================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission file number 1-11476
WORLD WASTE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3977501
(State or Other Jurisdiction of (I.R.S. Employer
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 |_|
Smaller Reporting Company |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: 27,596,491 shares issued and
outstanding as of August 1, 2008.
================================================================================
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 Operations 16
Item 4 Controls and Procedures 26
PART II OTHER INFORMATION 27
Item 1 Litigation 27
Item 1A Risk Factors 27
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
June 30, December 31,
2008 2007
----------------------------------
ASSETS: (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 3,856,488 $ 2,711,200
Short-term investments 4,542,966 7,093,418
Prepaid expenses 310,549 336,726
Assets held for sale, less equipment sold to date 88,977 1,083,223
----------------------------------
Total Current Assets 8,798,980 11,224,567
----------------------------------
Fixed Assets:
Machinery, equipment net of accumulated depreciation of $25,991
on 6/30/08 and $23,358 on 12/31/07. 30,535 35,302
----------------------------------
Total Fixed Assets 30,535 35,302
Other Assets:
Deposit L/T 4,719 36,519
----------------------------------
TOTAL ASSETS $ 8,834,234 $ 11,296,388
==================================
LIABILITIES AND STOCKHOLDERS' (DEFICIT):
LIABILITIES:
Current Liabilities:
Accounts payable $ 394,493 $ 359,988
Accrued salaries payable 194,117 108,992
Capital lease S/T - 49,524
Accrued liabilities 292,755 -
Other liabilities 39,994 290,181
----------------------------------
Total Current Liabilities 921,359 808,685
----------------------------------
Long Term Liabilities:
Capital lease L/T - 30,826
----------------------------------
Total Long Term Liabilities - 30,826
----------------------------------
TOTAL LIABILITIES 921,359 839,511
----------------------------------
Convertible Redeemable preferred stock (See Note 5) 27,885,429 22,812,640
----------------------------------
Commitments and Contingencies (See Note 7)
STOCKHOLDERS' (DEFICIT):
Common Stock - $.001 par value: 100,000,000 shares authorized, 27,596,491
and 27,576,046 shares issued and outstanding at June 30, 2008 and
December 31, 2007,
respectively. 27,595 27,575
Additional paid-in-capital 58,701,540 57,782,888
Deficit accumulated during development stage (78,112,999) (70,000,282)
Accumulated comprehensive income (loss) (588,690) (165,944)
----------------------------------
TOTAL STOCKHOLDERS' (DEFICIT) (19,972,554) (12,355,763)
----------------------------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' (DEFICIT) $ 8,834,234 $ 11,296,388
==================================
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 June 18, 2002
Ended Ended Inception to
June 30, 2008 June 30, 2007 June 30, 2008 *
-----------------------------------------------------------------
GROSS REVENUE: $ - $ - $ 93,784
Disposal of rejects (65,526)
Plant operation cost (2,720,922)
Depreciation (1,843,615)
-----------------------------------------------------------------
Total cost of goods sold - - (4,630,063)
-----------------------------------------------------------------
Gross Margin - - (4,536,279)
G&A Expense
Research and development - (804,018) (3,438,582)
General and administrative (1,401,814) (1,425,176) (19,188,033)
Impairment of assets (18,191,450)
-----------------------------------------------------------------
Loss from operations (1,401,814) (2,229,194) (45,354,344)
-----------------------------------------------------------------
Interest income 78,134 105,717 757,141
Financing transaction expense - - (7,442,426)
Other income - - 1,969,073
-----------------------------------------------------------------
Net loss before provision for income tax (1,323,680) (2,123,477) (50,070,556)
-----------------------------------------------------------------
Income taxes - - -
-----------------------------------------------------------------
Net loss $ (1,323,680) $ (2,123,477) $ (50,070,556)
-----------------------------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (2,566,197) (3,347,388) (27,974,918)
-----------------------------------------------------------------
Net loss attributable to common shareholders $ (3,889,877) $ (5,470,865) $ (78,045,474)
=================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.14) $ (0.20) $ (3.86)
=================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 27,596,491 26,723,264 20,240,293
=================================================================
*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.
2
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Six Months June 18, 2002
Ended Ended Inception to
June 30, 2008 June 30, 2007 June 30, 2008 *
-----------------------------------------------------------------
GROSS REVENUE: $ - $ - $ 93,784
Disposal of rejects (65,526)
Plant operation cost (2,720,922)
Depreciation (1,843,615)
-----------------------------------------------------------------
Total cost of goods sold - - (4,630,063)
-----------------------------------------------------------------
Gross Margin - - (4,536,279)
G&A Expense
Research and development (16,359) (1,749,875) (3,438,582)
General and administrative (3,178,745) (2,408,667) (19,188,033)
Impairment of assets - - (18,191,450)
-----------------------------------------------------------------
Loss from operations (3,195,104) (4,158,542) (45,354,344)
-----------------------------------------------------------------
Interest income 147,871 235,854 757,141
Financing transaction expense - - (7,442,426)
Other income 24,940 - 1,969,073
-----------------------------------------------------------------
Net loss before provision for income tax (3,022,293) (3,922,688) (50,070,556)
-----------------------------------------------------------------
Income taxes - - -
-----------------------------------------------------------------
Net loss $ (3,022,293) $ (3,922,688) $ (50,070,556)
-----------------------------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (5,090,424) (7,051,028) (27,974,918)
-----------------------------------------------------------------
Net loss attributable to common shareholders $ (8,112,717) $ (10,973,716) $ (78,045,474)
=================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.29) $ (0.42) $ (3.86)
=================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 27,592,010 26,273,342 20,240,293
=================================================================
*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)
------------------------------------------------------------------------------------
December 31, 2002 9,100,000 100 73,036 (426,889) (353,753)
====================================================================================
Additional paid in capital 100 100
Common stock subscribed 125,000 125,000
Net Loss - 2003 (804,605) (804,605)
------------------------------------------------------------------------------------
December 31, 2003 9,100,000 100 73,136 125,000 (1,231,494) (1,033,258)
====================================================================================
Merger with Waste Solutions, Inc. 7,100,000 63 2,137 2,200
Common stock subscriptions 125,000 1 124,999 (125,000) -
Common stock and warrants net of offering
cost prior to VPTI merger 3,045,206 31 3,952,321 3,952,352
Shares cancelled (500,000) (5) 5 -
Warrants issued 281,171 281,171
Merger with VPTI 1,200,817 21,062 (21,062) -
Conversion of promissory notes 1,193,500 12 1,193,488 1,193,500
Accrued Interest on notes forgiven 135,327 135,327
Common stock and warrants net of offering cost 1,460,667 1,461 2,865,462 2,866,923
Amortization of stock options and warrants to
employees and consultants 217,827 217,827
Net loss - 2004 (2,496,188) (2,496,188)
------------------------------------------------------------------------------------
December 31, 2004 22,725,190 22,725 8,824,811 (3,727,682) 5,119,854
====================================================================================
Common stock and warrants net of offering cost 1,961,040 1,961 3,072,116 3,074,077
Amortization of stock options and warrants to
employees and consultants 654,220 654,220
Dividend redeemable (Preferred Stock) 106,645 (671,769) (565,124)
Warrants issued 861,853 861,853
Bridge financing warrants 1,114,105 1,114,105
Beneficial conversion feature on redeemable
preferred stock 1,328,066 1,328,066
Amortization of beneficial conversion
feature, warrant discount and offering costs
on redeemable preferred stock (562,704) (562,704)
Net loss - December 2005 (3,078,917) (3,078,917)
------------------------------------------------------------------------------------
December 31, 2005 24,686,230 24,686 15,961,816 (8,041,072) 7,945,430
====================================================================================
4
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 302,660 302 261,192 261,494
Warrant exercises
Amortization of stock options and warrants to
employees and consultants 1,638,128 1,638,128
Dividend (Preferred Stock) (3,173,396) (3,173,396)
Conversion of Series B preferred stock 1,860,724 1,861 4,704,099 4,705,960
Amortization of beneficial conversion
feature, warrant discount and offering costs
on redeemable preferred stock (9,838,354) (9,838,354)
Net loss - 2007 (15,352,669) (15,352,669)
Unrealized gain (loss) on short term
investments held for sale (165,944) (165,944)
------------------------------------------------------------------------------------
December 31, 2007 27,576,046 27,575 57,782,888 $ 0 (70,000,282) (165,944) (12,355,763)
====================================================================================
Amortization of stock options and warrants to
employees and consultants 901,037 901,037
Dividend (Preferred Stock) (1,595,434) (1,595,434)
Conversion of Series B preferred stock 20,445 20 17,615 17,635
Amortization of beneficial conversion
feature, warrant discount and offering costs
on redeemable preferred stock (3,494,990) (3,494,990)
Net loss - June 30, 2008 (Unaudited) (3,022,293) (3,022,293)
Unrealized gain (loss) on short term
investments held for sale (422,746) (422,746)
------------------------------------------------------------------------------------
June 30, 2008 (Unaudited) 27,596,491 $27,595 $58,701,540 $ 0 $(78,112,999) $(588,690)$(19,972,554)
====================================================================================
* 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
Six Months Six Months June 18, 2002
Ended Ended (Inception) to
June 30, 2008 June 30, 2007 June 30, 2008
--------------------------------------------------------------
Cash Flow from operating activities: $ $ $
Net loss (3,022,293) (3,922,688) (50,070,556)
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment of assets 18,191,450
Depreciation and amortization 4,767 686,314 3,021,562
Interest forgiveness 135,327
Warrant and common stock Issued for consulting 84,566
Amortization of warrants & options to employees 901,037 631,198 3,923,825
Fair value adjustment warrant liability (1,789,134)
Financial transaction expense 7,442,426
Amortization of offering cost 252,277
Changes in operating assets and liabilities:
Accounts receivable 12,517 -
Prepaid expenses/Emp. receivable 26,177 (8,775) (310,549)
Asset held for sale 994,246 650,398
Accounts payable 34,505 (57,098) 394,493
Accrued salaries 85,125 (23,410) 194,117
Accrued other liabilities 42,568 209,694 592,249
--------------------------------------------------------------
Net Cash used in operating activities (933,868) (2,472,248) (17,287,549)
--------------------------------------------------------------
Cash flows from investing activities:
Construction in progress (4,043,205)
Leasehold improvements (6,222) (2,970,548)
Deposits on equipment (5,231,636)
Purchase machinery & equipment (80,350) (147,025) (8,333,759)
Patient license
Deposits 31,800 (4,719)
(Purchase)sale of short-term investments 2,127,706 (9,813,486) (5,131,656)
--------------------------------------------------------------
Net Cash provided by(used in)investing activities 2,079,156 (9,966,733) (25,715,523)
--------------------------------------------------------------
Cash flows from financing activities:
Capital Lease
Redeemable preferred stock 30,346,461
Senior secured debt 6,265,000
Repayment of senior secured debt
Senior secured debt offering cost (420,523)
Payment of senior secured debt (2,785,000)
Warrants, common stock and
Additional paid in capital 1,996 13,453,622
--------------------------------------------------------------
Net Cash provided by financing activities 0 1,996 46,859,560
--------------------------------------------------------------
Net increase (decrease)in cash and cash equivalents 1,145,288 (12,436,985) 3,856,488
Beginning cash and cash equivalents 2,711,200 14,330,840
--------------------------------------------------------------
Ending cash and cash equivalents 3,856,488 1,893,855 3,856,488
==============================================================
Non-cash investing and financing activities:
Interest (Paid) Received $ 105,717 $ 236,207 $ 787,143
Income Taxes Paid -- -- --
*During 2002, the Company issued $67,526 of Convertible Promissory Notes
payable for preformation funds received and expended prior to Inception.
*The Company issued warrants to purchase 315,354 shares of common stock to
the placement agent for services rendered in connection with the fund
raising effort.
*The Company issued warrants to purchase 50,000 shares of common stock for
consulting services in 2004 and 100,000 shares of common stock upon the
exercise of a warrant in exchange for services rendered.
*The Company issued 1,193,500 shares of common stock upon conversion of the Convertible
Promissory notes payable and accrued interest of $135,327.
*The Company issued warrants to purchase 250,000 shares of its common
stock for a modification to the technology license agreement.
*During the six months ended June 30, 2007, the Company issued 103,340 shares in
exchange for services rendered in 2006.
*During the six month periods ended June 30, 2007 and 2008, the Company
issued 1,209,646 shares and 20,445, respectively, of common stock in
exchange for conversion of Preferred Series B stock.
*Short-term investments have been adjusted for unrealized losses of $588,690.
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
JUNE 30, 2008 AND 2007
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.
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.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements include all adjustments
(consisting of only normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation. Operating results for the six
months ended June 30, 2008 are not necessarily indicative of the results to be
expected for a full year. December 31, 2007 balances were derived from audited
financial statements. The consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 2007.
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 and may
be limited due to future changes in control. 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, Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109, on January 1, 2007. There was no
material impact on the Company's financial statements as a result of the
adoption.
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.
7
SHORT TERM INVESTMENTS
The Company determines the appropriate classification of its investments at the
time of acquisition and reevaluates such determination at each balance sheet
date. All investments held at June 30, 2008 are short-term available for sale
securities. At June 30, 2008, their face value was $5.1 million. They are
carried at quoted fair market value of $4.5, with unrealized gains and losses
reported in shareholders' equity as a component of accumulated comprehensive
income. Due to the uncertainty in the financial markets, auction rate securities
have experienced liquidity uncertainty. In August 2008, the Company sold
securities with a face value of $3.6 million for $3.3 million, which was equal
to their fair market value at June 30, 2008. The Company has not been able to
liquidate the remaining $1.5 million securities as of August 14, 2008. The
Company has not been required to liquidate any of these investments for
operating purposes and the failure to sell the securities has not affected the
Company's operations. The Company is working with its investment advisor and
closely monitoring the market in an effort to reduce its risk and minimize any
losses. The Company has evaluated the solvency of the issuers of these
securities as of August 14, 2008 and, as of this date, did not believe that a
further write-down or recognition of any losses other than temporary was
necessary in accordance with FSP 115-1 "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments." The net unrealized loss
of $588,690 recorded in shareholders' equity as of June 30, 2008 was comprised
entirely of unrealized losses. Maturity dates of investments, primarily auction
rate securities, classified as available for sale securities extend to 2050.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances at financial institutions. Cash balances
at the institution are insured by the Federal Deposit Insurance Corporation up
to $100,000.
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 our Anaheim plant (no longer leased or
otherwise being used by us),over the remaining life of the lease, whichever is
shorter.
Our policy regarding fixed assets is to review such fixed assets for impairment
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. If the review indicates that fixed 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.
During the third quarter of 2007, we determined that our ongoing research and
development work, if necessary, would more efficiently be carried out at a
facility other than our Anaheim Facility. As of June 30, 2008, the Anaheim
Facility lease had been terminated and all assets had been sold or scrapped.
We capitalize leases in accordance with FASB 13.
8
INTANGIBLES
Intangible assets are recorded at cost and are classified as held for sale at
June 30, 2008. At June 30, 2008, the remaining intangible asset value is
associated with the patent purchased from the University of Alabama in
Huntsville on May 1, 2006. In February of 2008, we entered into an agreement to,
among other things, sell the patent and all of its associated rights. The sale
was scheduled to be completed by July 31, 2008. As of August 14, 2008, the sale
had not been completed. The Company is still in discussions with CES for the
purchase of the patent. The Company believes a sale will be completed within one
year, as prescribed by the requirements in SFAS 144, and therefore the Company
has concluded that the "held for sale" classification is appropriate.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock which may be redeemable for cash at the
determination of the holder is classified as mezzanine equity, in accordance
with FAS 150 "Accounting for Certain Financial Instruments with Characteristics
of Both Debt and Equity," EITF Topic D 98 and ASR 268, and is shown net of
discounts for offering costs, warrant values and beneficial conversion features.
STOCK-BASED COMPENSATION
As of June 30, 2008, 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 $451,036 and $446,090 for the three months ended June 30, 2008
and 2007, respectively, and $901,037, $631,198 and $3,923,825 for the six months
ended June 30, 2008 and 2007 and for the period from inception to June 30, 2008,
respectively. Because the Company is in a net loss position, no income tax
benefit has been recognized in the income statement for share-based compensation
arrangements. As of June 30, 2008 and 2007, 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. At December 31,2007, there were
1,812,000 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 year ended December 31, 2007 to employees, members of the
board of directors and consultants. During the quarter ended June 30, 2008, the
Company granted options to acquire 1,575,000 shares to employees and members of
the board of directors.
In November of 2007, the board of directors approved the extension of the period
of time in which an optionee has to exercise vested options after termination of
employment from three months to three years. The Company's calculation of the
incremental expense resulting from this change in accordance with SFAS 123R
paragraph 51 was approximately $70,000.
The Company believes that such awards better align the interests of its
employees with those of its shareholders. Option awards are generally granted
with an exercise price equal to the market price of the Company's stock at the
date of grant; those option awards generally vest based on 2 to 4 years of
continuous service and have 10-year contractual terms. Certain option awards
provide for accelerated vesting if there is a change in control (as defined in
each Plan).
9
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
table below. Expected volatilities are based on the historical volatility of the
Company's common stock from August 24, 2004 through the date of the respective
grant. The Company uses historical data to estimate option exercise and employee
terminations within the valuation model. The expected term of options granted
was estimated using the simple method which the Company believes provides a
reasonable estimation of the period of time that options granted are expected to
be outstanding. The risk-free rate for periods within the contractual life of
the option is based on the LIBOR rate at the time of grant.
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2008 JUNE 30, 2007
------------------- ------------------
Expected volatility 81.20 - 94.46 % 75%
Expected dividends 0 % 0 %
Expected term (in years) 5.15 - 9.45 5.5 - 9.9
Risk-free rate 1.55 - 4.19% 4.98 - 5.1%
In an effort to provide certain employees and consultants with an incentive to
remain committed to the Company's business while it is evaluating its strategic
alternatives (as described below), on February 27, 2008, the Company's Board of
Directors granted an option to acquire up to 300,000 shares of its common stock
to John Pimentel, the Company's Chief Executive Officer, and an option to
acquire up to 75,000 shares of its common stock to David Rane, the Company's
former Chief Financial Officer (currently serving in a consulting capacity), in
each case pursuant to the Company's 2007 Plan. Each option has an exercise price
equal to $0.155 per share (the closing price of the Company's common stock on
the date of grant) and vests in 12 equal monthly installments commencing as of
March 27, 2008.
On February 27, 2008, the Company also announced that it has formed a Special
Committee of its Board of Directors to evaluate the Company's strategic
alternatives, and that the Special Committee plans to retain a financial advisor
to assist in this process. These alternatives may include, but are not limited
to, a sale or merger of the Company and/or a restructuring.
As compensation for serving on the Special Committee, each of the members
thereof is entitled to receive $5,000 per month for up to 6 months and was
granted an option to acquire up to 300,000, or a total of 1,200,000, shares of
common stock pursuant to the Company's 2007 Plan. Each option has an exercise
price equal to $0.155 per share (the closing price of WWT's common stock on the
date of grant) and vests in six equal monthly installments commencing as of
March 27, 2008.
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 30,579,551, consisting of employee options
of 6,418,000, non-employment warrants of 6,829,827, Preferred Series A of
6,253,341 and Preferred Series B of 11,078,382, were not included in the
calculation of diluted earnings per share at June 30, 2008 . Due to their
anti-dilutive effect, common stock equivalents of 28,526,234, consisting of
employee options of 4,843,000, investor warrants of 6,803,827, Preferred Series
A of 5,777,119 and Preferred Series B of 11,102,288, were not included in the
calculation of diluted earnings per share at June 30, 2007.
NEW ACCOUNTING PRONOUNCEMENTS
10
SFAS NO. 162, THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The FASB has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities. Statement 162 is effective 60 days following the SEC's
approval of the PCAOB amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles. Management
does not believe the adoption of SFAS No. 162 will have a material impact on the
Company's financial statements.
ISSUE NO. 08-4, "TRANSITION GUIDANCE FOR CONFORMING CHANGES TO ISSUE NO. 98-5"
- -------------------------------------------------------------------------------
At the November 2007 EITF meeting, the FASB staff and EITF discussed a document
highlighting revisions that should be made to Issue 98-5 as a result of the
guidance in: (a) EITF Issue No. 00-27, "Application of EITF Issue No. 98-5,
'Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments,"
and (b) FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. At the FASB meeting of June
12, 2008, the FASB ratified the final consensus reached in this issue.
Management does not believe the adoption of Issue No. 08-4 will have a material
impact on the Company's financial statements.
ISSUE NO. 08-3, "ACCOUNTING BY LESSEES FOR MAINTENANCE DEPOSITS UNDER LEASE
AGREEMENTS"
- --------------------------------------------------------------------------------
Equipment lease agreements often call for the lessee to repair and
maintain a leased asset over the term of the lease. In some cases, the lease
agreement requires the lessee to pay a maintenance deposit to the lessor. The
purpose of this deposit is to protect the lessor in the event the lessee does
not fulfill its repair and maintenance responsibilities related to the leased
asset. Requiring such a deposit from the lessee does not excuse the lessee from
its obligation to repair and maintain the leased asset. In addition, the
lessor's acceptance of such a deposit does not transfer the responsibility for
repairing and maintaining the leased asset to the lessor, nor does it transfer
to the lessor the cost or quality risk associated with the repair and
maintenance activities. As the lessee incurs costs to repair and maintain the
leased asset, the lessor may be required to reimburse the lessee for these costs
using the maintenance deposit, to the extent the maintenance deposit includes
sufficient funds. If there are funds left in the maintenance deposit at the end
of the lease term, the lease agreement may call for either: (a) the lessor
making a payment to the lessee for that remaining amount or (b) the lessor
retaining that remaining amount. The former is often referred to as a refundable
maintenance deposit. The latter is often referred to as a nonrefundable
maintenance deposit. At the FASB meeting of June 12, 2008, the FASB ratified the
final consensus reached in this issue. Management does not believe the adoption
of Issue No. 08-4 will have a material impact on the Company's financial
statements.
FASB STAFF POSITION NO. EITF 03-6-1 DETERMINING WHETHER INSTRUMENTS GRANTED IN
SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING SECURITIES
- -------------------------------------------------------------------------------
This FASB Staff Position (FSP) addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share (EPS) under the two-class method described in paragraphs 60
and 61 of FASB Statement No. 128, Earnings per Share. Management does not
believe the adoption of this staff position will have a material impact on the
Company's financial statements.
FASB STAFF POSITION NO. APB 14-1 ACCOUNTING FOR CONVERTIBLE DEBT INSTRUMENTS
THAT MAY BE SETTLED IN CASH UPON CONVERSION (INCLUDING PARTIAL CASH SETTLEMENT)
- -------------------------------------------------------------------------------
This FSP applies to convertible debt instruments that, by their stated terms,
may be settled in cash (or other assets) upon conversion, including partial cash
settlement, unless the embedded conversion option is required to be separately
accounted for as a derivative under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. Management does not believe that
the adoption of this staff position will have a material impact on the Company's
financial statements.
FASB STAFF POSITION NO. FAS 142-3 DETERMINATION OF THE USEFUL LIFE OF INTANGIBLE
ASSETS
- --------------------------------------------------------------------------------
This FASB Staff Position (FSP) amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency between
the useful life of a recognized intangible asset under Statement 142 and the
period of expected cash flows used to measure the fair value of the asset under
FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S.
generally accepted accounting principles (GAAP). Management does not believe
that the adoption of the staff position will have a material impact on the
Company's financial statements.
11
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company had a net loss for
the six months ended June 30, 2008 of $8,112,717 and an accumulated deficit
attributable to common shareholders of $78,112,999 for the six months ended June
30, 2008. The Company expects to incur substantial additional losses and costs
and capital expenditures before it can operate profitably. These issues raise
substantial doubt about the Company's ability to continue as a going concern.
The ability to operate profitably is subject to, among other things, developing
products. The Company's ability to accomplish this is dependent on successful
research and development, engineering and obtaining additional funding. If
the Company is unsuccessful, it may be unable to continue as a going concern for
a reasonable period of time.
There can be no assurance that the Company's research and development and
engineering activities or any future efforts to raise additional debt and/or
equity financing will be successful. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
In addition to looking for traditional capital, the Company is looking for a
joint venture partner to assist in the development of its gasification strategy
and is also evaluating strategic alternatives, such as a merger or acquisition,
to help generate additional financing. In this regard, on May 15, 2008, the
Company entered into a definitive agreement to merge with Vertex Energy, Inc.,
which agreement was amended and restated on May 19, 2008. There can be no
assurance that the transaction will be completed, and the Company's continuation
as a going concern remains 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,
2006. The technology was designed to provide for the processing and separation
of material contained in Municipal Solid Waste (MSW). 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.
In April 2007, the Company filed a lawsuit against BPI alleging, among other
things, breach of contract and negligence with respect to the construction of
the vessels.
12
During the fourth quarter of 2007, the Company determined it would not use the
technologies related to the intangible assets in its future plants.
Consequently, it reclassified the unamortized intangible assets to Assets Held
for Sale and accounted for at the lower of fair value less cost to sell (net
fair value) or carrying value. In March of 2008, the Company entered into a
definitive agreement to sell the intangible assets, settle the lawsuit with BPI
and sell a significant amount of the assets which were used in the Anaheim plant
to exploit the patent, for a total of approximately $1.9 million. As of August
14, 2008, the Company had not received the entire payment for the purchase of
the patent. Because the carrying value of $89,000 is less than the net fair
value no adjustment was recorded.
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. The Company subsequently determined
that the ongoing research and development work, if necessary, would more
efficiently be carried out at another location. 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
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. On
November 7, 2007, Taormina filed an unlawful detainer action in the Superior
Court of the State of California, County of Orange (the "Action") against the
Company as to the Anaheim Facility. On March 5, 2008, Taormina and the Company
entered into a stipulation for entry of judgment in the Action (the
"Stipulation"). The Stipulation provides for: (a) the cancellation and
forfeiture of the lease; (b) the Company to make a payment of $192,217.57 (the
"Payment") to Taormina; and (c) the Company to remain in possession of the
Anaheim Facility until June 30, 2008. The Company has made the Payment to
Taormina and, on May 8, 2008, vacated the premises.
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).
NOTE 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has outstanding two classes of Preferred Stock, Series A and Series
B. Holders of both series of preferred stock are entitled to receive cumulative
dividends, payable quarterly in additional shares of preferred stock, at the
rate of 8% per annum as and if declared by the Board of Directors. The holders
of a majority of each class of preferred shares have the option to require the
Company to redeem all outstanding shares on April 28, 2010. If all of the shares
that are outstanding at June 30, 2008 were outstanding and redeemed at April 28,
2010, the liability would be approximately $46 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 to be 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.
13
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 3,099,351 4,771,762 7,871,113
Converted to common stock -- (5,564,608) (5,564,608)
---------------- ---------------- ----------------
Total outstanding 13,288,351 27,695,954 40,984,305
Unamortized beneficial conversion feature (581,610) (7,175,024) (7,756,634)
Unamortized offering costs (685,014) (1,806,431) (2,491,445)
Unamortized warrant value (581,611) (2,269,186) (2,850,797)
---------------- ---------------- ----------------
Balance at June 30, 2008 $ 11,440,116 $ 16,445,313 $ 27,885,429
================ ================ ================
NOTE 6. CAPITAL LEASE OBLIGATION
Capital Lease obligation is comprised as follows:
JUNE 30, 2008 DECEMBER 31, 2007
-------------------- -------------------
Capital Lease for Front End Loader, 0 monthly $ 80,350
installments were remaining at June 30, 2008 ,
interest was imputed at 8.25%
Less: Current portion 49,524
-------------------- -------------------
$0 $ 30,826
==================== ===================
The capital lease was terminated in March of 2008.
NOTE 7. COMMITMENT AND CONTINGENCIES
On October 29, 2007 the lease for the Company's Anaheim plant was terminated
(see Note 4). Consequently, the Company has not included the future rent
obligations in the schedule below. The Company has an operating lease obligation
for its San Diego office space through September 2008 of approximately $13,029:
Less than 1 year $13,029
more than 1 less than 3 $ --
more than 3 less than 5 $ --
after 5 years $ --
14
NOTE 8. SUBSEQUENT EVENTS
As previously disclosed, in March 2008, the Company entered into an agreement
with Clean Earth Solutions, Inc. ("CES"), pursuant to which the Company agreed
(i) to sell to CES specified assets relating to the "front end" process of the
Company's Anaheim Facility for a cash payment to us of $500,000 (the "First
Closing"), (ii) to settle a dispute arising from design issues related to the
steam classification vessels that the Company had intended to use in its
operations, in exchange for a payment to the Company of $640,000 (the "Second
Closing") and (iii) to sell to CES all of the Company's intellectual property
rights in the Company's pressurized steam classification process in exchange for
a payment to the Company of $800,000 (of which $236,000 was previously paid by
CES to the Company) (the "Third Closing"). On March 7, 2008, CES paid the
Company $500,000 and the First Closing was consummated. In June 2008, CES paid
the Company $640,000 for the Second Closing. Pursuant to this agreement, the
Third Closing is to occur on such a date as determined by CES, provided that
the Third Closing must occur no later than July 31, 2008. As of August 14, the
Third Closing had not occurred.
At June 30, 2008, approximately $4.5 million of our securities were in the form
of auction rate securities. These securities are stated at the lower of cost or
market. The face value of these securities was approximately $5.1 million. The
securities had been offered for sale during the quarter ended June 30, 2008.
However, due to the failure of the auctions, no securities were sold. The
failure of the auctions did not affect the Company's ability to meet its
obligations in the normal course of business. Management has evaluated the
solvency of the issuers of these securities and does not believe an additional
reserve is necessary. In August of 2008, the Company sold some of its auction
rate securities with a face value of $3.6 million for $3.3 million, which was
the stated fair market value at June 30, 2008. As of August 14, 2008, the
Company continues to hold auction rate securities with a face value of $1.5
million. The market value of these securities at June 30, 2008, as reflected in
the financial statements, was estimated to be approximately $1.2 million.
15
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, contains "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 10K for the year ended December 31, 2007.
PROPOSED MERGER
On May 15, 2008, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Vertex Energy, LP, a Texas limited partnership ("Vertex
LP"), Vertex Energy, Inc., a Nevada corporation ("Vertex Nevada"), Vertex Merger
Sub, Inc., a California corporation and wholly owned subsidiary of Vertex
Nevada, and Benjamin P. Cowart, as agent for the shareholders of Vertex Nevada
(the "Agent"). On May 19, 2008, the Company, Vertex LP, Vertex Nevada and Vertex
Merger Sub, LLC., a California limited liability company and wholly owned
subsidiary of Vertex Nevada ("Merger Sub"), entered into an Amended and Restated
Merger Agreement (as so amended and restated, the "Merger Agreement").
Vertex LP is a Texas-based privately held limited partnership controlled by the
Agent. Among other businesses, Vertex LP engages in the recycling of used motor
oil and other hydrocarbons. This is accomplished (1) through Vertex LP's Black
Oil division, which aggregates used motor oil from third-party collectors and
manages the delivery of its feedstock primarily to a third-party re-refining
facility, and (2) through Vertex LP's Refining and Marketing division, which
aggregates hydrocarbon streams from collectors and generators and manages the
delivery of the hydrocarbon waste products to a third-party facility for further
processing, and then manages the sale of the end products. In addition, Vertex
LP proposes to implement proprietary re-refining technology that will process
used motor oil and convert it to higher value products such as marine diesel oil
and vacuum-gas oil. Vertex Nevada generated revenues of approximately $36.5
million and approximately $42 million in 2006 and 2007, respectively. Pursuant
to the merger, Vertex LP will transfer the assets relating to the foregoing
businesses to Vertex Nevada.
Immediately following the merger and assuming no appraisal rights are exercised,
the existing partners of Vertex LP will hold approximately 45% of the
outstanding shares of Vertex Nevada (including shares to be held by advisors and
consultants to Vertex LP), the
existing holders of the Company's common stock will hold approximately 20% of
the outstanding shares of Vertex Nevada, the existing holders of the Company's
Series A Preferred Stock will hold approximately 14% of the outstanding shares
of Vertex Nevada, and the existing holders of the Company's Series B Preferred
Stock will hold approximately 21% of the outstanding shares of Vertex Nevada (in
each case, treating as outstanding, shares issuable upon the exercise of
warrants to acquire shares of common stock at a nominal exercise price).
Immediately prior to the Merger, the Company will be required to make a cash
payment to the existing Vertex shareholders of $4.4 million. As a result of
these transactions, immediately following the merger the existing shareholders
of World Waste will own approximately 55% of the capital stock of Vertex Nevada,
in exchange for which World Waste will have made net payments of $7.0 million
(comprised of (1) the $4.4 million just described, plus (2) $5.0 million that
World Waste is required to transfer to Vertex Nevada, less (3) $2.4 million of
World Waste indebtedness being assumed by Vertex Nevada).
The Merger Agreement contains customary and mutual representations, warranties,
covenants and indemnification provisions. Either party has the right to
terminate the Merger Agreement if the merger has not closed by December 31,
2008.
16
The obligation of each party to consummate the Merger is subject to the approval
of the Merger by the shareholders of the Company in accordance with California
law and the Company's charter documents, the exemption of the issuance of the
shares of Vertex Nevada to the Company's shareholders from the registration
requirements of the Securities Act of 1933, as amended (or the inclusion of such
shares on a registration statement declared effective by the SEC), and the
satisfaction or waiver (where permissible) of other customary closing conditions
set forth in the Merger Agreement.
The obligation of Vertex to consummate the Merger is subject to the satisfaction
or waiver (where permissible) of additional closing conditions including the
following:
o the Company has no liabilities (except for up to $2.4 million
of permitted indebtedness);
o after taking into account the $4.4 million payment by the
Company to the Vertex LP partners, the Company has at least
$5.0 million of cash on hand (inclusive of the proceeds of up
to $2.4 million of permitted indebtedness). In order to
satisfy these cash requirements, the Company will need to
liquidate its short term investments in auction rate
securities ("ARS's"). Due to the illiquidity of the ARS
market, the Company may not be able liquidate these securities
at their face amount. Accordingly, the Company may
not be able to meet this cash on hand requirement; and
o the Agent and certain members of his immediate family have
been removed as personal guarantors on certain indebtedness of
Vertex LP to be assumed by Vertex Nevada.
COMPANY OVERVIEW
World Waste management is currently focused on completing the merger
with Vertex Nevada while maintaining the viability of its renewable energy
business plan. Following the merger, it is anticipated that the renewable energy
business plan may continue to be pursued by Vertex Nevada through a subsidiary.
Expenditures related to the renewable energy business are being minimized as
World Waste seeks to maintain relationships, contract negotiations and other
relevant activities related to the potential development of renewable energy
projects without encumbering its ability to meet the closing conditions of a
merger in a timely manner. However, the primary focus of the combined company
post merger will be Vertex's hydrocarbon recycling business and the pursuit of
growth opportunities related to this business segment. The following is an
overview of World Waste and its business operations prior to consummation of the
merger and other transactions contemplated by the merger agreement.
World Waste is a development stage company formed to develop, 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 wood waste and construction and demolition debris, into usable commodities
and products. These products are expected to include renewable energy,
recyclable commodities, and potentially bio-fuels. World Waste plans to continue
to concentrate its efforts on producing renewable energy from waste materials
through the use of gasification and pyrolysis technologies in order to meet the
rapidly growing demand for renewable power. World Waste believes that this
increased demand is being driven, to a large extent, by the adoption of
Renewable Portfolio Standards in a number of states, which require or encourage
utilities to have a specific percentage of their electricity sales come from
renewable sources.
17
To implement its renewable energy platform, World Waste may plan to
pursue the development of facilities in targeted markets where it believes World
Waste will be able to earn a "tipping" fee for accepting wastes and a premium
for the sale of renewable energy products or receive a very low cost biomass
feedstock. World Waste also may plan to develop or obtain the rights to use
gasification technologies in demonstration application to gain operating
experience with the unique aspects of gasifying biomass derived from municipal
solid waste and other waste streams such as construction and demolition debris,
and to develop detailed design criteria for larger-scale systems.
World Waste anticipates that the development of projects using these
technologies could position it to generate three distinct revenue streams: (a)
"tipping" fees charged to the entities that supply it with MSW or other waste
materials, (b) recycling revenue from the sale of commodity recyclables (such as
beverage containers, aluminum, steel, plastics, and glass) that its process
recovers and which otherwise would be interred in landfills, and (c) revenue
from the sale of its end products, anticipated to be primarily renewable
electricity, and potentially bio-fuels. World Waste believes that its receipt of
fees from waste generators or handlers could provide it with a low cost fuel
source, which is an important and beneficial characteristic of its business
model.
RENEWABLE ELECTRICITY OPPORTUNITIES
World Waste may plan to continue to focus its efforts on the
utilization of one or more gasification and/or pyrolysis technologies that may
be used to generate various renewable energy products from MSW and other waste
streams. It may plan to seek to continue to enter into strategic relationships
with companies that have developed gasification technologies, and to further
investigate the commercialization of its own technology. A process, which it
believes has significant potential for successful commercialization, involves
using a gasification technology to produce a synthetic gas (or "syngas") from
the cellulose biomass fraction of MSW and construction and demolition debris
derived from a materials' separation and classification process. Wood waste,
sewage sludge and other commercial waste streams are also potential feedstocks.
The resulting syngas or bio-oil would be used to fire a boiler driving a steam
turbine. World Waste also believes that after a gas clean-up process, it may be
possible to put the syngas directly into a gas-fired turbine. In either case,
World Waste believes the process has the potential to produce a significant
amount of renewable electricity for sale to utilities.
STRATEGY
World Waste's goal is to develop and/or acquire full-scale commercial
facilities which profitably transform residual MSW, wood waste and other waste
streams into usable renewable energy or products, including electricity,
synthetic gas and bio-oil and/or bio-fuels.
AGREEMENT WITH CES
In March 2008, we entered into an agreement with Clean Earth Solutions,
Inc. ("CES"), pursuant to which we agreed (i) to sell to CES specified assets
relating to the "front end" process of our Anaheim Facility for a cash payment
to us of $500,000 (the "First Closing"), (ii) to settle a dispute arising from
design issues related to the steam classification vessels that we had intended
to use in our operations, in exchange for a payment to us of $640,000 (the
"Second Closing") and (iii) to sell to CES all of our intellectual property
rights in our pressurized steam classification process in exchange for a payment
to us of $800,000 (of which $236,000 was previously paid by CES to us) (the
"Third Closing"). On March 7, 2008, CES paid $500,000 to us, and the First
Closing was consummated. In June 2008, CES paid The Company $640,000 for the
Second Closing. Pursuant to this agreement, the Third Closing is to occur on
such a date as determined by CES, provided that the Third Closing must occur no
later than July 31, 2008. As of August 14, 2008, the Third Closing had not
occurred. In the event that CES is unable to comply with its commitments as set
forth in this agreement, taking into account any agreed-upon extensions, we
would continue to pursue our rights with respect to the dispute (unless it is
otherwise resolved) and we would seek an alternative buyer or licensee for our
intellectual property rights, in addition to any pursuing any other remedies we
might be entitled to from CES.
18
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to impairment of long-lived assets, including finite
lived intangible assets, accrued liabilities and certain expenses. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
materially from these estimates under different assumptions or conditions.
Our significant accounting policies are summarized in Note 1 to our
audited financial statements for the year ended December 31, 2007 and our
unaudited financial statements dated June 30, 2008. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements:
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America. The Company is a new enterprise in the development stage as defined by
Statement No. 7 of the Financial Accounting Standards Board, since it has not
derived substantial revenues from its activities to date.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements include all adjustments
(consisting of only normal recurring accruals), which are, in the opinion of
management, necessary for a fair presentation. Operating results for the six
months ended June 30, 2008 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 consolidated financial statements for the year
ended December 31, 2007.
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. We used estimates to perform the
undiscounted cash flow projections used in the impairment analysis of the
Anaheim plant assets (see Fixed Assets below). We also used estimates to
determine the employee stock-based compensation expense.
19
SHORT TERM INVESTMENTS
The Company determines the appropriate classification of its investments
at the time of acquisition and reevaluates such determination at each balance
sheet date. All investments held at June 30, 2008 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 our Anaheim plant (no longer being used),
over the remaining life of the lease, whichever is shorter.
Our policy regarding fixed assets is to review such fixed assets for
impairment whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. If the review indicates that fixed
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.
During the third quarter of 2007, we determined that our ongoing research
and development work, if necessary, would more efficiently be carried out at a
facility other than our Anaheim Facility. As of June 30, 2008, the Anaheim
Facility lease had been terminated and all assets had been sold or scrapped.
We capitalize leases in accordance with FASB 13.
20
INTANGIBLES
Intangible assets are recorded at cost and are classified as held for
sale at June 30, 2008. At June 30, 2008, the remaining intangible asset value is
associated with the patent purchased from the University of Alabama in
Huntsville on May 1, 2006.In February of 2008, we entered into an agreement to,
among other things, sell the patent and all of its associated rights. The sale
was scheduled to be completed by July 31, 2008. As of August 14, 2008, the sale
had not been completed. The Company is still in discussions with CES for the
purchase of the patent. The Company believes a sale will be completed within one
year, as prescribed by the requirements in SFAS 144, and therefore the Company
has concluded that the "held for sale" classification is appropriate.
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, 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
During the fourth quarter of 2004, we adopted SFAS No. 123 entitled,
"Accounting for Stock-Based Compensation" retroactively to our inception.
Accordingly, we have expensed the compensation cost for the options and warrants
issued based on their fair value at their grant dates. During the quarter ended
March 31, 2006, we adopted SFAS No. 123R, "Share Based Payments."
NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 162, THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
- -----------------------------------------------------------------------
The FASB has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles for
nongovernmental entities. Statement 162 is effective 60 days following the SEC's
approval of the PCAOB amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles. Management
does not believe the adoption of SFAS No. 162 will have a material impact on the
Company's financial statements.
ISSUE NO. 08-4, "TRANSITION GUIDANCE FOR CONFORMING CHANGES TO ISSUE NO. 98-5"
- -------------------------------------------------------------------------------
At the November 2007 EITF meeting, the FASB staff and EITF discussed a document
highlighting revisions that should be made to Issue 98-5 as a result of the
guidance in: (a) EITF Issue No. 00-27, "Application of EITF Issue No. 98-5,
'Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments
," and (b) FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. At the FASB meeting of June
12, 2008, the FASB ratified the final consensus reached in this issue.
Management does not believe the adoption of Issue No. 08-4 will have a material
impact on the Company's financial statements.
21
ISSUE NO. 08-3, "ACCOUNTING BY LESSEES FOR MAINTENANCE DEPOSITS UNDER LEASE
AGREEMENTS"
- -------------------------------------------------------------------------------
Equipment lease agreements often call for the lessee to repair and maintain a
leased asset over the term of the lease. In some cases, the lease agreement
requires the lessee to pay a maintenance deposit to the lessor. The purpose of
this deposit is to protect the lessor in the event the lessee does not fulfill
its repair and maintenance responsibilities related to the leased asset.
Requiring such a deposit from the lessee does not excuse the lessee from its
obligation to repair and maintain the leased asset. In addition, the lessor's
acceptance of such a deposit does not transfer the responsibility for repairing
and maintaining the leased asset to the lessor, nor does it transfer to the
lessor the cost or quality risk associated with the repair and maintenance
activities. As the lessee incurs costs to repair and maintain the leased asset,
the lessor may be required to reimburse the lessee for these costs using the
maintenance deposit, to the extent the maintenance deposit includes sufficient
funds. If there are funds left in the maintenance deposit at the end of the
lease term, the lease agreement may call for either: (a) the lessor making a
payment to the lessee for that remaining amount or (b) the lessor retaining that
remaining amount. The former is often referred to as a refundable maintenance
deposit. The latter is often referred to as a nonrefundable maintenance deposit.
At the FASB meeting of June 12, 2008, the FASB ratified the final consensus
reached in this issue. Management does not believe the adoption of Issue No.
08-4 will have a material impact on the Company's financial statements.
FASB STAFF POSITION NO. EITF 03-6-1 DETERMINING WHETHER INSTRUMENTS GRANTED IN
SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING SECURITIES
- --------------------------------------------------------------------------------
This FASB Staff Position (FSP) addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share (EPS) under the two-class method described in paragraphs 60
and 61 of FASB Statement No. 128, Earnings per Share. Management does not
believe the adoption of this staff position will have a material impact on the
Company's financial statements.
FASB STAFF POSITION NO. APB 14-1 ACCOUNTING FOR CONVERTIBLE DEBT INSTRUMENTS
THAT MAY BE SETTLED IN CASH UPON CONVERSION (INCLUDING PARTIAL CASH SETTLEMENT)
- -------------------------------------------------------------------------------
This FSP applies to convertible debt instruments that, by their stated terms,
may be settled in cash (or other assets) upon conversion, including partial cash
settlement, unless the embedded conversion option is required to be separately
accounted for as a derivative under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. Management does not believe that
the adoption of this staff position will have a material impact on the Company's
financial statements.
FASB STAFF POSITION NO. FAS 142-3 DETERMINATION OF THE USEFUL LIFE OF INTANGIBLE
ASSETS
- --------------------------------------------------------------------------------
This FASB Staff Position (FSP) amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency between
the useful life of a recognized intangible asset under Statement 142 and the
period of expected cash flows used to measure the fair value of the asset under
FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S.
generally accepted accounting principles (GAAP). Management does not believe
that the adoption of the staff position will have a material impact on the
Company's financial statements.
22
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED JUNE 30, 2008 AND 2007
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 have not recognized
any revenue since. We essentially ceased utilizing the plant for any purpose in
the third quarter of 2007 and vacated the plant completely in May 2008. World
Waste management is currently focused on completing the merger with Vertex
Nevada while attempting to maintain the viability of its renewable energy
business plan.
EXPENSES
There was no research and development expense during the quarter ended
June 30, 2008, a decrease from approximately $800,000 during the comparable
quarter in 2007. The decrease was primarily due to the closure of the Anaheim
plant and our focus on completing the transaction with Vertex Nevada as
described above.
General and administrative expense decreased to $1,401,814 during the
quarter ended June 30, 2008 from $1,425,176 for the comparable period in 2007.
This $23,362 decrease was primarily the result of a decrease in payroll expenses
due to a decrease in headcount, offset by an increase in employee stock option
expense of approximately $270,000. General and administrative expense for the
quarter ended June 30,2008 was comprised primarily of employee option expense of
approximately $451,000, compensation expense, including Board of Director's
fees, of approximately $296,000, including severance of $50,000, business
development expenses of approximately $200,000, professional fees of
approximately $267,000, property taxes of $107,000 and other expenses of
$83,000.
The Company's "cash burn" rate (net loss before depreciation, stock
compensation and accrued severance expense) decreased during the quarter ended
June 30, 2008 to approximately $820,000 from approximately $1,360,000 for the
quarter ended June 30, 2007. This is a result of our focus on completing the
transaction with Vertex Nevada as described above.
Interest income of $78,134 and $105,717 for the second quarter of 2008 and
2007, respectively, represents the interest earned on the cash received for the
issuance of the Series B Preferred Stock in May of 2006.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs decreased to $2,556,197 in the
quarter ended June 30, 2008 from $3,347,388 during the comparable period in 2007
due to the amortization of beneficial conversion feature.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2008 TO THE SIX MONTHS ENDED JUNE 30,
2007
REVENUES AND COST OF GOODS SOLD
During the plant start up phase of our Anaheim plant, we confronted
several issues, including an unexpected high level of biological oxygen demand
from organic waste in the wastewater from the pulp screening and cleaning
process. In January 2007, we decided not to make the capital improvements
necessary to the Anaheim plant's wetlap process which the Company considers
necessary to operate the plant with the expectation of being profitable.
Therefore, beginning in January 2007, we began to operate the plant only as part
of research and development projects including but not limited to the
development of alternative back end processes such as gasification and acid
hydrolysis for the production of ethanol. Consequently, we did not recognize any
revenue since. We essentially ceased utilizing the plant for any purpose in the
third quarter of 2007 and vacated the plant completely in May 2008. World Waste
management is currently focused on completing the merger with Vertex Nevada
while maintaining the viability of its renewable energy business plan.
EXPENSES
Research and development expense decreased from $1,749,875 for the six
months ended June 30, 2007 to $16,359 for the six months ended June 30, 2008.
The decrease was primarily due to the closure of the Anaheim plant in 2008 and
our focus on the transaction with Vertex Nevada compared to the cost of research
and development activities related to gasification of approximately $150,000,
Anaheim plant costs of approximately $750,000, and plant depreciation of
$630,000 in the 2007 period being classified as research and development expense
due to the then-current nature and intent of the plant operations.
23
General and administrative expense increased from $2,408,667 for the six
months ended June 30, 2007 to $3,178,745 for the comparable period in 2008. This
$770,078 increase was primarily the result of an increase in employee stock
option expense of $270,000, consulting fees of approximately $262,000 primarily
related to technologies and new sites, and legal fees due to agreements with
CES, Taormina and the Vertex Nevada merger. General and administrative expense
for the six months ended June 30,2008 was comprised primarily of employee option
expense of approximately $901,000, compensation expense, including Board of
Director's fees, of approximately $864,000, including severance of $288,000,
business development expenses of approximately $600,000, professional fees of
approximately $556,000, property tax of approximately $93,000,and other expenses
of $165,000.
The Company's "cash burn" rate (net loss before depreciation and stock
compensation) decreased during the six months ended June 30, 2008 to
approximately $2 million from approximately $2.7 million for the six months
ended June 30, 2007
The interest income of approximately $147,000 for the six months ended
June 30, 2008 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 $235,000 for the six month period ended June 30, 2007 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.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs decreased to $5,090,424 for the
first six months ended June 30, 2008 from $7,051,028 from the comparable period
in 2007 due to the conversion of some of the preferred stock to common.
24
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2008, we had cash and cash equivalents on hand of
approximately $3.9 million and short-term investments of approximately $4.5
million (a total of approximately $8.4 million) representing a decrease of $1.4
million from our December 31, 2007 cash, cash equivalents and short-term
investments totaling approximately $9.8 million.
During the first six months of 2008, net cash used for operating
activities was approximately $934,000, net of cash received from assets held for
sale of $994,000. The use of cash was primarily for general and administrative
expenses. During the six months ended June 30, 2008, approximately $80,000 was
used for the buyout of the Company's capital lease.
Cash and cash equivalents and short-term investments were also negatively
impacted during the six months ended June 30, 2008 due to the temporary
write-down of the Company's auction rate securities (short-term investments) by
$422,746, as described below.
In March 2008 and June 2008, we received payments from CES of $676,000 and
$640,000,respectively, upon the sale of assets relating to the front-end process
of our facility. These payments were accounted for as a reduction of the
Company's assets held for sale. CES is obligated to make additional payments to
us aggregating $564,000 in 2008 pursuant to our sale of certain intellectual
property rights. As of August 14, 2008, CES has not made the final payment. We
cannot assure you that the Company will receive the final payment.
At June 30, 2008, approximately $4.5 million of our securities were in the
form of auction rate securities. These securities are stated at the lower of
cost or market. As of June 30, 2008, the face value of these securities was
approximately $5.1 million. The securities had been offered for sale during the
quarter ended June 30, 2008. However, due to the failure of the auctions, no
such securities were sold. The failure of the auctions did not affect the
Company's ability to meet its obligations in the normal course of business.
Management has evaluated the solvency of the issuers of these securities and
does not believe an additional reserve is necessary. In August of 2008, the
Company sold auction rate securities with a face value of $3.6 million for $3.3
million which was the stated fair market value at June 30, 2008. As of August
14, 2008, the Company continues to hold auction rate securities with a face
value of $1.5 million. The market value of these securities at June 30, 2008, as
reflected in the financial statements, was estimated to be approximately $1.2
million.
In order to close the proposed merger with Vertex Nevada, the Company will
need to have a minimum of $9.4 million on hand, after satisfying all of its
liabilities (other than up to $2.4 million of permitted indebtedness). Due to a
number of factors, including (1) that the transaction has taken longer than
originally anticipated to close, (2) the possibility that the Company will be
unable to liquidate its remaining auction rate securities at or near their face
amount, (3) the possibility that the Company will be unable to secure the
necessary borrowing, and (4) the possibility that the transaction costs exceed
the Company's estimates, the Company might not have sufficient cash on hand to
satisfy this condition to the closing of the Proposed Merger. In this case,
absent a waiver of this closing condition by the other party to the transaction,
the proposed merger could not be consummated.
As of June 30, 2008, the Company had no long-term debt obligations,
capital lease obligations, operating lease obligations, purchase obligations, or
other similar long-term liabilities. The capital lease outstanding at December
31, 2007 was paid off in March 2008.
The holders of our preferred stock have the right to require our company
to redeem their shares on April 10, 2010, at a price equal to the original
issuance price (with accrued but unpaid dividends being treated as outstanding
for purposes of calculating the total redemption price), for a total of
approximately $46 million (assuming none of such shares of preferred stock are
converted to common stock prior to any such redemption). In the event that the
proposed merger with Vertex Nevada does not close, we will need to raise
significant additional capital or restructure the terms of our preferred stock
in order to meet this redemption obligation if and when it become due. If we are
unable to do so, and if the holders of World Waste's preferred stock exercise
their redemption right, World Waste would likely be rendered insolvent. In
addition, if the merger does not close, the holders of World Waste's Series A
Preferred Stock could exercise their right to elect a majority of World Waste's
Board of Directors, which would give such holders effective control over World
Waste.
25
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 Acting 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 Acting 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 Acting
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 Acting Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
There was no change in the Company's internal control over financial
reporting during the six months ended June 30, 2008 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
26
PART II - OTHER INFORMATION
ITEM 1 - LITIGATION
As previously disclosed, during early 2007 we began using our Anaheim
Facility to conduct research and development activities related to the
production of renewable energy from MSW. In 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, or at some other outsourced 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 recycle agreement. On October 29, 2007, Taormina
terminated the lease and the recycling agreement, effective as of October 31,
2007. On November 7, 2007, Taormina filed an unlawful detainer action against
us, and in March 2008, we entered into a stipulation for entry of judgment in
this action. The stipulation provided for: (a) the cancellation and forfeiture
of the lease; (b) a payment by us to Taormina of $192,218 (which payment was
subsequently made by us); and (c) our right to remain in possession of the
Anaheim Facility until June 30, 2008.
Pursuant to the Stipulation, we gave notice to Taormina of our intention
to vacate the premises on May 15, 2008. We engaged in discussions with Taormina
concerning the alterations and utility installations to be removed from the
premises prior to the return of the premises to Taormina. In connection with
those discussions, we entered into a letter agreement with Taormina concerning
the South Yard of the property, which letter agreement provided that we would
have no further obligation with respect to the turnover condition of the South
Yard, in exchange for our payment to Taormina of $29,096 and the release of
our rights to a refund of $30,904 of pre-paid rent. We made the $29,096
payment, and, on May 8, 2008, we turned over physical possession of the property
to Taormina. On May 12, 2008, we advised Taormina that we had vacated the
property, and requested that Taormina dismiss the unlawful detainer action. On
June 11, 2008, Taormina requested dismissal of the Action with prejudice, and
the dismissal was entered.
ITEM 1A - RISK FACTORS
There have not been any changes in the risk factors previously disclosed
in Form 10K for the year ended December 31, 2007.
ITEM 6. EXHIBITS
Exhibits
2.1 Amended and Restated Agreement and Plan of Merger, dated May 19, 2008,
by and among the Company, Vertex Energy, LP, Vertex Energy, LLC.,
Vertex Merger Sub, Inc., and Benjamin P. Cowart, as agent for the
shareholders of Vertex Energy, Inc.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
31.2 Certification of Acting 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 Acting Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2008 WORLD WASTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ David Rane
------------------------------
David Rane
Acting Chief Accounting Officer
28
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Amended and Restated Agreement and Plan of Merger, dated May 19, 2008,
by and among the Company, Vertex Energy, LP, Vertex Energy, Inc.,
Vertex Merger Sub, LLC., and Benjamin P. Cowart, as agent for the
shareholders of Vertex Energy, Inc.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
31.2 Certification of Acting Chief Accounting 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 Acting Chief Accounting Officer Pursuant to Section
906 of the Sarbanes-Oxley Act
29