,554 were not
included in the calculation of diluted earnings per share at September 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 nine months ended September 30, 2007 of $14,002,261 and an
accumulated deficit of $65,606,353 at September 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
developing and financing other products. The Company's ability to develop other
projects is dependent on successful research and development, engineering,
obtaining power purchase agreements, obtaining waste contracts and obtaining
additional funding. The Company is currently working on these areas. If the
Company is unsuccessful in any of these areas, 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
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
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 had intended 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. 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. Subsequently, the court ordered that
the matter be resolved by binding arbitration. The Company is seeking monetary
damages, among other relief sought.
At this time, the Company believes that the future cash flows from the
patent license fees and sublicense agreement related to future operations will
exceed the carrying amount of the intangibles. Therefore, the Company had no
material impairment to its intangible assets during the nine months ended
September 30, 2007 or the year ended December 31, 2006.
NOTE 4. TERMINATION OF SIGNIFICANT CONTRACT
In June 2003 the Company entered into a multi-year recycle agreement with
Taormina Industries, Inc. pursuant to which, among other things, Taormina agreed
to deliver residual municipal solid waste (MSW) to the Company for processing
and the Company agreed to lease a building for the related recycling facility on
Taormina's campus in Anaheim, California (the "Anaheim Facility"). The lease for
the Anaheim Facility was entered into in July 2004. The recycling agreement, as
amended, provided that the recycling agreement would terminate automatically
upon termination of the lease.
As previously disclosed, during early 2007 the Company began using the
Anaheim Facility to conduct research and development activities related to the
production of renewable energy from MSW. Recently the Company determined that
the ongoing research and development work would more efficiently be carried out
at the location of Applied Power Concepts, the Company's research and
development partner. Consequently, in order to reduce costs and focus management
attention and cash resources on the Company's renewable energy process, Company
initiated conversations with Taormina regarding termination of the lease of the
Anaheim Facility and the cancellation of the associated recycling agreement. On
October 29, 2007, Taormina terminated the lease and the recycling agreement,
effective as of October 31, 2007. The recycling agreement does not provide for
penalties due to early termination. The Company plans to make an orderly exit
from the facility over the next several months and is currently in discussion
with Taormina regarding a temporary lease arrangement to facilitate the orderly
removal and resale of various pieces of equipment at the site. Consequently, the
Company recorded a charge of $8,454,106 in the third quarter of 2007 which
represents the net carrying value of the assets at the Anaheim plant, net of
estimated fair value of the equipment and estimated costs of the equipment
removal and scrap.
The non-competition and right of first refusal provisions of the recycle
agreement will survive termination of such agreement through July 25, 2014 (the
date that the lease would have expired had it not been terminated). The Company
anticipates it will continue to work with Republic in other locations as a
potential provider of MSW to the Company based on the Company's plans to design,
build, own and operate commercial facilities to transform residual mixed solid
waste, green waste and other waste streams into renewable energy.
NOTE 5. 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 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 expect to 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
As of January 1, 2007, we were not under examination by any major tax
jurisdiction.
NOTE 6. 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. If all
of the shares that are outstanding at September 30, 2007 were outstanding and
redeemed at April 28, 2010, the liability would be approximately $50 million. 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 2,332,907 3,161,260 5,494,167
Converted to common stock -- (4,518,170) (4,518,170)
---------------- ---------------- ----------------
Total outstanding 12,521,907 27,131,890 39,653,797
Unamortized beneficial conversion feature (776,664) (10,451,215) (11,227,879)
Unamortized offering costs (914,745) (3,305,319) (4,220,064)
Unamortized warrant value (776,666) (2,631,265) (3,407,931)
---------------- ---------------- ----------------
Balance at September 30, 2007 $ 10,053,830 $ 10,744,091 $ 20,797,921
================ ================ ================
NOTE 7. CAPITAL LEASE OBLIGATION
Capital Lease obligation is comprised as follows:
SEPTEMBER 30, 2007 DECEMBER 31, 2006
-------------------- -------------------
Capital Lease for Front End Loader, 35 monthly $92,109 $125,966
installments of $4,526, 24 payments were remaining at
September 30, 2007, interest was imputed at 8.25%
Less: Current portion 48,517 45,615
-------------------- -------------------
$43,592 $ 80,351
==================== ===================
NOTE 8. 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. On October 26, the lease
for the Company's Anaheim plant was terminated (see Note 4). Consequently, the
Company not included the future rent obligations from the schedule below. The
Company is current determining its exit strategy. The Company has operating
lease obligations for office space of approximately:
Less than 1 year $52,000
more than 1 less than 3 $ -
more than 3 less than 5 $ -
after 5 years $ -
13
As of September 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.
NOTE 9. SUBSEQUENT EVENTS
In June 2003 the Company entered into a multi-year recycle agreement with
Taormina Industries, Inc. pursuant to which, among other things, Taormina agreed
to deliver residual municipal solid waste (MSW) to the Company for processing
and the Company agreed to lease a building for the related recycling facility on
Taormina's campus in Anaheim, California (the "Anaheim Facility"). The lease for
the Anaheim Facility was entered into in July 2004. The recycling agreement, as
amended, provided that the recycling agreement would terminate automatically
upon termination of the lease.
As previously disclosed, during early 2007 World Waste began using the
Anaheim Facility to conduct research and development activities related to the
production of renewable energy from MSW. Recently World Waste determined that
the ongoing research and development work would more efficiently be carried out
at the location of Applied Power Concepts, the Company's research and
development partner. Consequently, in order to reduce costs and focus management
attention and cash resources on the Company's renewable energy process, World
Waste initiated conversations with Taormina regarding termination of the lease
of the Anaheim Facility and the cancellation of the associated recycling
agreement. On October 29, 2007, Taormina terminated the lease and the recycling
agreement, effective as of October 31, 2007. The recycling agreement does not
provide for penalties due to early termination. The Company plans to make an
orderly exit from the facility over the next several months and is currently in
discussion with Taormina regarding a temporary lease arrangement to facilitate
the orderly removal and resale of various pieces of equipment at the site.
Consequently, the Company recorded a charge of $8,454,106 in the third quarter
of 2007 which represent the net carrying value of the assets at the Anaheim
plant, net of estimated fair value of the equipment and estimated costs of the
equipment removal and scrap.
The non-competition and right of first refusal provisions of the recycle
agreement will survive termination of such agreement through July 25, 2014 (the
date that the lease would have expired had it not been terminated). World Waste
anticipates it will continue to work with Republic in other locations as a
potential provider of MSW to World Waste based on World Waste's plans to design,
build, own and operate commercial facilities to transform residual mixed solid
waste, green waste and other waste streams into renewable energy.
14
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 two California utilities on total of four projects. Also, we plan to work
in parallel to install a small-scale gasifier in Anaheim, California, at the
facility of our R & D partner 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.
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 could provide us with a low cost fuel source which we
believe is an important and beneficial characteristic of our business model.
15
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.
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. A
process which we believe has significant 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 renewable electric power to two major California
utilities for a total of four projects. Each of the projects is expected to
process 1,000 tons per day of residual MSW destined for landfills resulting in
the production of 15 to 20 megawatts of electricity for sale to
utilities. We continue to work through the process of negotiating power purchase
agreements with respect to these projects (which are not expected to be awarded
until the first half of 2008, at the earliest.) If selected for these projects,
which we do not expect to know until during the first half of 2008, 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. During
the third quarter, we determined that the ongoing research and development work
being performed at our Anaheim facility would more efficiently be carried out at
the location of APC. Consequently, in order to reduce costs and focus management
attention and cash resources on our renewable energy process, we initiated
conversations with Taormina regarding termination of the lease of the Anaheim
Facility and the cancellation of the associated recycling agreement (see Note
4).
16
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.
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 or products,
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
We are currently investigating the installation of a small-scale
gasification unit in Anaheim, at our R & D partner's facility 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.
17
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 focus, (b)
projects which can be accelerated through participation by us, or (c)
established or 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
results of operations are based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related 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
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 September 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 nine
months ended September 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 September 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 were being
depreciated over a maximum of 8 years and two months on a straight line basis.
Maintenance and repairs are expensed as incurred.
We completed the construction of its initial plant in Anaheim, California
early in the second quarter of 2006. We 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 our 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
an unexpected high level of biological oxygen demand from organic waste in the
wastewater from the pulp screening and cleaning process. We decided not to make
the capital improvements necessary to the Anaheim plant's wetlap process or back
half which we considers necessary in order to recover the carrying amount of the
wetlap plant assets through projected future undiscounted cash flow from its
operation. Consequently, we recorded a charge of $9,737,344 which represented
the net carrying value of the wetlap process (or "back half") equipment. The
charge was equal to the carry cost of the assets of the wetlap process, net of
accumulated depreciation.
We did not record an impairment charge for the steam classification equipment
(or "front half") of the plant at that time because we intended to use that
equipment in research and development activities as part of our development of
alternative back end processes such as, but not limited to, gasification and
acid hydrolysis and because we also believed 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 third quarter of 2007, we determined that the ongoing research
and development work would more efficiently be carried out at the location of
Applied Power Concepts, our research and development partner. Consequently, in
order to reduce costs and focus management attention and cash resources on our
renewable energy process, we initiated conversations with Taormina Industries,
Inc., the lessor of the Company's Anaheim facility, regarding termination of
such lease and the cancellation of the associated recycling agreement with
Taormina. On October 29, 2007, Taormina terminated the lease and the recycling
agreement, effective as of October 31, 2007. Consequently, we recorded a charge
of $8,454,106 in the third quarter of 2007 which represented the net carrying
value of the assets at the Anaheim plant, net of estimated fair value of the
equipment and estimated costs of the equipment removal and scrap.
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 Bio-Products
International, Inc., the entity from which we sub-license certain technology
alleging, among other things, breach of contract and negligence with respect to
the construction of the steam classification vessels that the Company had
intended to use in its operations. 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 (which the Company owns) or
sub-license from BPI. At this time, the Company believes that the future cash
flows from the patent license fees and sublicense agreement from future
operations will exceed the carrying amount of the intangibles. Therefore, the
Company had no material impairment to its intangible assets during the nine
months ended September 30, 2007 or the year ended December 31, 2006.
20
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 three 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 this 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 three and nine month periods ended September 30,
2006 and for the balance sheet for December 31, 2006 have been reclassified to
conform with the presentation of the September 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
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 SEPTEMBER 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 considered
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 third 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 third 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 September 30, 2006 to approximately $419,000 during the comparable quarter
in 2007, an increase of $359,000. The increase was primarily due to costs at our
Anaheim plant of approximately $369,000 which was used during the quarter for
research and development activities and research and development activities
related to gasification approximately $50,000.
General and administrative expense increased from $945,000 during the
quarter ended September 30, 2006 to $1,395,000 for the comparable period in
2007. This $450,000 increase was primarily the result of an increase in employee
stock option expense of approximately $260,000, and professional and consulting
fees of approximately $190,000 primarily related to consulting fees related to
new technologies and new sites and to the costs of the annual shareholders
meeting. General and administrative expense for the quarter ended September 30,
2007 was comprised primarily of employee option expense of approximately
$530,000, compensation expense of approximately $225,000, business development
expenses of approximately $285,000, professional fees of approximately $168,000,
and other expenses of $187,000.
During the third quarter of 2007, we determined that our ongoing research
and development work would more efficiently be carried out at the location of
Applied Power Concepts, our research and development partner. Consequently, in
order to reduce costs and focus management attention and cash resources on our
renewable energy process, we initiated conversations with Taormina regarding
termination of the lease of the Anaheim Facility and the cancellation of the
associated recycling agreement. On October 29, 2007, Taormina terminated the
lease and the recycling agreement, effective as of October 31, 2007.
Consequently, we recorded a charge of $8,454,106 in the third quarter of 2007
which represents the net carrying value of the assets at the Anaheim plant, net
of estimated fair value of the equipment and estimated costs of the equipment
removal and scrap.
Interest income of $188,726 and $218,303 for the third quarters of 2007
and 2006, respectively, represents the interest earned on the cash received for
the issuance of the Series B Preferred Stock in May of 2006.
Change in fair value of warrant liability in the third quarter of 2006 of
$831,297 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 satisfied specified
registration requirements. The registration rights requirements were met by the
Company in December 2006; therefore, there was no warrant liability expense in
the 2007 period.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs decreased to $2,917,201 in the
quarter ended September 30, 2007 from $3,230,435 during the comparable period in
2006 due to the issuance of the Series B Preferred Stock at the end of May 2006
and amortization of beneficial conversion feature.
22
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 TO THE NINE MONTHS ENDED
SEPTEMBER 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 considered
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 nine 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 nine months ended September 30, 2006
Represented revenues earned and the costs incurred during the start-up phase of
the Anaheim plant which began in April 2006 and ended in the first quarter of
2007.
EXPENSES
Research and development expense increased from $180,000 for the nine
months ended September 30, 2006 to $2,169,000 for the nine months ended
September 30, 2007. This was primarily due to the cost associated with the
Anaheim plant of approximately $1,026,000, and plant depreciation of $940,000 in
the 2007 period being classified as research and development expense due to the
nature and intent of the plant operations and research and development
activities related to gasification of approximately $203,000.
General and administrative expense increased from $2,951,000 for the nine
months ended September 30, 2006 to $3,804,000 for the comparable period in 2007.
This $853,000 increase was primarily the result of an increase in employee stock
option expense of $470,000 and consulting fees of approximately $325,000
primarily related to technologies and new sites and to the costs of the annual
shareholders meeting. General and administrative expense for the nine months
ended September 30, 2007 was comprised primarily of employee stock option
expense of approximately $1,200,000, compensation expense of approximately
$775,000, professional fees of approximately $725,000, business development
costs of approximately $275,000, and other expenses of $829,000.
During the third quarter of 2007, we determined that our ongoing research and
development work would more efficiently be carried out at the location of
Applied Power Concepts, our research and development partner. Consequently, in
order to reduce costs and focus management attention and cash resources on our
renewable energy process, we initiated conversations with Taormina regarding
termination of the lease of the Anaheim Facility and the cancellation of the
associated recycling agreement. On October 29, 2007, Taormina terminated the
lease and the recycling agreement, effective as of October 31, 2007.
Consequently, we recorded a charge of $8,454,106 in the third quarter of 2007
which represented the net carrying value of the assets at the Anaheim plant, net
of estimated fair value of the equipment and estimated costs of the equipment
removal and scrap.
Interest income of approximately $424,580 for the nine months ended
September 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 $56,312 for the nine month period ended September 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 nine month period ended September 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 nine
month period ended September 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 satisfied specified registration
requirements. The registration rights requirements were met by the Company in
December 2006; therefore, there is no warrant liability expense in the 2007
period.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs increased to $9,968,229 for the
nine months ended September 30, 2007 from $5,278,696 for the comparable period
in 2006 due to the issuance of the Series B Preferred Stock in May of 2006.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2007, we had cash and cash equivalents on hand of
$1,574,760 and short term investments of approximately $8,975,530, a decrease of
approximately $3.8 million from December 31, 2006.
23
During the first nine months of 2007, net cash used for operating
activities was approximately $3,600,000. The use of cash was primarily for (i)
research and development activities of approximately $1,100,000 net of non cash
items primarily comprised of depreciation, and (ii)general and administrative
expenses of approximately $2,500,000 net of non cash items primarily comprised
of the amortization of employee options and warrants and accrued expenses for
consulting.
During the first nine months of 2007, net cash used for investing
activities was approximately $9,200,000. This was primarily due to $8,966,112
used to purchase short-term marketable securities and approximately $206,000 for
the purchase of equipment.
We estimate that our existing balance of cash and short term securities
will enable us to sustain operations through at least December 2008, based on
our current expected burn rate.
As of September 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 7 to the unaudited consolidated financial statements. In
October of 2007, Taormina terminated the lease and recycling agreement. Also,
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 September 30, 2007, we had cash and short term investments
of $10.6 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 our portfolio. We actively
monitor changes in interest rates.
At September 30, 2007 we had short term investments of $8,975,530
sensitive to changes in interest rates. We did not have any long term financial
instruments sensitive to changes in interest rates at September 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
There was no change in the Company's internal control over financial
reporting during the nine months ended September 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
You should carefully consider the risks described under "Risk Factors" in
our Annual Report on Form 10-K/A for the year ended December 31, 2006 (the "2006
Form 10-K") and in our Quarterly Report on Form 10-Q for the quarter ended March
31, 2007 (the "First Quarter 2007 10-Q"). These risks could materially affect
our business, results of operations or financial condition, or cause our actual
results to differ materially from those expected or those expressed in any
forward looking statements made by or on behalf of our company. These risks are
not exclusive, and additional risks to which we are subject include, but are not
limited to, the factors mentioned under "Forward-Looking Statements" above and
the risks of our business described in the 2006 Form 10-K, the First Quarter
2007 10-Q, in the immediately following paragraph, and elsewhere in this
Quarterly Report on Form 10-Q.
The termination of our agreements with Taormina could have an adverse
effect on our ability to continue our research and development activities.
During early 2007 we began using our Anaheim Facility to conduct research
and development activities related to the production of renewable energy from
MSW. Recently we determined that this ongoing research and development work
would more efficiently be carried out at another location. Consequently, in
order to reduce costs and focus management attention and cash resources on our
renewable energy process, we initiated conversations with Taormina regarding
termination of the lease of the Anaheim Facility and the cancellation of the
associated recycling agreement. On October 29, 2007, Taormina terminated the
lease and the recycling agreement, effective as of October 31, 2007. Although we
are now conducting our research and development activities at the location of
our research and development partner Applied Power Concepts,, theses facilities
may not adequately address all of our needs or continue to be available to us.
If we had to again relocate these facilities, we could suffer an unplanned slow
down in our research and development activities which could delay execution of
our business strategy and negatively affect our financial condition.
Item 5. Other Information
(a) On November 12, 2007, upon the recommendation of our Compensation
Committee, our Board approved an amendment of the terms of the outstanding stock
options previously issued under our 2004 Stock Option Plan (the "2004 Plan"), to
provide each recipient with an extended period of time in which to exercise his
or her stock options in the event of his or her involuntary termination from our
company (as an employee, director or consultant) for any reason (other than for
cause).
Prior to such amendments, the foregoing stock options provided for a
30-day period (or, with respect to a recipient's death or disability, a 12-or
6-month period, respectively), in which to exercise upon termination for any
reason. The stock options issued to such recipients under our 2007 Stock Option
Plan, however, provide for a three-year period in which to exercise following
each such recipient's involuntary termination from our company (as an employee,
director or consultant) for any reason (other than for cause). Pursuant to the
authority granted in the 2004 Plan and upon the recommendation of our
Compensation Committee, our Board amended all of the outstanding options issued
under the 2004 Plan to provide for a uniform period of time in which to exercise
following involuntary termination from our company for any reason (other than
for cause).
The following sets forth the options issued under the 2004 Plan held by
our executive officers and directors that were amended as described above:
Recipient Total Number of Options
----------------------------------- ----------------------------
David Rane, Chief Financial Officer 500,000
James Ferris, Director 187,000
Sam P. Cortez, Director 220,000
Russ Patten, Director 240,000
David Gutacker, Director 200,000
In all other respects, the terms of the foregoing options are unchanged.
We do not believe we will incur any additional compensation expense in
connection with the foregoing amendments.
25
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
26
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: November 14, 2007 WORLD WASTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ David Rane
------------------------------
David Rane
Chief Financial Officer
27
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
28