SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended
June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from
____________ to ____________.
Commission file number 1-11476
WORLD WASTE TECHOLOGIES,
INC.
(Exact Name of Registrant as Specified in
its Charter)
CALIFORNIA 95-3977501 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) |
13500 EVENING CREEK DRIVE, SUITE
440,
SAN DIEGO, CALIFORNIA
92128
(Address of Principal Executive Offices)
(858) 391-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non- accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule
12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |_| Accelerated Filer
|_| Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes |_| No |X|
State the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date:
26,924,968 shares issued and outstanding as of June 30, 2007.
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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 1 Consolidated Statements of Operations 2 Consolidated Statements of Stockholders' Equity (Deficit) 4 Consolidated Statements of Cash Flow 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of 15 Operations Item 3 Quantitative and Qualitative Disclosures About Market Risks 24 Item 4 Controls and Procedures 24 PART II OTHER INFORMATION 25 Item 1A Risk Factors 25 Item 6 Exhibits 26 SIGNATURES 27 |
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS June 30, December 31, 2007 2006 ---------------------------------- ASSETS: (UNAUDITED) Current Assets: Cash and cash equivalents $ 1,893,855 $ 14,330,840 Short-term investments 9,811,183 - Accounts receivable - 12,517 Prepaid expenses 183,364 174,589 ---------------------------------- Total Current Assets 11,888,402 14,517,946 ---------------------------------- Fixed Assets: Machinery, equipment net of accumulated depreciation of $1,089,507 on 6/30/07 and $673,201 on 12/31/06. 6,282,624 6,460,326 Construction in Progress - 114,238 Leasehold Improvements net of accumulated depreciation of $483,686 on 6/30/07 and $271,164 on 12/31/06. 2,486,863 2,693,163 ---------------------------------- Total Fixed Assets 8,769,487 9,267,727 Other Assets: Deposit L/T 36,519 36,519 Patent license, net of accumulated amortization of $145,757 on 6/30/07 and $88,591 on 12/31/06 1,208,848 1,266,014 ---------------------------------- TOTAL ASSETS $ 21,903,256 $ 25,088,206 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): LIABILITIES: Current Liabilities: Accounts payable $ 446,654 $ 503,752 Accrued salaries payable 113,225 136,635 Capital lease S/T 47,530 45,615 Accrued liabilities 196,179 222,803 Other liabilities - 23,183 ---------------------------------- Total Current Liabilities 803,588 931,988 ---------------------------------- Long Term Liabilities: Capital lease L/T 56,097 80,351 ---------------------------------- Total Long Term Liabilities 56,097 80,351 ---------------------------------- TOTAL LIABILITIES 859,685 1,012,339 ---------------------------------- Convertible Redeemable preferred stock (See Note 5) 18,575,969 14,506,849 ---------------------------------- Commitments and Contingencies (See Note 7) STOCKHOLDERS' EQUITY (DEFICIT): Common Stock - $.001 par value: 100,000,000 shares authorized, 26,924,968 and 25,412,662 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively. 26,924 25,412 Additional paid-in-capital 55,052,560 51,179,469 Deficit accumulated during development stage (52,609,579) (41,635,863) Accumulated comprehensive income (loss) (2,303) - ---------------------------------- TOTAL STOCKHOLDERS' EQUITY 2,467,602 9,569,018 ---------------------------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 21,903,256 $ 25,088,206 ================================== SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Three Months Ended Ended June 30, 2007 June 30, 2006 ------------------------------------- GROSS REVENUE: $ - $ 14,327 Disposal of rejects (14,247) Plant operation cost (664,809) Depreciation (595,346) ------------------------------------- Total cost of goods sold - (1,274,402) ------------------------------------- Gross Margin - (1,260,075) G&A Expense Research and development (804,018) (60,000) General and administrative (1,425,176) (1,037,451) ------------------------------------- Loss from operations (2,229,194) (2,357,526) ------------------------------------- Interest income (expense) 105,717 (290,190) Financing transaction expense - (5,795,176) Change in fair value of warrant liability - (135,642) ------------------------------------- Net loss before provision for income tax (2,123,477) (8,578,564) ------------------------------------- Income taxes - - ------------------------------------- Net loss (2,123,477) (8,578,564) ------------------------------------- Preferred stock dividend and amortization of beneficial conversion feature, warrant discount and offering costs (3,347,388) (1,507,775) ------------------------------------- Net loss attributable to common shareholders $ (5,470,865) $ (10,086,339) ===================================== BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (0.20) $ (0.41) ===================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN CALCULATION 26,723,264 24,893,023 ===================================== SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 2 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Six Months June 18, 2002 Ended Ended Inception to June 30, 2007 June 30, 2006 June 30, 2007* ---------------------------------------------------------- GROSS REVENUE: $ - $ 14,327 $ 93,784 Disposal of rejects (14,247) (65,526) Plant operation cost (664,809) (2,720,922) Depreciation (595,346) (1,843,615) --------------------------------------------------------- Total cost of goods sold - (1,274,402) (4,630,063) --------------------------------------------------------- Gross Margin - (1,260,075) (4,536,279) G&A Expense Research and development (1,749,875) (120,000) (2,791,155) General and administrative (2,408,667) (2,006,117) (13,166,066) Asset impairment (9,737,344) --------------------------------------------------------- Loss from operations (4,158,542) (3,386,192) (30,230,844) --------------------------------------------------------- Interest income (expense) 235,854 (274,616) 265,856 Financing transaction expense - (7,442,426) (7,442,426) Change in fair value of warrant liability - (255,796) - Other income (expense) - - 1,789,133 --------------------------------------------------------- Net loss before provision for income tax (3,922,688) (11,359,030) (35,618,281) --------------------------------------------------------- Income taxes - - - --------------------------------------------------------- Net loss $ (3,922,688) $ (11,359,030) $ (35,618,281) --------------------------------------------------------- Preferred stock dividend and amortization of beneficial conversion feature, warrant discount and offering costs (7,051,028) (2,048,261) (16,923,772) --------------------------------------------------------- Net loss attributable to common shareholders $ (10,973,716) $ (13,407,291) $ (52,542,053) ========================================================= BASIC AND DILUTED NET LOSS PER SHARE $ (0.42) $ (0.54) $ (2.82) ========================================================= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN CALCULATION 26,273,342 24,809,174 18,638,083 ========================================================= *APPROXIMATELY $67,526 IN CONSULTING AND TRAVEL EXPENSES INCURRED PRIOR TO INCEPTION OF THE BUSINESS ON JUNE 18, 2002 ARE NOT INCLUDED. SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 3 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) Additional Accumulated Paid in Common Stock Accumulated Comprehensive Shares Dollars Capital Subscription Deficit * Income (Loss) Total ------------------------------------------------------------------------------------- $ $ $ $ $ $ Preformation expenses (67,526) (67,526) Formation - June 18, 2002 9,100,000 100 73,036 73,136 Net Loss - 2002 (359,363) (359,363) ------------------------------------------------------------------------------------ December 31, 2002 9,100,000 100 73,036 (426,889) (353,753) ==================================================================================== Additional paid in capital 100 100 Common stock subscribed 125,000 125,000 Net Loss - 2003 (804,605) (804,605) ------------------------------------------------------------------------------------ December 31, 2003 9,100,000 100 73,136 125,000 (1,231,494) (1,033,258) ==================================================================================== Merger with Waste Solutions, Inc. 7,100,000 63 2,137 2,200 Common stock subscriptions 125,000 1 124,999 (125,000) - Common stock and warrants net of offering cost prior to VPTI merger 3,045,206 31 3,952,321 3,952,352 Shares cancelled (500,000) (5) 5 - Warrants issued 281,171 281,171 Merger with VPTI 1,200,817 21,062 (21,062) - Conversion of promissory notes 1,193,500 12 1,193,488 1,193,500 Accrued Interest on notes forgiven 135,327 135,327 Common stock and warrants net of offering cost 1,460,667 1,461 2,865,462 2,866,923 Amortization of stock options and warrants to employees and consultants 217,827 217,827 Net loss - 2004 (2,496,188) (2,496,188) ------------------------------------------------------------------------------------ December 31, 2004 22,725,190 22,725 8,824,811 (3,727,682) 5,119,854 ==================================================================================== Common stock and warrants net of offering cost 1,961,040 1,961 3,072,116 3,074,077 Amortization of stock options and warrants to employees and consultants 654,220 654,220 Dividend redeemable (Preferred Stock) 106,645 (671,769) (565,124) Warrants issued 861,853 861,853 Bridge financing warrants 1,114,105 1,114,105 Beneficial conversion feature on redeemable preferred stock 1,328,066 1,328,066 Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (562,704) (562,704) Net loss - December 2005 (3,078,917) (3,078,917) ------------------------------------------------------------------------------------ December 31, 2005 24,686,230 24,686 15,961,816 (8,041,072) 7,945,430 ==================================================================================== 4 |
Additional Accumulated Paid in Common Stock Accumulated Comprehensive Shares Dollars Capital Subscription Deficit * Income (Loss) Total ------------------------------------------------------------------------------------ Common stock and warrants net of offering cost 262,85 263 9,561 9,824 Amortization of stock options and warrants to employees and consultants 989,252 989,252 Dividend (Preferred Stock) 386,954 (2,920,893) (2,533,939) Warrants issued preferred stock 1,647,250 1,647,250 Bridge financing warrants 787,500 787,500 Beneficial conversion feature - Series B 18,207,102 18,207,102 Conversion of Series B preferred stock 296,581 296 840,716 841,012 Series B Investor & placement warrants 7,922,663 7,922,663 Series A Investor warrants 3,065,931 3,065,931 Elimination of warrant liabilities 674,420 674,420 UAH stock for purchase of patent 167,000 167 697,833 698,000 Registration filing fees (11,529) (11,529) Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (5,717,378) (5,717,378) Net loss - 2006 (24,956,520) (24,956,520) ------------------------------------------------------------------------------------ December 31, 2006 25,412,662 25,412 51,179,469 (41,635,863) 9,569,018 ==================================================================================== Common stock for services 103,340 103 259,397 259,500 Warrant exercises 199,320 199 1,795 1,994 Amortization of stock options and warrants to employees and consultants 631,198 631,198 Dividend (Preferred Stock) (1,608,523) (1,608,523) Conversion of Series B preferred stock 1,209,646 1,210 2,980,701 2,981,911 Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (5,442,505) (5,442,505) Net loss - March 2007 (Unaudited) (3,922,688) (3,922,688) Unrealized gain (loss) on short term Investments held for sale (2,303) (2,303) ------------------------------------------------------------------------------------ June 30, 2007 (Unaudited) 26,924,968 $26,924 $55,052,560 $ 0 $(52,609,579) $(2,303) $2,467,602 ==================================================================================== * During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and expended prior to Inception. SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 5 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW Six Months Six Months June 18, 2002 Ended Ended (Inception) to June 30, 2007 June 30, 2006 June 30, 2007 ----------------------------------------------------------- Cash Flow from operating activities: $ $ $ Net loss (3,922,688) (11,359,030) (35,618,281) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of assets 9,737,344 Depreciation and amortization 686,314 633,871 2,654,514 Interest forgiveness 135,327 Warrant and common stock Issued for consulting 84,566 Amortization of warrants & options to employees 631,198 520,867 2,492,496 Fair value adjustment warrant liability 255,796 (1,789,134) Financial transaction expense 7,442,426 7,442,426 Amortization of offering cost 252,277 252,277 Changes in operating assets and liabilities: Accounts receivable 12,517 - Prepaid expenses/Emp. receivable (8,775) (23,837) (183,364) Accounts payable (57,098) 148,905 446,654 Accrued salaries (23,410) (12,302) 113,225 Accrued other liabilities 209,694 (53,133) 455,679 ----------------------------------------------------------- Net Cash used in operating activities (2,472,248) (2,194,160) (13,776,272) ----------------------------------------------------------- Cash flows from investing activities: Construction in progress (4,043,205) Leasehold improvements (6,222) (2,970,549) Deposits on equipment (5,231,636) Purchase machinery & equipment (147,025) (3,109,258) (8,176,512) Patient license (20,000) (440,890) Deposits 57,595 (36,519) Purchase of Short-term investments (9,813,486) (9,813,486) ----------------------------------------------------------- Net Cash used in investing activities (9,966,733) (3,071,663) (30,712,797) ----------------------------------------------------------- Cash flows from financing activities: Redeemable preferred stock 22,649,764 32,070,511 Senior secured debt 2,000,000 6,265,000 Repayment of senior secured debt (2,785,000) Senior secured debt offering cost (122,424) (420,523) Payment of senior secured debt (2,785,000) Warrants, common stock and Additional paid in capital 1,996 9,627 11,252,936 ----------------------------------------------------------- Net Cash provided by financing activities 1,996 21,751,967 46,382,924 ----------------------------------------------------------- Net increase in cash and cash equivalents (12,436,985) 16,486,142 1,893,855 Beginning cash and cash equivalents 14,330,840 2,864,377 ----------------------------------------------------------- Ending cash and cash equivalents 1,893,855 19,350,519 1,893,855 =========================================================== Non-cash investing and financing activities: Interest (Paid) Received $ 236,207 $ (153,964) $ 266,209 Income Taxes Paid -- -- -- *During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and expended prior to Inception. *The company issued warrants to purchase 315,354 shares of common stock to the placement agent for services rendered in connection with the fund raising effort. *The Company issued warrants to purchase 50,000 shares of common stock for consulting services in 2004 and 100,000 shares of common stock upon the exercise of a warrant in exchange for services rendered. *The Company issued 1,193,500 shares of common stock upon conversion of the Convertible Promissory notes payable and accrued interest of $135,327. *The Company issued warrants to purchase 250,000 shares of its common stock for a modification to the technology license agreement. *During the six months ended June 30, 2006, upon completion of the plant in Anaheim, CA. all construction in progress was transferred to leasehold improvements and all deposits on equipment was transferred to machinery and equipment. *During the six months ended June 30, 2007, the Company issued 103,340 shares in exchange for services rendered in 2006. *During the six months ended June 30, 2007, the Company issued 1,209,646 shares of common stock in exchange for conversion of $1,609,731 of Preferred Series B stock. *Short-term investments have been adjusted for unrealized losses of $2,303. SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6 |
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WORLD
WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007 AND 2006
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America.
The Company is a new enterprise in the development stage as defined by
Statement No. 7 of the Financial Accounting Standards Board, since it has not
derived substantial revenues from its activities to date.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements
include all adjustments (consisting of only normal recurring accruals), which
are, in the opinion of management, necessary for a fair presentation. Operating
results for the six months ended June 30, 2007 are not necessarily indicative
of the results to be expected for a full year. The consolidated financial
statements should be read in conjunction with the Company's amended
consolidated financial statements for the year ended December 31, 2006.
USE OF ESTIMATES
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts for the year ended December 31,
2006 have been reclassified to conform with the presentation of the June 30,
2007 amounts. These reclassifications had no effect on reported net loss.
REVENUE RECOGNITION
Revenue for receiving Municipal Solid Waste (MSW)
is recognized when the MSW is delivered. Revenue for products sold, such as
unbleached fiber, metals and aluminum, are recognized when the product is
delivered to the customer.
All shipping and handling costs are accounted for
as cost of goods sold.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to
operations when incurred.
INCOME TAXES
The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." In accordance with SFAS No.
109, the Company records a valuation allowance against net deferred tax assets
if, based upon the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income and when temporary differences become deductible. The Company considers,
among other available information, uncertainties surrounding the recoverability
of deferred tax assets, scheduled reversals of deferred tax liabilities,
projected future taxable income, and other matters in making this assessment.
The Company adopted FIN 48 on January 1, 2007.
There was no material impact on the Company's financial statements as a result
of the adoption.
7
CASH AND
CASH EQUIVALENTS
The Company considers all highly liquid
investments with a maturity of three months or less when purchased, which are
not securing any corporate obligations, to be cash equivalents.
SHORT TERM INVESTMENTS
The Company determines the appropriate
classification of its investments at the time of acquisition and reevaluates
such determination at each balance sheet date. All investments held at June 30,
2007 are short-term available for sale securities. They are carried at quoted
fair value, with unrealized gains and losses reported in shareholders' equity
as a component of accumulated comprehensive income. The net unrealized loss of
$2,303 recorded in shareholders' equity during the quarter ended June 30, 2007
was comprised of unrealized gains of $67 and unrealized losses of $2,370.
Maturity dates of investments classified as available for sale securities range
from February of 2008 to December of 2008.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in a financial
institution. Cash balances at the institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. The Company has not experienced
any losses in connection with such accounts.
FIXED ASSETS
Machinery and Equipment is stated at cost.
Depreciation is computed on the straight-line method over the estimated useful
asset lives or for leasehold improvements or equipment installed in the Anaheim plant, over the
remaining life of the lease, whichever is shorter. Due to the fact that at the
time the assets were placed into service the lease had 8 years and two months
remaining, all assets and leasehold improvements at the Anaheim facility are being depreciated over a
maximum of 8 years and two months on a straight line basis. Maintenance and
repairs are expensed as incurred.
The Company completed the construction of its
initial plant in Anaheim, California early in the second quarter of
2006. The Company placed into service and began depreciating the assets related
to this facility in the second quarter of 2006.
The assets at the Anaheim plant are comprised of
two basic technologies; the front half of the plant consists of assets related
to the Company's core patented technology related to "steam
classification" and material separation and the back half of the plant
consist of assets related to screening and cleaning of the cellulose biomass
material to prepare it for sale to paper mills. During the plant start up
phase, we confronted several issues, including an unexpected high level of biological
oxygen demand from organic waste in the wastewater from the pulp screening and
cleaning process. The Company decided not to make the capital improvements
necessary to the Anaheim
plant's wetlap process, or "back half" which the Company considers
necessary in order to recover the carrying amount of the wetlap plant assets
through projected future undiscounted cash flow from its operation.
Consequently, the Company recorded a charge of $9,737,344 in 2006 which
represented the net carrying value of the wetlap process (or "back
half") equipment. The charge was equal to the carry cost of the assets of
the wetlap process, net of accumulated depreciation. The Company did not record
an impairment charge for the steam classification equipment (or "front half")
of the plant because the Company intends to use that equipment in research and
development activities as part of its development of alternative back end
processes such as, but not limited to, gasification and acid hydrolysis and
because it also believes that by making certain improvements to the plant, such
as adding equipment for energy co-generation, and changing the use of the
cellulose biomass mass from the wetlap process to another application, such as
its use as a form of fuel, the future undiscounted cash flow from its
operations might cover the capitalized cost.
During the remainder of 2007, the Company plans to
continue to operate primarily in the research and development mode.
Consequently, depreciation of the "steam classification" equipment
may be charged to research and development under FASB 2, "Accounting for
Research and Development Costs."
The Company capitalizes leases in accordance with
FASB 13, "Accounting for Leases."
8
INTANGIBLES
Intangible assets are recorded at
cost.
The Company's policy regarding intangible assets
is to review such intangible assets for impairment whenever events or changes
in circumstances indicate that their carrying amount may not be recoverable. If
the review indicates that intangible assets are not recoverable (i.e. the
carrying amounts are more than the future projected undiscounted cash flows),
their carrying amounts would be reduced to fair value.
In April 2007, the Company filed a lawsuit against
BPI alleging, among other things, breach of contract and negligence with
respect to the construction of the vessels. The Company does not believe that
this lawsuit affects the carrying value of the patent or sub-license.
Therefore, the Company had no material impairment to its intangible assets
during the six months ended June 30, 2007 or the year ended December 31, 2006.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock which may be
redeemable for cash at the determination of the holder is classified as
mezzanine equity, in accordance with FAS 150 "Accounting for Certain
Financial Instruments with Characteristics of Both Debt and Equity," EITF
Topic D 98 and ASR 268, and is shown net of discounts for offering costs,
warrant values and beneficial conversion features.
STOCK-BASED COMPENSATION
As of June 30, 2007, the Company had two
share-based compensation plans, which are described below. The compensation
cost that has been charged against income for the plans was $446,090 and
$231,703 for the three months ended June 30, 2007 and 2006 , respectively, and
$631,198, $463,406 and $2,063,186 for the six months ended June 30, 2007 and
2006 and for the period from inception to June 30, 2007, respectively. Because
the Company is in a net loss position, no income tax benefit has been recognized
in the income statement for share-based compensation arrangements. As of June
30, 2007 and 2006, no share-based compensation cost had been capitalized as
part of inventory or fixed assets.
The Company's 2004 Incentive Stock Option Plan
(the 2004 Plan), which is shareholder-approved, provides for the issuance by
the Company of a total of up to 2.0 million shares of common stock and options
to acquire common stock to the Company's employees, directors and consultants.
The Company granted options to acquire 475,000 shares during the six months
ended June 30, 2007 to employees, members of the board of directors and
consultants. At June 30, 2007, there were 1,987,000 options outstanding under
the Plan.
In May of 2007 the board of directors approved the
Company's 2007 Incentive Stock Plan (the 2007 Plan), which is not
shareholder-approved. The 2007 plan provides for the issuance by the Company of
a total of up to 6.0 million shares of common stock and options to acquire
common stock to the Company's employees, directors and consultants. The Company
granted options to acquire 2,856,000 shares during the quarter ended June 30,
2007 to employees, members of the board of directors and consultants. At June
30, 2007 they all were outstanding.
The Company believes that such awards better align
the interests of its employees with those of its shareholders. Option awards
are generally granted with an exercise price equal to the market price of the
Company's stock at the date of grant; those option awards generally vest based
on 2 to 4 years of continuous service and have 10-year contractual terms.
Certain option awards provide for accelerated vesting if there is a change in
control (as defined in each Plan).
9
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
table below. Expected volatilities are based on the historical volatility of
the Company's common stock from August 24, 2004 through the date of the
respective grant. The Company uses historical data to estimate option exercise
and employee terminations within the valuation model. The expected term of
options granted was estimated using the simple method which the Company
believes provides a reasonable estimation of the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual life of the option is based on the LIBOR rate at the time of
grant.
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2007 DECEMBER 31, 2006 ------------------- ------------------- Expected volatility 75 % 70 % Expected dividends 0 % 0 % Expected term (in years) 5.5 - 9.9 4 Risk-free rate 4.98% - 5.1% 4.64 % |
EARNINGS PER SHARE
The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 provides for the calculation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution of securities that could share in the earnings
of an entity, such as stock options, warrants or convertible securities. Due to
their anti-dilutive effect, common stock equivalents of 28,526,234, consisting
of employee options of 4,843,000, investor warrants of 6,803,827, Preferred
Series A of 5,777,119 and Preferred Series B of 11,102,288, were not included
in the calculation of diluted earnings per share at June 30, 2007 and common
stock equivalents of 25,364.807 were not included in the calculation of diluted
earnings per share at June 30, 2006.
RECENT ACCOUNTING PRONOUNEMENTS
The FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements". This
new standard provides guidance for using fair value to measure assets and
liabilities and information about the extent to which companies measure assets
and liabilities at fair value, the information used to measure fair value, and
the effect of fair value measurements on earnings. This framework is intended
to provide increased consistency in how fair value determinations are made
under various existing accounting standards which permit, or in some cases
require, estimates of fair market value. SFAS 157 also expands financial
statement disclosure requirements about a company's use of fair value
measurements, including the effect of such measures on earnings. The provisions
of SFAS No. 157 are effective for fiscal years beginning after November 15,
2007. While the Company is currently evaluating the provisions of SFAS 157, the
adoption is not expected to have a material impact on its consolidated
financial statements.
The FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities-Including an Amendment of
FASB Statement No. 115(SFAS No. 159). This standard permits an entity to choose
to measure many financial instruments and certain other items at fair value.
The accounting provisions of SFAS No. 159 are effective for financial
statements issued for fiscal years beginning after November 15, 2007. While the
Company is currently evaluating the provisions of SFAS 159, the adoption is not
expected to have a material impact on its consolidated financial statements.
NOTE 2. GOING CONCERN
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The Company had a net loss for the six months ended June 30, 2007 of $3,922,688
and an accumulated deficit of $52,609,579 at June 30, 2007. The Company expects
to incur substantial additional losses and costs and capital expenditures
before it can operate profitably. The ability to operate profitably is subject
to resolving significant operating issues or developing other products. The
Company's ability to accomplish this is dependent on successful research and
development, engineering and obtaining of additional funding. If the Company is
unsuccessful, it may be unable to continue as a going concern for a reasonable
period of time. These issues raise substantial doubt about the Company's
ability to continue as a going concern.
10
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