SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended
September 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the
transition period from ____________ to ____________.
Commission
file number 1-11476
WORLD WASTE
TECHOLOGIES, INC.
(Exact Name of Registrant as Specified in
its Charter)
CALIFORNIA 95-3977501 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) |
13500 EVENING CREEK DRIVE, SUITE
440,
SAN DIEGO, CALIFORNIA 92128
(Address of Principal Executive Offices)
(858) 391-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |_| Accelerated Filer
|_| Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes |_| No |X|
State the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date:
27,182,606 shares issued and outstanding as of September 30, 2007.
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WORLD WASTE TECHNOLOGIES, INC. FORM 10-Q TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1 Condensed Financial Statements: Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Operations 2 Condensed Consolidated Statements of Stockholders' Equity (Deficit) 4 Condensed Consolidated Statements of Cash Flow 6 Condensed Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of 15 Operations Item 3 Quantitative and Qualitative Disclosures About Market Risks 24 Item 4 Controls and Procedures 24 PART II OTHER INFORMATION 25 Item 1A Risk Factors 25 Item 5 Other information 25 Item 6 Exhibits 27 SIGNATURES 28 |
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2007 2006 ---------------------------------- ASSETS: (UNAUDITED) Current Assets: Cash and cash equivalents $ 1,574,760 $ 14,330,840 Short-term investments 8,975,530 - Accounts receivable - 12,517 Prepaid expenses 312,831 174,589 ---------------------------------- Total Current Assets 10,863,121 14,517,946 ---------------------------------- Fixed Assets: Machinery, equipment net of accumulated depreciation of $20,962 on 9/30/07 and $673,201 on 12/31/06. 22,057 6,460,326 Construction in Progress - 114,238 Leasehold Improvements net of accumulated depreciation of $271,164 on 12/31/06. - 2,693,163 ---------------------------------- Total Fixed Assets 22,057 9,267,727 Other Assets: Deposit L/T 36,519 36,519 Patent license, net of accumulated amortization of $174,340 on 9/30/07 and $88,591 on 12/31/06 1,180,265 1,266,014 ---------------------------------- TOTAL ASSETS $ 12,101,962 $ 25,088,206 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): LIABILITIES: Current Liabilities: Accounts payable $ 246,884 $ 503,752 Accrued salaries payable 84,422 136,635 Capital lease S/T 48,517 45,615 Accrued liabilities 172,538 222,803 Other liabilities - 23,183 ---------------------------------- Total Current Liabilities 552,361 931,988 ---------------------------------- Long Term Liabilities: Capital lease L/T 43,592 80,351 ---------------------------------- Total Long Term Liabilities 43,592 80,351 ---------------------------------- TOTAL LIABILITIES 595,953 1,012,339 ---------------------------------- Convertible Redeemable preferred stock (See Note 6) 20,797,921 14,506,849 ---------------------------------- Commitments and Contingencies (See Note 8) STOCKHOLDERS' EQUITY (DEFICIT): Common Stock - $.001 par value: 100,000,000 shares authorized, 27,182,606 and 25,412,662 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively. 27,182 25,412 Additional paid-in-capital 56,277,840 51,179,469 Deficit accumulated during development stage (65,606,352) (41,635,863) Accumulated comprehensive income (loss) 9,418 - ---------------------------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (9,291,912) 9,569,018 ---------------------------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) $ 12,101,962 $ 25,088,206 ================================== SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Three Months Ended Ended September 30, 2007 September 30, 2006 ------------------------------------------- GROSS REVENUE: $ - $ 44,288 Disposal of rejects (31,292) Plant operation cost (1,075,427) Depreciation (620,881) ------------------------------------------- Total cost of goods sold - (1,727,600) ------------------------------------------- Gross Margin - (1,683,312) G&A Expense Research and development (418,707) (60,000) General and administrative (1,395,486) (944,584) Impairment of assets (Note 1) (8,454,106) ------------------------------------------- Loss from operations (10,268,299) (2,687,896) ------------------------------------------- Interest income 188,726 218,303 Change in fair value of warrant liability - 831,297 ------------------------------------------- Net loss before provision for income tax (10,079,573) (1,638,296) ------------------------------------------- Income taxes - - ------------------------------------------- Net loss (10,079,573) (1,638,296) ------------------------------------------- Preferred stock dividend and amortization of beneficial conversion feature, warrant discount and offering costs (2,917,201) (3,230,435) ------------------------------------------- Net loss attributable to common shareholders $ (12,996,774) $ (4,868,731) ============================================ BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (0.48) $ (0.19) ============================================ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN CALCULATION 27,115,117 25,283,040 ============================================ SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Nine Months June 18, 2002 Ended Ended Inception to September 30, 2007 September 30, 2006 September 30, 2007* ----------------------------------------------------------------- GROSS REVENUE: $ - $ 58,615 $ 93,784 Disposal of rejects (45,539) (65,526) Plant operation cost (1,740,237) (2,720,922) Depreciation (1,216,227) (1,843,615) ----------------------------------------------------------------- Total cost of goods sold - (3,002,003) (4,630,063) ----------------------------------------------------------------- Gross Margin - (2,943,388) (4,536,279) G&A Expense Research and development (2,168,582) (180,000) (3,209,862) General and administrative (3,804,153) (2,950,701) (14,561,552) Impairment of assets (Note 1) (8,454,106) (18,191,450) ----------------------------------------------------------------- Loss from operations (14,426,841) (6,074,089) (40,499,143) ----------------------------------------------------------------- Interest income (expense) 424,580 (56,312) 454,582 Financing transaction expense - (7,442,426) (7,442,426) Change in fair value of warrant liability - 575,501 - Other income (expense) - - 1,789,133 ----------------------------------------------------------------- Net loss before provision for income tax (14,002,261) (12,997,326) (45,697,854) ----------------------------------------------------------------- Income taxes - - - ----------------------------------------------------------------- Net loss $ (14,002,261) $ (12,997,326) $ (45,697,854) ----------------------------------------------------------------- Preferred stock dividend and amortization of beneficial conversion feature, warrant discount and offering costs (9,968,229) (5,278,696) (19,840,973) ----------------------------------------------------------------- Net loss attributable to common shareholders $ (23,970,490) $ (18,276,022) $ (65,538,827) ================================================================= BASIC AND DILUTED NET LOSS PER SHARE $ (0.90) $ (0.73) $ (3.44) ================================================================= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING USED IN CALCULATION 26,561,235 24,946,629 19,042,794 ================================================================= *APPROXIMATELY $67,526 IN CONSULTING AND TRAVEL EXPENSES INCURRED PRIOR TO INCEPTION OF THE BUSINESS ON JUNE 18, 2002 ARE NOT INCLUDED. SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) Additional Accumulated Paid in Common Stock Accumulated Comprehensive Shares Dollars Capital Subscription Deficit * Income (Loss) Total ------------------------------------------------------------------------------------- $ $ $ $ $ $ Preformation expenses (67,526) (67,526) Formation - June 18, 2002 9,100,000 100 73,036 73,136 Net Loss - 2002 (359,363) (359,363) ------------------------------------------------------------------------------------ December 31, 2002 9,100,000 100 73,036 (426,889) (353,753) ==================================================================================== Additional paid in capital 100 100 Common stock subscribed 125,000 125,000 Net Loss - 2003 (804,605) (804,605) ------------------------------------------------------------------------------------ December 31, 2003 9,100,000 100 73,136 125,000 (1,231,494) (1,033,258) ==================================================================================== Merger with Waste Solutions, Inc. 7,100,000 63 2,137 2,200 Common stock subscriptions 125,000 1 124,999 (125,000) - Common stock and warrants net of offering cost prior to VPTI merger 3,045,206 31 3,952,321 3,952,352 Shares cancelled (500,000) (5) 5 - Warrants issued 281,171 281,171 Merger with VPTI 1,200,817 21,062 (21,062) - Conversion of promissory notes 1,193,500 12 1,193,488 1,193,500 Accrued Interest on notes forgiven 135,327 135,327 Common stock and warrants net of offering cost 1,460,667 1,461 2,865,462 2,866,923 Amortization of stock options and warrants to employees and consultants 217,827 217,827 Net loss - 2004 (2,496,188) (2,496,188) ------------------------------------------------------------------------------------ December 31, 2004 22,725,190 22,725 8,824,811 (3,727,682) 5,119,854 ==================================================================================== Common stock and warrants net of offering cost 1,961,040 1,961 3,072,116 3,074,077 Amortization of stock options and warrants to employees and consultants 654,220 654,220 Dividend redeemable (Preferred Stock) 106,645 (671,769) (565,124) Warrants issued 861,853 861,853 Bridge financing warrants 1,114,105 1,114,105 Beneficial conversion feature on redeemable preferred stock 1,328,066 1,328,066 Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (562,704) (562,704) Net loss - December 2005 (3,078,917) (3,078,917) ------------------------------------------------------------------------------------ December 31, 2005 24,686,230 24,686 15,961,816 (8,041,072) 7,945,430 ==================================================================================== 4 |
Additional Accumulated Paid in Common Stock Accumulated Comprehensive Shares Dollars Capital Subscription Deficit * Income (Loss) Total ------------------------------------------------------------------------------------ Common stock and warrants net of offering cost 262,851 263 9,561 9,824 Amortization of stock options and warrants to employees and consultants 989,252 989,252 Dividend (Preferred Stock) 386,954 (2,920,893) (2,533,939) Warrants issued preferred stock 1,647,250 1,647,250 Bridge financing warrants 787,500 787,500 Beneficial conversion feature - Series B 18,207,102 18,207,102 Conversion of Series B preferred stock 296,581 296 840,716 841,012 Series B Investor & placement warrants 7,922,663 7,922,663 Series A Investor warrants 3,065,931 3,065,931 Elimination of warrant liabilities 674,420 674,420 UAH stock for purchase of patent 167,000 167 697,833 698,000 Registration filing fees (11,529) (11,529) Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (5,717,378) (5,717,378) Net loss - 2006 (24,956,520) (24,956,520) ------------------------------------------------------------------------------------ December 31, 2006 25,412,662 25,412 51,179,469 (41,635,863) 9,569,018 ==================================================================================== Common stock for services 103,340 103 259,397 259,500 Warrant exercises 199,320 199 1,795 1,994 Amortization of stock options and warrants to employees and consultants 1,161,490 1,161,490 Dividend (Preferred Stock) (2,391,885) (2,391,885) Conversion of Series B preferred stock 1,467,284 1,468 3,675,689 3,677,157 Amortization of beneficial conversion feature, warrant discount and offering costs on redeemable preferred stock (7,576,344) (7,576,344) Net loss - September 2007 (Unaudited) (14,002,261) (14,002,261) Unrealized gain (loss) on short term Investments held for sale 9,418 9,418 ------------------------------------------------------------------------------------ September 30, 2007 (Unaudited) 27,182,606 $27,182 $56,277,840 $ 0 $(65,606,353) $9,418 $(9,291,912) ==================================================================================== * During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and expended prior to Inception. SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 |
WORLD WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW Nine Months Nine Months June 18, 2002 Ended Ended (Inception) to September 30, 2007 September 30, 2006 September 30, 2007 -------------------------------------------------------------- Cash Flow from operating activities: $ $ $ Net loss (14,002,261) (12,997,326) (45,697,854) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of assets 8,454,106 18,191,450 Depreciation and amortization 1,048,595 1,276,078 3,016,795 Interest forgiveness 135,327 Warrant and common stock Issued for consulting 84,566 Amortization of warrants & options to employees 1,161,490 752,570 3,022,788 Fair value adjustment warrant liability (575,501) (1,789,134) Financial transaction expense 7,485,547 7,442,426 Amortization of offering cost 252,277 252,277 Changes in operating assets and liabilities: Accounts receivable 12,517 (11,279) - Prepaid expenses/Emp. receivable (138,242) 57,056 (312,831) Accounts payable (256,868) 261,944 246,884 Accrued salaries (52,213) (114,044) 84,422 Accrued other liabilities 186,053 (83,950) 432,038 -------------------------------------------------------------- Net Cash used in operating activities (3,586,823) (3,696,638) (14,890,846) -------------------------------------------------------------- Cash flows from investing activities: Construction in progress (4,043,205) Leasehold improvements (6,221) (2,970,549) Deposits on equipment (5,231,636) Purchase machinery & equipment (198,917) (4,516,937) (8,228,404) Patient license (20,000) (440,890) Deposits 68,320 (36,519) Purchase of Short-term investments (8,966,112) (8,966,111) -------------------------------------------------------------- Net Cash used in investing activities (9,171,250) (4,468,617) (29,917,314) -------------------------------------------------------------- Cash flows from financing activities: Capital Lease 153,874 Redeemable preferred stock 22,526,135 31,375,262 Senior secured debt 2,000,000 6,265,000 Repayment of senior secured debt (2,785,000) Senior secured debt offering cost (122,424) (420,523) Payment of senior secured debt (2,785,000) Warrants, common stock and Additional paid in capital 1,993 78,969 11,948,181 -------------------------------------------------------------- Net Cash provided by financing activities 1,993 21,851,554 46,382,920 -------------------------------------------------------------- Net increase in cash and cash equivalents (12,756,080) 13,686,299 1,574,760 Beginning cash and cash equivalents 14,330,840 2,864,377 -------------------------------------------------------------- Ending cash and cash equivalents 1,574,760 16,550,676 1,574,760 ============================================================== Non-cash investing and financing activities: Interest (Paid) Received $ 424,580 $ 169,034 $ 454,935 Income Taxes Paid -- -- -- *During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and expended prior to Inception. *The Company issued warrants to purchase 315,354 shares of common stock to the placement agent for services rendered in connection with the fund raising effort. *The Company issued warrants to purchase 50,000 shares of common stock for consulting services in 2004 and 100,000 shares of common stock upon the exercise of a warrant in exchange for services rendered. *The Company issued 1,193,500 shares of common stock upon conversion of the Convertible Promissory notes payable and accrued interest of $135,327. *The Company issued warrants to purchase 250,000 shares of its common stock for a modification to the technology license agreement. *During the nine months ended September 30, 2006, upon completion of the plant in Anaheim, CA. all construction in progress was transferred to leasehold improvements and all deposits on equipment was transferred to machinery and equipment. *During the nine months ended September 30, 2007, the Company issued 103,340 shares in exchange for services rendered in 2006. *During the nine months ended September 30, 2007, the Company issued 1,467,284 shares of common stock in exchange for conversion of $3,675,689 of Preferred Series B stock. *Short-term investments have been adjusted for unrealized gains of $9,418. SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 |
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WORLD
WASTE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States of America.
The Company is a new enterprise in the development stage as defined by
Statement No. 7 of the Financial Accounting Standards Board, since it has not
derived substantial revenues from its activities to date.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements
include all adjustments (consisting of only normal recurring accruals), which
are, in the opinion of management, necessary for a fair presentation. Operating
results for the nine months ended September 30, 2007 are not necessarily
indicative of the results to be expected for a full year. December 31, 2006
balances were derived from audited financial statements. The consolidated
financial statements should be read in conjunction with the Company's amended
consolidated financial statements for the year ended December 31, 2006.
USE OF ESTIMATES
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts for the three and nine month
periods ended September 30, 2006 and for the December 31, 2006 balance sheet
have been reclassified to conform with the presentation of the September 30,
2007 amounts. These reclassifications had no effect on reported net loss.
REVENUE RECOGNITION
Revenue for receiving Municipal Solid Waste (MSW)
is recognized when the MSW is delivered. Revenue for products sold, such as
unbleached fiber, metals and aluminum, are recognized when the product is
delivered to the customer.
All shipping and handling costs are accounted for
as cost of goods sold.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to
operations when incurred.
INCOME TAXES
The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." In accordance with SFAS No.
109, the Company records a valuation allowance against net deferred tax assets
if, based upon the available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income and when temporary differences become deductible. The Company considers,
among other available information, uncertainties surrounding the recoverability
of deferred tax assets, scheduled reversals of deferred tax liabilities,
projected future taxable income, and other matters in making this assessment.
The Company adopted FIN 48 on January 1, 2007.
There was no material impact on the Company's financial statements as a result
of this adoption.
7
CASH AND
CASH EQUIVALENTS
The Company considers all highly liquid
investments with a maturity of three months or less when purchased, which are
not securing any corporate obligations, to be cash equivalents.
SHORT TERM INVESTMENTS
The Company determines the appropriate
classification of its investments at the time of acquisition and reevaluates
such determination at each balance sheet date. All investments held at
September 30, 2007 are short-term available for sale securities. They are
carried at quoted fair value, with unrealized gains and losses reported in
shareholders' equity as a component of accumulated comprehensive income. The
net unrealized gain of $9,418 recorded in shareholders' equity during the
quarter ended September 30, 2007 was comprised of unrealized gains of $11,037
and unrealized losses of $1,619. Maturity dates of investments classified as
available for sale securities range from February of 2008 to December of 2008.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in a
financial institution. Cash balances at the institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. The Company has not experienced
any losses in connection with such accounts.
FIXED ASSETS
Machinery and Equipment is stated at cost.
Depreciation is computed on the straight-line method over the estimated useful
asset lives or for leasehold improvements or equipment installed in the Anaheim plant, over the
remaining life of the lease, whichever is shorter. Due to the fact that at the
time the assets were placed into service the lease had 8 years and two months
remaining, all assets and leasehold improvements at the Anaheim facility were being depreciated over
a maximum of 8 years and two months on a straight line basis. Maintenance and
repairs are expensed as incurred.
The Company completed the construction of its
initial plant in Anaheim, California early in the second quarter of
2006. The Company placed into service and began depreciating the assets related
to this facility in the second quarter of 2006.
The assets at the Anaheim plant are comprised of
two basic technologies; the front half of the plant consists of assets related
to the Company's core patented technology related to "steam
classification" and material separation and the back half of the plant
consist of assets related to screening and cleaning of the cellulose biomass
material to prepare it for sale to paper mills. During the plant start up
phase, we confronted several issues, including an unexpected high level of
biological oxygen demand from organic waste in the wastewater from the pulp
screening and cleaning process. The Company decided not to make the capital
improvements necessary to the Anaheim
plant's wetlap process, or "back half"
which the Company considers necessary in order to recover the carrying amount
of the wetlap plant assets through projected future
undiscounted cash flow from its operation. Consequently, the Company recorded a
charge of $9,737,344 in 2006 which represented the net carrying value of the wetlap process (or "back half") equipment. The
charge was equal to the carry cost of the assets of the wetlap
process, net of accumulated depreciation.
The Company did not record an impairment charge
for the steam classification equipment (or "front half") of the plant
at that time because the Company intended to use that equipment in research and
development activities as part of its development of alternative back end
processes such as, but not limited to, gasification and acid hydrolysis and
because it also believed that by making certain improvements to the plant, such
as adding equipment for energy co-generation, and changing the use of the
cellulose biomass mass from the wetlap process to
another application, such as its use as a form of fuel, the future undiscounted
cash flow from its operations might cover the capitalized cost.
During the third quarter of 2007, the Company determined
that the ongoing research and development work would more efficiently be
carried out at the location of Applied Power Concepts, the Company's research
and development partner. Consequently, in order to reduce costs and focus
management attention and cash resources on the Company's renewable energy
process, the Company initiated conversations with Taormina
Industries, Inc., the lessor of the Company's Anaheim
Facility regarding termination of such lease and the cancellation of the
associated recycling agreement with Taormina. On October 29, 2007, Taormina
terminated the lease and the recycling agreement, effective as of October 31,
2007. Consequently, the Company recorded a charge of $8,454,106 in the third
quarter of 2007 which represented the net carrying value of the assets at the Anaheim plant, net of
estimated fair value of the equipment and estimated costs of the equipment
removal and scrap. (See Note 4)
The Company capitalizes leases in accordance with
FASB 13, "Accounting for Leases."
8
INTANGIBLES
Intangible assets are recorded at
cost.
The Company's policy regarding intangible assets
is to review such intangible assets for impairment whenever events or changes
in circumstances indicate that their carrying amount may not be recoverable. If
the review indicates that intangible assets are not recoverable (i.e. the
carrying amounts are more than the future projected undiscounted cash flows),
their carrying amounts would be reduced to fair value.
In April 2007, the Company filed a lawsuit against
Bio-Products International, Inc., the entity from which we sub-license certain
technology alleging, among other things, breach of contract and negligence with
respect to the construction of the steam classification vessels that the
Company had intended to use in its operations. The Company does not believe
that this lawsuit affects the carrying value of the patent (which we currently
own) or the sub-license. In October 2007, the Company received a termination
notice of the lease of the Anaheim
facility and is in the process of removing and selling its equipment from that
location. At this time, the Company believes that the future cash flows from
the patent license fees and sublicense agreement from future operations will
exceed the carrying amount of the intangibles. Therefore, the Company had no
material impairment to its intangible assets during the nine months ended
September 30, 2007 or the year ended December 31, 2006.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock which may be
redeemable for cash at the determination of the holder is classified as
mezzanine equity, in accordance with FAS 150 "Accounting for Certain
Financial Instruments with Characteristics of Both Debt and Equity," EITF
Topic D 98 and ASR 268, and is shown net of discounts for offering costs,
warrant values and beneficial conversion features.
STOCK-BASED COMPENSATION
As of September 30, 2007, the Company had two
share-based compensation plans, which are described below. The compensation
cost that has been charged against income for the plans was $530,292 and
$231,703 for the three months ended September 30, 2007 and 2006
, respectively, and $1,161,490, $695,110 and $2,594,088 for the nine
months ended September 30, 2007 and 2006 and for the period from inception to
September 30, 2007, respectively. Because the Company is in a net loss
position, no income tax benefit has been recognized in the income statement for
share-based compensation arrangements. As of September 30, 2007 and 2006, no
share-based compensation cost had been capitalized as part of inventory or
fixed assets.
The Company's 2004 Incentive Stock Option Plan
(the 2004 Plan), which is shareholder-approved, provides for the issuance by
the Company of a total of up to 2.0 million shares of common stock and options
to acquire common stock to the Company's employees, directors and consultants.
The Company granted options to acquire 475,000 shares during the nine months
ended September 30, 2007 to employees, members of the board of directors and
consultants. At September 30, 2007, there were 1,987,000 options outstanding
under the 2004 Plan.
In May of 2007 the board of directors approved the
Company's 2007 Incentive Stock Plan (the 2007 Plan), which is not
shareholder-approved. The 2007 plan provides for the issuance by the Company of
a total of up to 6.0 million shares of common stock and options to acquire
common stock to the Company's employees, directors and consultants. The Company
granted options to acquire 2,856,000 shares during the nine months ended
September 30, 2007 to employees, members of the board of directors and
consultants. At September 30, 2007, there were 2,856,000 options outstanding
under the 2007 plan.
The Company believes that such awards better align
the interests of its Employees, directors and consultants with those of its
shareholders. Option awards are generally granted with an exercise price equal
to the market price of the Company's stock at the date of grant; those option
awards generally vest based on 2 to 4 years of continuous service and have
10-year contractual terms. Certain option awards provide for accelerated
vesting if there is a change in control (as defined in each Plan).
9
The fair
value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions
noted in the table below. Expected volatilities are based on the historical
volatility of the Company's common stock from August 24, 2004 through the date
of the respective grant. The Company uses historical data to estimate option
exercise and employee terminations within the valuation model. The expected
term of options granted was estimated using the simple method which the Company
believes provides a reasonable estimation of the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual life of the option is based on the LIBOR rate at the time of
grant.
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 2007 DECEMBER 31, 2006 -------------------- ------------------- Expected volatility 78.2 % 70 % Expected dividends 0 % 0 % Expected term (in years) 5.5 - 9.9 4 Risk-free rate 3.30 - 4.58% 4.64 % |
EARNINGS PER SHARE
The Company has adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 provides for the calculation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share
in the earnings of an entity, such as stock options, warrants or convertible
securities. Due to their anti-dilutive effect, common stock equivalents of
28,418,245, consisting of employee options of 4,843,000, investor warrants of
6,829,828, Preferred Series A of 5,892,662 and Preferred Series B of
10,852,755, were not included in the calculation of diluted earnings per share
at September 30, 2007 and common stock equivalents of 25,509,554 were not
included in the calculation of diluted earnings per share at September 30,
2006.
RECENT ACCOUNTING PRONOUNEMENTS
The FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements". This
new standard provides guidance for using fair value to measure assets and
liabilities and information about the extent to which companies
measure assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. This
framework is intended to provide increased consistency in how fair value
determinations are made under various existing accounting standards which
permit, or in some cases require, estimates of fair market value. SFAS 157 also
expands financial statement disclosure requirements about a company's use