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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 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.)
20400 STEVENS CREEK ROAD, 7TH FLOOR,
CUPERTINO, CALIFORNIA 95014
(Address of Principal Executive Offices)
(408) 517-3306
(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, a non- accelerated filer or a smaller reporting
company. See definition of "accelerated filer," "large accelerated filer" and
"smaller reporting company" 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 November 12, 2008.
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WORLD WASTE TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1 Condensed Financial Statements:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Stockholders' Equity (Deficit) 4
Condensed Consolidated Statements of Cash Flow 6
Condensed Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 4 Controls and Procedures 22
PART II OTHER INFORMATION 23
Item 1A Risk Factors 23
Item 6 Exhibits 23
SIGNATURES 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2008 2007
----------------------------------
ASSETS: (UNAUDITED)
Current Assets:
Cash and cash equivalents $ 7,753,969 $ 2,711,200
Short-term investments - 7,093,418
Prepaid expenses 236,035 336,726
Assets held for sale, less equipment sold to date 89,476 1,083,223
----------------------------------
Total Current Assets 8,079,480 11,224,567
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Fixed Assets:
Machinery, equipment net of accumulated depreciation of $25,991
As of 9/30/08 and $23,358 as of 12/31/07. - 35,302
----------------------------------
Total Fixed Assets - 35,302
Other Assets:
Deposit L/T 4,720 36,519
----------------------------------
TOTAL ASSETS $ 8,084,200 $ 11,296,388
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT):
LIABILITIES:
Current Liabilities:
Accounts payable $ 115,384 $ 359,988
Accrued salaries payable 120,526 108,992
Capital lease S/T - 49,524
Accrued liabilities 214,030 -
Other liabilities 120 290,181
----------------------------------
Total Current Liabilities 450,061 808,685
----------------------------------
Long Term Liabilities:
Capital lease L/T - 30,826
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Total Long Term Liabilities - 30,826
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TOTAL LIABILITIES 450,061 839,511
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Convertible Redeemable Preferred Stock (See Note 5) 30,458,780 22,812,640
----------------------------------
Commitments and Contingencies (See Note 7)
STOCKHOLDERS' EQUITY(DEFICIT):
Common Stock - $.001 par value: 100,000,000 shares authorized, 27,596,491
and 27,576,046 shares issued and outstanding at September 30, 2008 and
December 31, 2007,
respectively. 27,595 27,575
Additional paid-in-capital 59,097,312 57,782,888
Deficit accumulated during development stage (81,949,547) (70,000,282)
Accumulated comprehensive income (loss) - (165,944)
----------------------------------
TOTAL STOCKHOLDERS' EQUITY(DEFICIT) (22,824,640) (12,355,763)
----------------------------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY(DEFICIT) $ 8,084,200 $ 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
AND COMPREHENSIVE INCOME
Three Months Three Months
Ended Ended
September 30, 2008 September 30, 2007
---------------------------------------------
GROSS REVENUE: $ - $ -
Disposal of rejects
Plant operation cost
Depreciation
----------------------------------------------
Total cost of goods sold - -
---------------------------------------------
- -
Gross Margin - -
G&A Expense
Research and development - (418,707)
General and administrative (917,133) (1,395,486)
Impairment of assets (8,454,106)
----------------------------------------------
Loss from operations (917,133) (10,268,299)
----------------------------------------------
Interest income 43,075 188,726
Other (expense) (389,139) -
----------------------------------------------
Net loss before provision for income tax (1,263,197) (10,079,573)
----------------------------------------------
Income taxes - -
----------------------------------------------
Net loss $ (1,263,197) $ (10,079,573)
----------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (2,573,350) (2,917,201)
----------------------------------------------
Net loss attributable to common shareholders $ (3,836,547) $ (12,996,774)
==============================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.14) $ (0.48)
==============================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 27,596,491 27,115,117
==============================================
COMPREHENSIVE INCOME
Net loss $ (1,263,197) $ (10,079,873)
Unrealized gain (loss) on short term
Investments held for sale 588,690 11,721
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Total comprehensive income $ (674,507) $ (10,068,152)
==============================================
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
AND COMPREHENSIVE INCOME
Nine Months Nine Months June 18, 2002
Ended Ended Inception to
September 30, 2008 September 30, 2007 September 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) (2,168,582) (3,438,582)
General and administrative (4,066,782) (3,804,153) (20,105,166)
Impairment of assets - (8,454,106) (18,191,450)
-----------------------------------------------------------------
Loss from operations (4,083,141) (14,426,841) (46,271,477)
-----------------------------------------------------------------
Interest income 190,946 424,580 800,216
Financing transaction expense - - (7,442,426)
Other income (expense) (393,295) - 1,579,934
-----------------------------------------------------------------
Net loss before provision for income tax (4,285,490) (14,002,261) (51,333,753)
-----------------------------------------------------------------
Income taxes - - -
-----------------------------------------------------------------
Net loss $ (4,285,490) $ (14,002,261) $ (51,333,753)
-----------------------------------------------------------------
Preferred stock dividend and amortization
of beneficial conversion feature, warrant discount
and offering costs (7,663,775) (9,968,229) (30,548,268)
-----------------------------------------------------------------
Net loss attributable to common shareholders $ (11,949,265) $ (23,970,490) $ (81,882,021)
=================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.43) $ (0.90) $ (4.01)
=================================================================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING USED IN CALCULATION 27,593,514 26,561,235 20,405,174
=================================================================
COMPREHENSIVE INCOME
Net loss $ (4,285,490) $ (14,002,261) $ (51,333,753)
Unrealized gain (loss) on short term
Investments held for sale 165,944 9,418 -
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Total comprehensive income $ (4,119,546) $ (13,992,843) $ (51,333,753)
=================================================================
*APPROXIMATELY $67,526 IN CONSULTING AND TRAVEL EXPENSES INCURRED PRIOR TO
INCEPTION OF THE BUSINESS ON JUNE 18, 2002 ARE NOT INCLUDED.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional Accumulated
Paid in Common Stock Accumulated Comprehensive
Shares Dollars Capital Subscription Deficit * Income (Loss) Total
-------------------------------------------------------------------------------------
$ $ $ $ $ $
Preformation expenses (67,526) (67,526)
Formation - June 18, 2002 9,100,000 100 73,036 73,136
Net Loss - 2002 (359,363) (359,363)
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December 31, 2002 9,100,000 100 73,036 (426,889) (353,753)
====================================================================================
Additional paid in capital 100 100
Common stock subscribed 125,000 125,000
Net Loss - 2003 (804,605) (804,605)
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December 31, 2003 9,100,000 100 73,136 125,000 (1,231,494) (1,033,258)
====================================================================================
Merger with Waste Solutions, Inc. 7,100,000 63 2,137 2,200
Common stock subscriptions 125,000 1 124,999 (125,000)
Common stock and warrants net of offering
cost prior to VPTI merger 3,045,206 31 3,952,321 3,952,352
Shares cancelled (500,000) (5) 5
Warrants issued 281,171 281,171
Merger with VPTI 1,200,817 21,062 (21,062)
Conversion of promissory notes 1,193,500 12 1,193,488 1,193,500
Accrued Interest on notes forgiven 135,327 135,327
Common stock and warrants net of offering cost 1,460,667 1,461 2,865,462 2,866,923
Amortization of stock options and warrants to
employees and consultants 217,827 217,827
Net loss - 2004 (2,496,188) (2,496,188)
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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)
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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)
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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 1,296,809 1,296,809
Dividend (Preferred Stock) (2,417,127) (2,417,127)
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 (5,246,648) (5,246,648)
Net loss - September 30, 2008 (Unaudited) (4,285,490) (4,285,490)
Unrealized gain (loss) on short term
Investment held for sale 165,944 165,944
------------------------------------------------------------------------------------
September 30, 2008 (Unaudited) 27,596,491 $27,595 $59,097,312 $ 0 $(81,949,547) $ 0 $(22,824,640)
====================================================================================
* During 2002, the Company issued $67,526 of Convertible Promissory Notes
payable for preformation funds received and expended prior to Inception.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Nine Months June 18, 2002
Ended Ended (Inception) to
September 30, 2008 September 30, 2007 September 30, 2008
--------------------------------------------------------------
Cash Flow from operating activities: $ $ $
Net loss (4,285,490) (14,002,261) (51,333,753)
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment of assets 8,454,106 17,899,006
Depreciation and amortization 6,356 1,048,595 3,023,151
Interest forgiveness 135,327
Warrant and common stock issued for consulting 84,566
Amortization of warrants & options to employees 1,296,809 1,161,490 4,319,597
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 100,691 (138,242) (236,035)
Accounts payable (244,604) (256,868) 115,384
Accrued salaries 11,535 (52,213) 120,527
Accrued other liabilities (76,033) 186,053 473,648
--------------------------------------------------------------
Net Cash used in operating activities (3,190,736) (3,586,823) (19,493,013)
--------------------------------------------------------------
Cash flows from investing activities:
Construction of plant (4,043,205)
Leasehold improvements (6,211) (2,970,548)
Deposits on equipment (5,231,636)
Purchase machinery & equipment (198,917) (8,304,813)
Sale of machinery & equipment 942,343 942,343
Deposits 31,800 (4,719)
(Purchase) sale of short-term investments 7,259,362 (8,966,122)
--------------------------------------------------------------
Net Cash provided by(used in)investing activities 8,233,505 (9,171,250) (19,612,578)
--------------------------------------------------------------
Cash flows from financing activities:
Redeemable preferred stock 30,346,460
Senior secured debt 6,265,000
Senior secured debt offering cost (420,523)
Payment of senior secured debt (2,785,000)
Warrants, common stock and
Additional paid in capital 1,993 13,453,623
--------------------------------------------------------------
Net Cash provided by financing activities - 1,993 46,859,560
--------------------------------------------------------------
Net increase (decrease)in cash and cash equivalents 5,042,769 (12,756,080) 7,753,969
Beginning cash and cash equivalents 2,711,200 14,330,840
--------------------------------------------------------------
Ending cash and cash equivalents $ 7,753,969 $ 1,574,760 $ 7,753,969
==============================================================
Non-cash investing and financing activities:
Interest (Paid) Received $ 200,346 $ 424,580 $ 881,772
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 2007, the Company issued 103,340 shares in
exchange for services rendered in 2006.
*During the nine 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.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine
months ended September 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. During the quarter ended September 30, 2008, all short term investments
held for sale, which included auction rate securities, at June 30, 2008 were
sold and the proceeds are included in cash and cash equivalents. The Company
recognized a loss of $389,000 during the quarter, recorded in Other Income and
(Expense), upon the sale.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances at financial institutions. Cash balances
at the institutions are insured by the Federal Deposit Insurance Corporation up
to $250,000. All cash equivalents are invested in government securities.
FIXED ASSETS
During the quarter ended September 30, 2008, all remaining fixed assets were
liquidated. Machinery and equipment was stated at cost. Depreciation was
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 was 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.
We capitalize leases in accordance with FASB 13.
8
ASSETS HELD FOR SALE
Intangible assets are recorded at cost and are classified as held for sale at
September 30, 2008. At September 30, 2008, the remaining intangible asset value
was associated with the patent purchased from the University of Alabama in
Huntsville on May 1, 2006.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock which may be redeemable for cash at the
determination of the holder is classified as mezzanine equity, in accordance
with FAS 150 "Accounting for Certain Financial Instruments with Characteristics
of Both Debt and Equity," EITF Topic D 98 and ASR 268, and is shown net of
discounts for offering costs, warrant values and beneficial conversion features.
STOCK-BASED COMPENSATION
As of September 30, 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 $395,772 and $530,292 for the three months ended
September 30, 2008 and 2007, respectively, and $1,296,809, $1,161,490 and
$4,319,597 for the nine months ended September 30, 2008 and 2007 and for the
period from inception to September 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 September 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 to acquire up to 1,812,000 shares of common stock 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 up to
2,856,000 shares during the year ended December 31, 2007 to employees, members
of the board of directors and consultants. During the nine months ended
September 30, 2008, the Company granted options to acquire up to 1,575,000
shares to employees and members of the board of directors.
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.
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2008 SEPTEMBER 30, 2007
------------------- ------------------
Expected volatility 81.20 - 94.46 % 78.2%
Expected dividends 0 % 0 %
Expected term (in years) 5.15 - 9.45 5.5 - 9.9
Risk-free rate 1.55 - 4.19% 3.30 - 4.58%
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, comprised of four directors, to evaluate
the Company's strategic alternatives, and that the Special Committee would
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 a monthly payment of $5,000 for the period the
Special Committee continues to function, 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 the Company's common stock on the date of grant) and
vested in six equal monthly installments commencing as of March 27, 2008. The
Board recently agreed to continue the monthly payments of $5,000 until the
transaction with Vertex Energy, Inc. (as described above) closes or is
terminated.
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 30,672,273, consisting of employee options
of 6,163,286, non-employment warrants of 6,829,827, Preferred Series A of
6,378,409 and Preferred Series B of 11,300,751, were not included in the
calculation of diluted earnings per share at September 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 September 30, 2007.
NEW ACCOUNTING PRONOUNCEMENTS
There were no new pronouncements issued during the quarter ended September 30,
2008 that would impact the Company.
10
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company had a net loss for
the nine months ended September 30, 2008 of $11,949,265 and an accumulated
deficit attributable to common shareholders at September 30, 2008 of
$81,949,547. The Company expects it will incur substantial additional losses,
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 Company is party to a merger agreement with Vertex Energy, Inc. If
this transaction fails to close as contemplated, the Company may be unable to
continue as a going concern for a reasonable period of time.
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. 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. (See Management's Discussion and Analysis
for a detailed description of the Merger Agreement.) There can be no assurance
that the transaction will be completed. If not closed as contemplated, 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 restricted common stock valued at
its fair value on the date of issuance of approximately $698,000. The patent was
to revert to UAH in the event of bankruptcy of the Company. This patent had been
licensed to BPI. The license to the patent in the United States was assigned by
BPI 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.
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 these assets at the lower of fair value less cost to
sell (net fair value) or carrying value.
In March 2008, the Company entered into an agreement with Clean Earth Solutions,
Inc. ("CES"), pursuant to which it agreed (i) to sell to CES specified assets
relating to the "front end" process of World Waste's Anaheim Facility for a cash
payment to the Company 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 us of $640,000 (the "Second Closing") and (iii) to sell to CES all of
the Company's intellectual property rights in its pressurized steam
classification process in exchange for a payment of $800,000 (of which $236,000
was previously paid by CES) (the "Third Closing"). On March 7, 2008, CES paid
$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 was to occur on such a date as determined by CES, provided that the
Third Closing could not occur later than July 31, 2008.
11
As a result of the default by CES, the Third Closing never occurred. On October
22, 2008, the Company sold the patent and related intellectual property rights
in its pressurized steam classification process to CleanTech Biofuels, Inc.
("CTB") in exchange for $150,000 in cash, a $450,000 secured promissory note and
warrants to purchase up to 900,000 shares of CTB's common stock. The promissory
note matures on July 22, 2009, bears interest at 6.0% per annum and is secured
by the patent. The warrants are exercisable at any time for five years from the
date of issuance at a price of $0.45 per share. In addition, CTB issued the
Company a contingent warrant to purchase up to an additional 900,000 shares of
its common stock on the same terms, except that this warrant is exercisable only
if CTB defaults on its obligations under the note.
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 provided for: (a) the cancellation and
forfeiture of the lease; (b) the Company to make a payment of $192,218 (the
"Payment") to Taormina; and (c) the Company to remain in possession of the
Anaheim Facility until June 30, 2008. The Company 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 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 were outstanding at September 30, 2008 remain outstanding and the holders
of such shares seek their redemption on April 28, 2010, the Company would be
required to make payments to these holders totaling 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.
12
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 3,365,119 5,327,686 8,692,805
Converted to common stock -- (5,564,608) (5,564,608)
---------------- ---------------- ----------------
Total outstanding 13,554,119 28,251,878 41,805,997
Unamortized beneficial conversion feature (513,172) (6,196,611) (6,709,783)
Unamortized offering costs (604,410) (1,560,100) (2,164,510)
Unamortized warrant value (513,173) (1,959,751) (2,472,924)
---------------- ---------------- ----------------
Balance at September 30, 2008 $ 11,923,364 $ 18,535,416 $ 30,458,780
================ ================ ================
NOTE 6. CAPITAL LEASE OBLIGATION
Capital Lease obligation is comprised as follows:
SEPTEMBER 30, 2008 DECEMBER 31, 2007
-------------------- -------------------
Capital Lease for Front End Loader, 0 monthly $ 80,350
installments were remaining at September 30, 2008
interest was imputed at 8.25%
Less: Current portion 49,524
-------------------- -------------------
$0 $ 30,826
==================== ===================
The capital lease was terminated in March 2008.
NOTE 7. COMMITMENTS AND CONTINGENCIES
As of September 30, 2008, the Company had no lease obligations.
13
NOTE 8. SUBSEQUENT EVENTS
In March 2008, the Company entered into an agreement with Clean Earth Solutions,
Inc. ("CES"), pursuant to which it agreed (i) to sell to CES specified assets
relating to the "front end" process of World Waste's Anaheim Facility for a cash
payment to the Company 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 us of $640,000 (the "Second Closing") and (iii) to sell to CES all of
the Company's intellectual property rights in its pressurized steam
classification process in exchange for a payment of $800,000 (of which $236,000
was previously paid by CES) (the "Third Closing"). On March 7, 2008, CES paid
$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 was to occur on such a date as determined by CES, provided that the
Third Closing could not occur later than July 31, 2008.
As a result of the default by CES, the Third Closing never occurred. On October
22, 2008, the Company sold the patent and related intellectual property rights
in its pressurized steam classification process to CleanTech Biofuels, Inc.
("CTB") in exchange for $150,000 in cash, a $450,000 secured promissory note and
warrants to purchase up to 900,000 shares of CTB's common stock. The promissory
note matures on July 22, 2009, bears interest at 6.0% per annum and is secured
by the patent. The warrants are exercisable at any time for five years from the
date of issuance at a price of $0.45 per share. In addition, CTB issued the
Company a contingent warrant to purchase up to an additional 900,000 shares of
its common stock on the same terms, except that this warrant is exercisable only
if CTB defaults on its obligations under the note.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion, as well as information contained elsewhere in this
report, 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, World Waste Technologies, Inc. (the "Company" or "World Waste")
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 business of recycling of
used motor oil and other hydrocarbons. This is accomplished through (1) 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) 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 thermal chemical upgrading technology that
will process used motor oil and convert it to higher value products such as
marine diesel oil and vacuum-gas oil. Pursuant to the merger, Vertex LP will
transfer the operations of the foregoing businesses to Vertex Nevada. These
businesses generated revenues of approximately $36.5 million, approximately $42
million, and approximately $32 million in 2006,2007 and for the six months ended
June 30, 2008, respectively.
Immediately following the merger and assuming no appraisal rights are exercised,
the existing partners of Vertex LP will hold approximately 44% 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 20.5% 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 21.5%
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 some of the existing Vertex partners of $4.4 million. As a result of
these transactions, immediately following the merger the existing shareholders
of the Company will own approximately 56% of the capital stock of Vertex Nevada,
in exchange for which the Company will have made net payments of $7.0 million
(comprised of (1) the $4.4 million just described, plus (2) $5.0 million that
the Company is required to transfer to Vertex Nevada, less (3) $2.4 million of
the Company indebtedness that the Company is permitted to incur and that will be
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.
15
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); 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.
At the end of November 2008, the Company expects to solicit proxies from its
shareholders for a special meeting being called to approve the merger, and to
close the merger by the end of December 2008.
Any party to the Merger Agreement has the right to terminate the Merger
Agreement if the merger does not close by December 31, 2008. If the transaction
does not close for this or any other reason, the Company may seek to enter into
a transaction with a different company. In addition, the holders of the
Company's Series A Preferred Stock could exercise their right to elect a
majority of Company's Board of Directors, which would give such holders
effective control over the Company.
COMPANY OVERVIEW
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. 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 has been
minimized as World Waste seeks to maintain relationships, 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
the 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 may include paper pulp, renewable energy,
recyclable commodities, and potentially bio-fuels. Subject to focusing its
efforts on closing the merger, the Company plans to continue its efforts on
producing renewable energy from waste materials through the use of conversion
technologies in order to meet the rapidly growing demand for renewable power. As
previously stated this initiative is secondary to completing the Vertex merger.
16
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 September 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 to date it
has not derived substantial revenues from its activities.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements include all
adjustments (consisting of only normal recurring accruals), which are, in the
opinion of management, necessary for a fair presentation. Operating results for
the nine months ended September 30, 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.
17
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. During the quarter ended September 30, 2008, all short
term investments held for sale, which included auction rate securities, at June
30, 2008 were sold and the proceeds are included in cash and cash equivalents.
The Company recognized a loss of $389,000 during the quarter, recorded in Other
Income and (Expense), upon the sale.
ASSETS HELD FOR SALE
Intangible assets are recorded at cost and are classified as held for
sale at September 30, 2008. At September 30, 2008, the remaining intangible
asset value was associated with the patent purchased from the University of
Alabama in Huntsville on May 1, 2006.
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.
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 SFAS 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
There were no new pronouncements issued during the quarter ended
September 30, 2008 that would impact the Company.
18
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED SEPTEMBER 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 this decision was made. We essentially ceased utilizing the
plant 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
During the third quarter of 2007, we determined that our ongoing
research and development work would more efficiently be carried out at an
outside, third party-owned research location. Consequently, in order to reduce
costs and focus management attention and cash resources on our renewable energy
process, we initiated conversations with Taormina regarding termination of the
lease of the Anaheim Facility and the cancellation of the associated recycling
agreement. On October 29, 2007, Taormina terminated the lease and the recycling
agreement, effective as of October 31, 2007. Consequently, we recorded a charge
of $8,454,106 in the third quarter of 2007 which represented the net carrying
value of the assets at the Anaheim plant, net of estimated fair value of the
equipment and estimated costs of the equipment removal and scrap.
There was no research and development expense during the quarter ended
September 30, 2008. We are currently focusing on completing the transaction with
Vertex Nevada as described above.
General and administrative expense decreased to approximately $917,000
during the quarter ended September 30, 2008 from $1,395,000 for the comparable
period in 2007. This $478,000 decrease was primarily the result of a decrease in
payroll expenses of $190,000 due to a reduction in headcount, a decrease of
option expense of $135,000, a decrease of consulting expense of $120,000 and a
decrease of other expenses due to the reduction in activity while we focus on
completing the Vertex merger. General and administrative expense for the quarter
ended September 30, 2008 of $917,000 was comprised primarily of employee option
expense of approximately $395,000, compensation expense, including Board of
Director's fees, of approximately $198,000, consulting fees of approximately
$100,000, legal and professional fees of approximately $121,000, and other
expenses of $103,000.
Interest income during the third quarter of 2008 of approximately
$43,000 was a decreased of $145,000 from $189,000 for the comparable period is
due to a decrease in cash and short-term investments as well as a decrease in
yields as the Company liquidated its short term investments and invested its
cash in government securities. Other expense of approximately $389,000
represents the loss realized upon the sale of the Company's short term
investments, auction rate securities, during the third quarter.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs decreased to approximately
$2,573,000 during the quarter ended September 30, 2008 from $2,917,000 during
the comparable period in 2007 due to the conversion of some preferred shares to
common shares.
19
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2008 TO THE NINE MONTHS ENDED
SEPTEMBER 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 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 approximately
$2,169,000 for the nine months ended September 30, 2007 to approximately $16,000
for the nine months ended September 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.
General and administrative expense increased from approximately
$3,804,000 for the nine months ended September 30, 2007 to approximately
$4,067,000 for the comparable period in 2008. This $263,000 increase was
primarily the result of an increase in employee stock option expense of $135,000
and an increase in consulting and legal fees of $342,000 primarily due to the
Vertex Nevada merger, offset partially by a reduction in investor relations
expense of $197,000. General and administrative expense for the nine months
ended September 30, 2008 of $4,067,000 was comprised primarily of stock option
amortization of $1,297,000, compensation expense, including Board compensation,
of $1,049,000, consulting fees of $554,000, accounting fees of $195,000, legal
fees of $485,000 and other expenses of $487,000.
During the third quarter of 2007, we determined that our ongoing
research and development work would more efficiently be carried out at the
location of Applied Power Concepts, our research and development partner.
Consequently, in order to reduce costs and focus management attention and cash
resources on our renewable energy process, we initiated conversations with
Taormina regarding termination of the lease of the Anaheim Facility and the
cancellation of the associated recycling agreement. On October 29, 2007,
Taormina terminated the lease and the recycling agreement, effective as of
October 31, 2007. Consequently, we recorded a charge of $8,454,106 in the third
quarter of 2007 which represents the net carrying value of the assets at the
Anaheim plant, net of estimated fair value of the equipment and estimated costs
of the equipment removal and scrap.
Interest income decreased from approximately $425,000 for the nine
months ended September 30, 2007 to approximately $191,000 for the nine months
ended September 30, 2008 due primarily to the decrease in cash and short term
investments in the 2008 period. Other expense of $389,000 represents the loss
realized upon the sale of the Company's short term investments, auction rate
securities, during the third quarter of 2008.
Preferred stock dividend and amortization of beneficial conversion
feature, warrant discount and offering costs decreased to approximately
$7,664,000 for the nine months ended September 30, 2008 from $9,968,000 for the
comparable period in 2007 due to the conversion of some of the preferred stock
to common.
20
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2008, we had cash and cash equivalents on hand of
approximately $7.75 million representing a decrease of $2.05 million from our
December 31, 2007 cash, cash equivalents and short-term investments totaling
approximately $9.8 million.
During the first nine months of 2008, net cash used for operating
activities was approximately $3.2 million, offset by cash received from
assets held for sale of $1.1 million. The use of cash was primarily for general
and administrative expenses.
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 secure the necessary borrowing, and (3) 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 merger.
In this case, absent a waiver of this closing condition by the other parties to
the transaction, the merger could not be consummated.
As of September 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 the
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.
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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
Principal Accounting Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Based on the foregoing, the Company's Chief Executive Officer and
Acting Principal Accounting 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 Principal
Accounting Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Because of reductions in our staff, in particular of several employees
who were involved in controls related to cash disbursements, we evaluated and
revised the roles and functions of our personnel overseeing the cash
disbursement process. The Company's Chief Executive Officer and Acting Principal
Accounting Officer believe that, despite this change in our internal controls
over financial reporting, such controls remain adequate. There were no other
changes in the Company's internal control over financial reporting during the
nine months ended September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
22
PART II - OTHER INFORMATION
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
Exhibit
Number Description
- ------ -----------
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
10.1 Patent Purchase Agreement dated October 22, 2008 by and between the
Company and CleanTech Biofuels, Inc.
10.2 Note issued to the Company by CleanTech Biofuels, Inc.
10.3 Security Agreement between CleanTech Biofuels, Inc. and the Company
dated October 27, 2008.
10.4 Warrant to acquire shares of CleanTech Biofuels, Inc.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2008 WORLD WASTE TECHNOLOGIES, INC.
(Registrant)
By: /s/ David Rane
------------------------------
David Rane
Acting Principal Accounting Officer
24
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
31.2 Certification of 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
10.1 Patent Purchase Agreement dated October 22, 2008 by and between the
Company and CleanTech Biofuels, Inc.
10.2 Note issued to the Company by CleanTech Biofuels, Inc.
10.3 Security Agreement between CleanTech Biofuels, Inc. and the Company
dated October 27, 2008.
10.4 Warrant to acquire shares of CleanTech Biofuels, Inc.
25