SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended
March 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the
transition period from ____________ to ____________.
Commission
file number 1-11476
WORLD WASTE
TECHOLOGIES, INC.
(Exact Name of Registrant as Specified in
its Charter)
CALIFORNIA 95-3977501 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) |
13500 EVENING CREEK DRIVE, SUITE
440,
SAN DIEGO, CALIFORNIA 92128
(Address of Principal Executive Offices)
(858) 391-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |_| Accelerated Filer
|_| Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes |_| No |X|
State the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date:
26,255,662 shares issued and outstanding as of March 31, 2007.
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WORLD WASTE TECHNOLOGIES, INC. FORM 10-Q TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Consolidated Balance Sheets F-1 Consolidated Statements of Operations F-2 Consolidated Statements of Stockholders' Equity (Deficit) F-3 Consolidated Statements of Cash Flow F-5 Notes to Consolidated Financial Statements F-6 PART II OTHER INFORMATION Item 1A Risk Factors 1 Item 2 Management's Discussion and Analysis of Financial Condition and Results of 1 Operations Item 3 Quantitative and Qualitative Disclosures About Market Risks 9 Item 4 Controls and Procedures 9 Item 6 Exhibits 10 SIGNATURES 11 |
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY WORLD WASTE OF AMERICA, INC.) (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS March 31, December 31, 2007 2006 ---------------------------------- ASSETS: (UNAUDITED) Current Assets: Cash $ 13,033,032 $ 14,330,840 Accounts receivable - 12,517 Prepaid expenses 144,044 174,589 ---------------------------------- Total Current Assets 13,177,076 14,517,946 ---------------------------------- Fixed Assets: Machinery, equipment net of accumulated depreciation of $894,643 on 3/31/07 and $673,201on 12/31/06. 6,107,193 6,187,065 Construction in Progress - 114,238 Leasehold Improvements net of accumulated depreciation of $361,718 on 3/31/07 and $271,164 on 12/31/06. 2,970,549 2,966,424 ---------------------------------- Total Fixed Assets 9,077,742 9,267,727 Other Assets: Deposit L/T 36,518 36,519 Patent license, net of accumulated amortization of $107,896 on 3/31/07 1,237,432 1,266,014 And $88,591 on 12/31/06 ---------------------------------- TOTAL ASSETS $ 23,528,768 $ 25,088,206 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): LIABILITIES: Current Liabilities: Accounts payable $ 405,288 $ 503,752 Accrued salaries payable 85,197 136,635 Capital lease S/T 46,563 45,615 Accrued liabilities 192,106 222,803 Other liabilities 10,000 23,183 ---------------------------------- Total Current Liabilities 739,154 931,988 ---------------------------------- Long Term Liabilities: Capital lease L/T 68,349 80,351 ---------------------------------- Total Long Term Liabilities 68,349 80,351 ---------------------------------- TOTAL LIABILITIES 807,503 1,012,339 ---------------------------------- Redeemable preferred stock (See Note 5) 16,347,912 14,506,849 ---------------------------------- Commitments and Contingencies (See Note 7) STOCKHOLDERS' EQUITY (DEFICIT): Common Stock - $.001 par value: 100,000,000 shares authorized, 26,257,122 and 25,412,662 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively. 26,256 25,412 Additional paid-in-capital 53,485,811 51,179,469 Deficit Accumulated during development stage (47,138,714) (41,635,863) ---------------------------------- TOTAL STOCKHOLDERS' EQUITY 6,373,353 9,569,018 ---------------------------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 23,528,768 $ 25,088,206 ================================== SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS F-1 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY WORLD WASTE OF AMERICA, INC.) (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS For the Quarter For the Quarter June 18, 2002 Ending Ending Inception to March 31, 2007 March 31, 2006 March 31, 2007* ----------------------------------------------------- GROSS REVENUE: $ 93,784 Disposal of rejects (65,526) Plant operation cost (2,720,922) Depreciation (1,843,615) ----------------------------------------------------- Total cost of goods sold (4,630,063) ----------------------------------------------------- Gross Margin (4,536,279) G&A Expense Research and development $ (918,934) $ (60,000) (1,960,214) General and administrative (983,491) (968,668) (11,740,890) ----------------------------------------------------- Loss from operations (1,902,425) (1,028,668) (18,237,383) ----------------------------------------------------- Interest income 130,490 15,575 160,492 Financing transaction expense - (1,647,250) (7,442,426) Asset impairment (9,764,267) Other income (expense) (27,276) (120,154) 1,788,780 ----------------------------------------------------- Net loss before provision for income tax (1,799,211) (2,780,497) (33,494,804) ----------------------------------------------------- Income taxes - - - ----------------------------------------------------- Net loss $ (1,799,211) $ (2,780,497) $ (33,494,804) ----------------------------------------------------- Preferred stock dividend and amortization of beneficial conversion feature, warrant discount and offering costs (3,703,640) (540,486) (13,576,484) ----------------------------------------------------- Net loss attributable to common shareholders $ (5,502,851) $ (3,320,983) $ (47,071,288) ===================================================== BASIC AND DILUTED NET LOSS PER SHARE $ (0.21) $ (0.13) $ (2.58) ===================================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN CALCULATION 25,830,809 24,724,833 18,212,936 ===================================================== *APPROXIMATELY $67,526 IN CONSULTING AND TRAVEL EXPENSES INCURRED PRIOR TO INCEPTION OF THE BUSINESS ON JUNE 18, 2002 ARE NOT INCLUDED. SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-2 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY WORLD WASTE OF AMERICA, INC.) (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) Additional Common Stock Accumulated Shares Dollars Paid in Capital Subscription Deficit * Total ------------------------------------------------------------------------------------- $ $ $ $ $ Preformation expenses (67,526) (67,526) Formation - June 18, 2002 9,100,000 100 73,036 73,136 Net Loss - 2002 (359,363) (359,363) ------------------------------------------------------------------------------------- December 31, 2002 9,100,000 100 73,036 (426,889) (353,753) ===================================================================================== Additional paid in capital 100 100 Common stock subscribed 125,000 125,000 Net Loss - 2003 (804,605) (804,605) ------------------------------------------------------------------------------------- December 31, 2003 9,100,000 100 73,136 125,000 (1,231,494) (1,033,258) ===================================================================================== Merger with Waste Solutions, Inc. 7,100,000 63 2,137 2,200 Common stock subscriptions 125,000 1 124,999 (125,000) - Common stock and warrants net of offering cost prior to VPTI merger 3,045,206 31 3,952,321 3,952,352 Shares cancelled (500,000) (5) 5 - Warrants issued 281,171 281,171 Merger with VPTI 1,200,817 21,062 (21,062) - Conversion of promissory notes 1,193,500 12 1,193,488 1,193,500 Accrued Interest on notes forgiven 135,327 135,327 Common stock and warrants net of offering cost 1,460,667 1,461 2,865,462 2,866,923 Amortization of stock options and warrants to employees and consultants 217,827 217,827 Net loss - 2004 (2,496,188) (2,496,188) ------------------------------------------------------------------------------------- December 31, 2004 22,725,190 22,725 8,824,811 0 (3,727,682) 5,119,854 ===================================================================================== Common stock and warrants net of offering cost 1,961,040 1,961 3,072,116 3,074,077 Amortization of stock options and warrants to employees and consultants 654,220 654,220 Dividend redeemable (Preferred Stock) 106,645 (671,769) (565,124) Warrants issued 861,853 861,853 Bridge financing warrants 1,114,105 1,114,105 Beneficial conversion feature on redeemable preferred stock 1,328,066 1,328,066 Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (562,704) (562,704) Net loss - December 2005 (3,078,917) (3,078,917) ------------------------------------------------------------------------------------- December 31, 2005 24,686,230 24,686 15,961,816 0 (8,041,072) 7,945,430 ===================================================================================== F-3 |
Additional Common Stock Accumulated Shares Dollars Paid in Capital Subscription Deficit * Total ------------------------------------------------------------------------------------- Common stock and warrants net of offering cost 262,851 263 9,561 9,824 Amortization of stock options and warrants to employees and consultants 989,252 989,252 Dividend (Preferred Stock) 386,954 (2,920,893) (2,533,939) Warrants issued preferred stock 1,647,250 1,647,250 Bridge financing warrants 787,500 787,500 Beneficial conversion feature - Series B 18,207,102 18,207,102 Conversion of Series B preferred stock 296,581 296 840,716 841,012 Series B Investor & placement warrants 7,922,663 7,922,663 Series A Investor warrants 3,065,931 3,065,931 Elimination of warrant liabilities 674,420 674,420 UAH stock for purchase of patent 167,000 167 697,833 698,000 Registration filing fees (11,529) (11,529) Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (5,717,378) (5,717,378) Net loss - 2006 (24,956,520) (24,956,520) ------------------------------------------------------------------------------------- December 31, 2006 25,412,662 25,412 51,179,469 0 (41,635,863) 9,569,018 ===================================================================================== Common stock for services 103,340 103 259,397 259,500 Amortization of stock options and warrants to employees and consultants 185,108 185,108 Dividend (Preferred Stock) (810,842) (810,842) Conversion of Series B preferred stock 741,120 741 1,861,837 1,862,578 Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (2,892,798) (2,892,798) Net loss - March 2007 (Unaudited) (1,799,211) (1,799,211) ------------------------------------------------------------------------------------- March 31, 2007 (Unaudited) 26,257,122 $ 26,256 $ 53,485,811 $ 0 ($47,138,714) $6,373,353 ===================================================================================== * During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and expended prior to Inception. SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-4 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY WORLD WASTE OF AMERICA, INC.) (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW June 18, 2002 Quarter ended Quarter ended (Inception) to March 31,2007 March 31, 2006 March 31, 2007 ----------------------------------------------------------- Cash Flow from operating activities: $ $ $ Net loss (1,799,211) (2,780,497) (33,494,804) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of assets 9,737,344 Depreciation and amortization 340,579 3,455 2,308,779 Interest forgiveness 135,327 Warrant and common stock Issued for consulting 84,566 Amortization of warrants & options to employees 185,108 289,164 2,046,406 Fair value adjustment warrant liability 120,154 (1,789,134) Financial transaction expense 1,647,250 7,442,426 Amortization of offering cost 252,277 Changes in operating assets and liabilities: Accounts receivable 12,517 - Prepaid expenses/Emp. receivable 30,545 72,713 (144,044) Accounts payable (98,463) (1,861) 405,288 Accrued salaries (51,438) 15,554 85,197 Accrued other liabilities 215,620 (40,479) 461,606 ----------------------------------------------------------- Net Cash used in operating activities (1,164,743) (674,547) (12,468,766) ----------------------------------------------------------- Cash flows from investing activities: Construction in progress (4,043,205) Leasehold improvements (94,679) (3,332,267) Deposits on equipment (5,231,636) Purchase machinery & equipment (38,386) (2,301,511) (7,794,612) Patient license (440,890) Deposits 4,719 (36,519) ----------------------------------------------------------- (133,065) (2,296,792) (20,879,129) ----------------------------------------------------------- Cash flows from financing activities: Redeemable preferred stock 32,071,719 Senior secured debt 2,000,000 6,265,000 Senior secured debt offering cost (122,425) (420,523) Payment of senior secured debt (2,785,000) Warrants, common stock and Additional paid in capital 8,208 11,249,731 ----------------------------------------------------------- 0 1,885,783 46,380,927 ----------------------------------------------------------- Net increase in cash (1,297,808) (1,085,556) 13,033,032 Beginning cash 14,330,840 2,864,377 ----------------------------------------------------------- Ending cash 13,033,032 1,778,821 13,033,032 =========================================================== Non-cash investing and financing activities: Interest (Paid) Received $ 130,490 $ 15,575 $ 160,492 Income Taxes Paid -- -- -- *During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and expended prior to Inception. *The company issued warrants to purchase 315,354 shares of common stock to the placement agent for services rendered in connection with the fund raising effort. *The Company issued warrants to purchase 50,000 shares of common stock for consulting services in 2004 and 100,000 shares of common stock upon the exercise of a warrant in exchange for services rendered. *The Company issued 1,193,500 shares of common stock upon conversion of the Convertible Promissory notes payable and accrued interest of $135,327. *The Company issued warrants to purchase 250,000 shares of its common stock for a modification to the technology license agreement. *During the quarter ended March 31, 2006, upon completion of the plant in Anaheim, CA. all construction in progress was transferred to leasehold improvements and all deposits on equipment was transferred to machinery and equipment. *During the quarter ended March 31, 2007, the Company issued 103,340 shares in exchange for services rendered in 2006. SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS F-5 |
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WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY WORLD WASTE OF AMERICA, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America.
The Company is a new enterprise in the development stage as defined by
Statement No. 7 of the Financial Accounting Standards Board, since it has not
derived substantial revenues from its activities to date.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements
include all adjustments (consisting of only normal recurring accruals), which
are, in the opinion of management, necessary for a fair presentation. Operating
results for the quarter ended March 31, 2007 are not necessarily indicative of
the results to be expected for a full year. The consolidated financial
statements should be read in conjunction with the Company's amended
consolidated financial statements for the year ended December 31, 2006.
USE OF ESTIMATES
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts for the year ended December 31,
2006 have been reclassified to conform with the
presentation of the March 31, 2007 amounts. These reclassifications had no
effect on reported net loss.
REVENUE RECOGNITION
Revenue for receiving Municipal Solid Waste (MSW)
is recognized when the MSW is delivered. Revenue for products sold, such as
unbleached fiber, metals and aluminum, are recognized when the product is
delivered to the customer.
All shipping and handling costs are accounted for
as cost of goods sold.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to
operations when incurred.
INCOME TAXES
The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." In accordance with SFAS No.
109, the Company records a valuation allowance against net deferred tax assets
if, based upon the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income and when temporary differences become deductible. The Company considers,
among other available information, uncertainties surrounding the recoverability
of deferred tax assets, scheduled reversals of deferred tax liabilities,
projected future taxable income, and other matters in making this assessment.
The Company adopted FIN 48 on January 1, 2007.
There was no material impact on the Company's financial statements as a result
of the adoption.
F-6
CASH AND
CASH EQUIVALENTS
The Company considers all highly liquid
investments with a maturity of three months or less when purchased, which are
not securing any corporate obligations, to be cash equivalents. The Company had
no cash equivalents at March 31, 2007.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in a
financial institution. Cash balances at the institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. The Company has not
experienced any losses in connection with such accounts.
FIXED ASSETS
Machinery and Equipment is stated at cost.
Depreciation is computed on the straight-line method over the estimated useful
asset lives or for leasehold improvements or equipment installed in the Anaheim plant, over the
remaining life of the lease, whichever is shorter. Due to the fact that at the
time the assets were placed into service the lease had 8 years and two months
remaining, all assets and leasehold improvements at the Anaheim facility are being depreciated over a
maximum of 8 years and two months on a straight line basis. Maintenance and
repairs are expensed as incurred.
The Company completed the construction of its
initial plant in Anaheim, California early in the second quarter of
2006. The Company placed into service and began depreciating the assets related
to this facility in the second quarter of 2006.
The assets at the Anaheim plant are comprised of
two basic technologies; the front half of the plant consists of assets related
to the Company's core patented technology related to "steam classification"
and material separation and the back half of the plant consist of assets
related to screening and cleaning of the cellulose biomass material to prepare
it for sale to paper mills. During the plant start up phase, we confronted
several issues, including an unexpected high level of biological oxygen demand
from organic waste in the wastewater from the pulp screening and cleaning
process. The Company decided not to make the capital improvements necessary to
the Anaheim
plant's wetlap process, or "back half"
which the Company considers necessary in order to recover the carrying amount
of the wetlap plant assets through projected future
undiscounted cash flow from its operation. Consequently, the Company recorded a
charge of $9,737,344 in 2006 which represented the net carrying value of the wetlap process (or "back half") equipment. The
charge was equal to the carry cost of the assets of the wetlap
process, net of accumulated depreciation. The Company did not record an
impairment charge for the steam classification equipment (or "front
half") of the plant because the Company intends to use that equipment in
research and development activities as part of its development of alternative
back end processes such as, but not limited to, gasification and acid hydrolysis
and because it also believes that by making certain improvements to the plant,
such as adding equipment for energy co-generation, and changing the use of the
cellulose biomass mass from the wetlap process to
another application, such as its use as a form of fuel, the future undiscounted
cash flow from its operations might cover the capitalized cost.
During 2007, the Company plans to continue to
operate primarily in the research and development mode. Consequently,
depreciation of the "steam classification" equipment may be charged
to research and development under FASB 2, "Accounting for Research and
Development Costs."
The Company capitalizes leases in accordance with
FASB 13, "Accounting for Leases."
F-7
INTANGIBLES
Intangible assets are recorded at cost. On May 1,
2006, pursuant to a Patent Assignment Agreement and a Patent Assignment, both
dated as of May 1, 2006 (the "Patent Assignment Agreement and a Patent
Assignment"), the Company completed the purchase of all right, title and
interest in United States Patent No. 6,306,248 (the "Patent") and
related intellectual property, subject to existing licenses, from the
University of Alabama in Huntsville for $100,000 and 167,000 shares of the
Company's unregistered common stock valued at approximately $698,000, based on
the market price of the stock on the date issued, May 1, 2006.
The Company continues to exploit the technology
covered by the Patent through a sublicense from the original licensee,
Bio-Products, International, Inc. (BPI). By virtue of the acquisition of the
Patent, the Company now owns all rights, title and interest in the Patent,
subject to BPI's existing license, which in turn
continues to sublicense the technology to the Company.
Prior to the purchase of the Patent, the Company's
only intangible asset was the sub-license from BPI for the patented technology
and other related intellectual property.
The Company began amortizing its intangible assets
during the second quarter of 2006 upon completion of its first facility, on a
straight-line basis over the remaining life of the intellectual property. The
Patent expires in 2017 and the license expires in 2022.
The Company's policy regarding intangible assets
is to review such intangible assets for impairment whenever events or changes
in circumstances indicate that their carrying amount may not be recoverable. If
the review indicates that intangible assets are not recoverable (i.e. the
carrying amounts are more than the future projected undiscounted cash flows),
their carrying amounts would be reduced to fair value.
In April 2007, the Company filed a lawsuit against
BPI alleging, among other things, breach of contract and negligence with
respect to the construction of the vessels. See Note 3 and 8. The Company does
not believe that this lawsuit affects the carrying value of the patent or
sub-license. Therefore, the Company had no material impairment to its
intangible assets during the quarter ended March 31, 2007 and the year ended
December 31, 2006.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock which may be
redeemable for cash at the determination of the holder is classified as
mezzanine equity, in accordance with FAS 150 "Accounting for Certain
Financial Instruments with Characteristics of Both Debt and Equity," EITF
Topic D 98 and ASR 268, and is shown net of discounts for offering costs,
warrant values and beneficial conversion features.
STOCK-BASED COMPENSATION
As of March 31, 2007, the Company had one
share-based compensation plan, which is described below. The compensation cost
that has been charged against income for the plan was $185,108, $463,406 and
$1,617,096 for the quarters ended March 31, 2007 and 2006 and for the period
from inception to March 31, 2007, respectively. Because the Company is in a net
loss position, no income tax benefit has been recognized in the income
statement for share-based compensation arrangements. As of March 31, 2007 and
2006, no share-based compensation cost had been capitalized as part of
inventory or fixed assets.
The Company's 2004 Incentive Stock Option Plan
(the Plan), which is shareholder-approved, provides for the issuance by the
Company of a total of up to 2.0 million shares of common stock and options to
acquire common stock to the Company's employees, directors and consultants. The
Company believes that such awards better align the interests of its employees
with those of its shareholders. Option awards are generally granted with an
exercise price equal to the market price of the Company's stock at the date of
grant; those option awards generally vest based on 2 to 4 years of continuous
service and have 10-year contractual terms. The Company granted 475,000 options
during the quarter ended March 31, 2007 to employees, members of the board of
directors and consultants. At March 31, 2007, there were 1,987,000 options
outstanding under the Plan. There were no grants made during the quarter ended
March 31, 2006. Certain option awards provide for accelerated vesting if there
is a change in control (as defined in the Plan). The Company plans to adopt a
new incentive stock plan in 2007.
F-8
The fair
value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions
noted in the table below. Expected volatilities are based on the historical
volatility of the Company's common stock from August 24, 2004 through the date
of the respective grant. The Company uses historical data to estimate option
exercise and employee terminations within the valuation model. The expected
term of options granted was estimated using the simple method which the Company
believes provides a reasonable estimation of the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual life of the option is based on the LIBOR rate at the time of
grant.
QUARTER ENDED YEAR ENDED MARCH 31, 2007 DECEMBER 31, 2006 ------------------- ------------------- Expected volatility 77 % 70 % Expected dividends 0 % 0 % Expected term (in years) 5.5 - 10.0 4 Risk-free rate 4.64% - 5.07 % 4.64 % |
A summary of option
activity under the Plan as of March 31, 2007, and changes during the quarter
then ended is presented below:
AVERAGE REMAINING AGGREGATE WEIGHTED-AVERAGE CONTRACTUAL INTRINSIC OPTIONS SHARES EXERCISE PRICE TERM VALUE -------------------------------------- ------------ ------------------ ------------- ------------ Outstanding at January 1, 2007 1,587,000 $ 2.44 $ 26,250 Granted 475,000 1.29 -- Exercised -- -- -- Forfeited or expired 75,000 $ 1.50 -- Outstanding at March 31, 2007 1,987,000 $ 2.16 8.65 -- Exercisable at March 31, 2007 824,500 $ 1.76 8.64 $ -- |
The aggregate intrinsic
value represents the total pretax intrinsic value, based on options with an
exercise price less than the Company's closing stock price of $1.11 as of March
31, 2007 which would have been received by the option holders had those option
holders exercised their options as of that date. The weighted-average
grant-date fair value of options granted during the three months ended March
31, 2007 was $0.82. There were no options granted during the three months ended
March 31, 2006. There have been no options exercised since inception. When
options are exercised, the Company will issue new shares to the recipient.
F-9
WEIGHTED-AVERAGE NON-VESTED STOCK OPTIONS OPTIONS GRANT DATE FAIR VALUE ----------------------- ----------------------- Non-vested at beginning of period 912,500 1.56 Granted 475,000 0.82 Vested 218,750 0.83 Forfeited -- -- Non-vested at end of period 1,168,750 1.40 |
As of March 31, 2007,
there was approximately $1.31 million of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period of
1.87 years.
Non employment stock warrants outstanding:
WEIGHTED- WEIGHTED AVERAGE AVERAGE GRANT NUMBER EXERCISE PRICE DATE FAIR VALUE ----------------------------------------- ------------- ------------------ ----------------- Outstanding at December 31, 2006 7,003,147 $ 2.19 $ 2.31 Exercisable at December 31, 2006 7,003,147 $ 2.19 $ 2.31 Granted during the period 0 $ - $ - Vested during the period 0 $ - $ - Exercised during the period 0 $ - $ - Cancelled 0 $ - $ - Outstanding at March 31, 2007 7,003,147 $ 2.19 $ 2.31 Exercisable at March 31, 2007 7,003,147 $ 2.19 $ 2.31 |
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the
earnings of an entity, such as stock options, warrants or convertible securities.
Due to their anti-dilutive effect, common stock equivalents of 25,981,222,
consisting of employee options of 1,987,000, investor warrants of 7,003,147,
Preferred Series A of 5,663,842 and Preferred Series B of 11,327,234, were not
included in the calculation of diluted earnings per share at March 31, 2007 and
common stock equivalents of 8,809,752 were not included in the calculation of
diluted earnings per share at March 31, 2006.
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company had a net loss for the quarter ended March 31, 2007 of $1,799,211
and an accumulated deficit of $47,138,714 at March 31, 2007.
The Company expects to incur substantial additional losses and costs and
capital expenditures before it can operate profitably. The ability to operate
profitably is subject to resolving significant operating issues or developing
other products. The Company's ability to accomplish this is dependent on
successful research and development, engineering and obtaining of additional
funding. If the Company is unsuccessful, it may be unable to continue as a
going concern for a reasonable period of time. These issues raise substantial
doubt about the Company's ability to continue as a going concern.
F-10
There can
be no assurance that the Company's research and development and engineering
activities or any future efforts to raise additional debt and/or equity
financing will be successful. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing, and ultimately to attain successful operations.
NOTE 3. LICENSE AGREEMENT
On June 21, 2002, the Company entered into a U.S. technology sub-license agreement with
Bio-Products International, Inc. (BPI), an Alabama corporation with respect to certain
intellectual property and patented methods and processes. This agreement was
amended on June 21, 2004 and again on August 19, 2005. The technology was
designed to provide for the processing and separation of material contained in
Municipal Solid Waste (MSW). This unique process treats MSW with a combination
of time, temperature and steam pressure. Temperatures of several hundred
degrees cook the material, and the pressure and agitation causes a pulping
action. This combination is designed to result in a significant volume
reduction, yielding high-density, cellulose biomass product that is ready for
processing and/or market. The most recent patent includes the capturing of all
Volatile Organic Compounds and was granted by the United States Patent and
Trademark Office in October 2001.
Through April 30, 2006, the University
of Alabama in Huntsville ("UAH") owned the patent
for this technology. On May 1, 2006, the Company acquired the patent from UAH
for $100,000 and 167,000 shares of the Company's unregistered common stock
valued at its fair value on the date of issuance of approximately $698,000. The
patent reverts to UAH in the event of bankruptcy of the Company. This patent is
licensed to BPI. The license to the patent in the United States was assigned to the
Company. BPI is required to continue to make certain payments to the Company,
as the patent owner, to maintain exclusivity to the patent for the technology.
The Company does not expect royalty income from BPI to be material for the foreseeable
future.
The Company continues to exploit the technology
covered by the Patent through the sublicense from the original licensee, BPI.
By virtue of the acquisition of the Patent, the Company now own
all rights, title and interest in the Patent, subject to BPI's
existing license, which in turn continues to sublicense the technology to the
Company.
The sub-license extends for a period of 20 years
from the effective date of the agreement. The agreement is subject to automatic
extension until the expiration date of the last patent issued to BPI.
For the sub-license, the Company agreed to pay a
one-time fee of $350,000. The license is being amortized over the remaining
life of the license beginning when the Company's plant first became
operational.
In addition, the Company is obligated to pay a
royalt