10-Q 1 worldwaste_10q-063007.txt ================================================================================ 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. ================================================================================
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
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 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 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. 11 During the start-up phase of the initial plant in Anaheim, California, the Company became aware of design issues related to the steam classification vessels that the Company intends to use in its operations. The steam vessels were designed and fabricated on the Company's behalf by BPI pursuant to a contract entered into with BPI in July 2004 and the sub-license agreement discussed above. The agreement also provides the Company with the rights to certain technology used in its process. The Company has been dissatisfied with the remediation of these issues by BPI and has proceeded to resolve them itself. Consequently, in April, 2007, the Company filed a lawsuit against BPI in the Superior Court of the State of California alleging, among other things, breach of contract and negligence with respect to the construction of the vessels. The Company is seeking monetary damages, among other relief sought. NOTE 4. INCOME TAXES On July 13, 2006, FASB Interpretation (FIN) No. 48, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. (FAS) 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 effective January 1, 2007. As defined by Fin 48, unrecognized tax benefits related to expenses that are recognized for determining income for financial statement purposes but have not been included as expenses in the Company's tax provision, as the Company believes these expenses will be disallowed for tax purposes. As of the date of adoption, the Company had a total amount of unrecognized tax benefits of $8,626,344. Virtually all of this balance relates to Federal net operating losses the Company acquired in connection with its merger with Voice Powered Technology International, Inc. These losses are subject to significant limitations under Internal Revenue Code Section 382 that will impact the Company's ability to utilize the net operating losses before they expire. As we provided for a 100% reserve against our deferred tax asset, the adoption of FIN 48 did not have a material effect on the financial statements. We have always excluded these net operating losses from the total available net operating losses we disclosed in our tax footnote. As of January 1, 2007, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2,165. The recognition of this amount would be offset by a corresponding tax provision adjustment for an increase to the valuation allowance for deferred taxes related to net operating losses. We have historically classified interest and penalties on income tax liabilities as additional income tax expense and will continue to do so after the adoption of FIN 48. As of January 1, 2007, our statement of financial position did not include any accrued interest or penalties. As of January 1, 2007, it was reasonably possible that the total amount of our unrecognized tax benefits would decrease by approximately $500,000 to $600,000 within the following twelve months. This would result from the expiration of a Federal net operating loss carryforward from the 1994 tax year. This net operating loss carryforward is subject to the limitations mentioned above. 12 As of January 1, 2007, we were not under examination by any major tax jurisdiction. NOTE 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company has outstanding two classes of Preferred Stock, Series A and Series B. Holders of both series of preferred stock are entitled to receive cumulative dividends, payable quarterly in additional shares of preferred stock, at the rate of 8% per annum as and if declared by the Board of Directors. The holders of a majority of each class of preferred shares have the option to require the Company to redeem all outstanding shares on April 28, 2010. In the event the holders do not exercise this redemption right, all shares of Series A and Series B will automatically convert into shares of Common Stock on such date. The warrant values, offering costs and beneficial conversion features of both classes of preferred stock have been treated as discounts to the carrying value of the preferred stock, and are being accreted through their redemption date under an acceptable method in accordance with EITF Topic D-98. For the Series B Preferred Stock the Company deemed the straight-line method was a preferable method, giving rise to a more appropriate distribution of the dividend recognition over the accretion period. The amortization costs are treated consistent with the treatment of preferred stock dividends. THE SUMMARY FOR THE SERIES A AND B IS AS FOLLOWS:
SERIES A SERIES B TOTAL --------------- --------------- --------------- Gross proceeds $ 10,189,000 $ 28,488,800 $ 38,677,800 Cumulative in kind dividends 2,087,379 2,623,425 4,710,804 Converted to common stock -- (3,822,923) (3,822,923) --------------- --------------- --------------- Total outstanding 12,276,379 27,289,302 39,565,681 Unamortized beneficial conversion feature (838,412) (11,686,928) (12,525,340) Unamortized offering costs (987,455) (3,696,128) (4,683,583) Unamortized warrant value (838,412) (2,942,377) (3,780,789) --------------- --------------- --------------- Balance at June 30, 2007 $ 9,612,100 $ 8,963,869 $ 18,575,969 =============== =============== ===============
NOTE 6. CAPITAL LEASE OBLIGATION Capital Lease obligation is comprised as follows:
JUNE 30, 2007 DECEMBER 31, 2006 -------------------- -------------------- Capital Lease for Front End Loader, 35 monthly $103,627 $125,966 installments of $4,526, 24 payments were remaining at June 30, 2007, interest was imputed at 8.25% Less: Current portion 47,530 45,615 -------------------- -------------------- $ 56,097 $ 80,351 ==================== ====================
NOTE 7. COMMITMENT AND CONTINGENCIES The Company is obligated to pay BPI for technical services $20,000 per month until the first plant processes or is able to process waste equal to or in excess of the facility's design capacity and then $15,000 per month for five years. Due to contract disputes with BPI, the Company suspended payments in January 2007 to BPI until the disputes are resolved. The Company has operating lease obligations for plant and office space of approximately: Less than 1 year $253,000 more than 1 less than 3 $428,000 more than 3 less than 5 $402,000 after 5 years $469,000 13 As of June 30, 2007, the Company had in place one employment agreement, pursuant to which the total annual salary was $224,000. The officer is entitled to receive 12 months salary and continuation of benefits in the event the Company terminates his agreement for other than "good cause" or the officer resigns from the Company for "good reason" (as such terms are defined in the agreements). In addition, the officer is entitled to 12 months salary and continuation of benefits in the event of disability or death during the term of his agreement. The Company's CEO is not under an employment contract. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The following discussion, as well as information contained elsewhere in this report, contain "forward-looking statements." These statements include statements regarding the intent, belief or current expectations of us, our directors or our officers with respect to, among other things: anticipated financial or operating results, financial projections, business prospects, future product performance and other matters that are not historical facts. The success of our business operations is dependent on factors such as the impact of competitive products, product development, commercialization and technology difficulties, the results of financing efforts and the effectiveness of our marketing strategies, and general competitive and economic conditions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including those described under "Item 1A - Risk Factors" in our annual report on Form 10-K/A for the year ended December 31, 2006. COMPANY OVERVIEW We are a development stage company formed to design, build, own and operate facilities which employ systems and technologies designed to profitably convert municipal solid waste (MSW) and other waste streams, such as green waste, into usable commodities and products. These products are expected to include renewable energy, recyclable commodities, fuel alcohols, specialty chemicals and paper pulp. We plan to concentrate our efforts on producing renewable electricity from MSW through the use of gasification technology in order to meet the rapidly growing demand for renewable power. We believe that this increased demand is being driven, to a large extent, by the adoption of Renewable Portfolio Standards by a number of states, which require or encourage utilities to have a specific percentage of their electricity sales come from renewable sources. To accelerate implementation of our renewable energy platform, we plan to pursue the development of facilities in targeted markets where we believe we will be able to earn a "tipping" fee for accepting wastes and a premium for the sale of renewable energy products. In this regard, we were recently short-listed by a California utility on three projects totaling 60 megawatts. Also, we plan to work in parallel to install a small-scale gasifier in our Anaheim, California facility, and/or to acquire similar gasification demonstration facilities to gain operating experience with the unique aspects of gasifying biomass derived from municipal solid waste and other waste streams, to develop detailed design criteria for our larger scale systems, and to demonstrate our various gasification technologies and systems which we are developing, acquiring and licensing. In our Anaheim facility we are also evaluating the feasibility to design, build, own and operate additional systems and technologies related to the Company's provisional patent for the production of fuel alcohols, primarily ethanol, through the catalytic conversion of syngas. We anticipate that the development of projects using our systems and technologies will position us to generate three distinct revenue streams: (a) "tipping" fees charged to the entities that supply us with MSW, (b) recycling revenue from the sale of commodity recyclables (such as beverage containers, aluminum, steel, plastics, and glass) that our process recovers and which otherwise would be interred in landfills, and (c) revenue from the sale of our end products, anticipated to be primarily renewable electricity, ethanol and other fuel alcohols. We believe that the ability to receive fees from waste generators or handlers provides us with a low cost fuel source which we believe is an important and beneficial characteristic of our business model. 15 MARKET OVERVIEW We believe there is a large and growing market for the production and sale of renewable energy in the United States, driven by: (1) high costs of hydrocarbon based fuels ; (2) high political and economic costs to obtain energy from unstable foreign countries; (3) harder to reach (therefore more expensive) locations for exploration and development of new oil and gas reserves; (4) increasing competition from developing countries such as China and India for finite amounts of hydrocarbon based energy; and (5) a growing public awareness of the environmental damages brought on by increasing levels of greenhouse gasses in the atmosphere created by carbon-based energy fuels which may be contributing to global warming. These factors have led to state and federal legislation. For example, the California Renewable Portfolio Standard established in 2002 requires certain retail electricity sellers to have 20% of their retail sales come from renewable energy sources by the year 2010. Twenty-two other states have some form of Renewable Portfolio Standard and popular support for such requirements appears to be growing. We believe that our existing and future technologies will potentially create value for various constituencies, including solid waste companies (by reducing transportation costs and increasing diversion of waste from landfills), communities and regulators (by increasing recycling rates, gaining a renewable energy source, lengthening landfill life, and reducing traffic), utilities and ethanol distributors (by increasing renewable content in energy production and diversifying ethanol supply away from corn-based production), and environmentally conscious consumers (by decreasing reliance on hydrocarbon-based power, reducing greenhouse gases from landfill methane and truck traffic, and creating ethanol from non-grain sources). Furthermore, we plan to design our systems and processes to compliment the existing investment made by communities to create and expand curbside recycling programs by targeting the MSW that is still going to the landfill (the "residual MSW", or "RMSW"). RMSW may have already been processed by an MRF, and often contains material that has historically been the most difficult portion of MSW to recycle. ELECTRICITY OPPORTUNITIES We plan to focus our efforts on the development of various renewable energy products which can be produced from MSW and other waste streams. The process which we believe has the most potential for successful commercialization involves using gasification technologies to produce a synthetic gas (or "syngas") from the cellulose biomass fraction of MSW derived from our materials' separation and classification process. Green waste, sewage sludge and other commercial waste streams are also potential feedstocks. The resulting syngas can be used to fire either a boiler driving a steam turbine, or, after a gas clean-up process we believe it may be possible to put the syngas directly into a gas-fired turbine. In either case, we believe the process has the potential to produce sufficient energy to satisfy all the energy needs of our own facilities and leave a significant amount of renewable electricity for sale to utilities. Consistent with this new direction, we recently were short-listed in the selection process to provide a total of 60 megawatts of renewable electric power to a major California utility. We made a good faith deposit to the utility of $60,000 for each of three sites in order to continue negotiations toward completing power purchase agreements (PPAs) with the utility. Each of the three projects is expected to process 1,000 tons per day of residual MSW destined for landfills resulting in the production of greater than 20 megawatts of electricity for sale to utilities. If selected for these projects, we would still need to raise significant additional financing and accomplish many other tasks, including: completion of contracts for the supply of municipal solid waste, establishment of site control, securing the necessary permits, and designing, financing and constructing the facilities. Ethanol / Specialty Chemicals Research We are continuing research on production of ethanol and specialty chemicals using municipal solid waste and green waste as a feedstock. Research and development has been performed using gasification, enzymatic and acid hydrolysis processes to produce liquid fuels and small-scale production has been demonstrated by our R & D partner, Applied Power Concepts, Inc (APC). The economics of larger scale production for this process are being analyzed, and we are analyzing the feasibility of converting the Anaheim facility to a facility for the production of renewable energy, specialty chemicals and liquid fuels. 16 We also have experimented with directing syngas through a catalyst environment to produce fuel grade alcohols, primarily ethanol and other specialty chemicals, and we believe this may become a commercially viable way to produce renewable transportation fuels and specialty chemicals. In this area we recently filed a provisional patent covering a process and certain operating conditions, which we believe may maximize the yield of such alcohols and chemicals. A by-product of the catalyst process is a residual producer gas that we believe has the potential to be used for the beneficial co-generation of renewable electricity. In the future, we believe this same basic process has the potential to be used to produce hydrogen for industrial applications and for fuel cells. Pulp Production Our original facility in Anaheim has processed over 2,500 tons of MSW and has produced over 400 tons of wetlap pulp. Papermaking customers reported that our Quadra-C pulp met their specifications and we did successfully sell the product as a raw material for the manufacture of packaging grade paper. However, as previously disclosed, we concluded that the Anaheim facility was not viable for commercial scale pulp production due to several factors, including: the small scale of the physical plant, the need to install expensive wastewater treatment equipment on site, and mechanical issues related to equipment supplied by specific vendors which did not support sustained continuous operation of the facility. These factors resulted in higher operating costs and lower yields than initially expected. We wrote off the assets related to the paper making equipment at the end of 2006 and we began liquidating some of that equipment to clear floor space for the other projects and to generate additional working capital. STRATEGY Our goal is to utilize a design, build, own and operate model to develop full-scale commercial facilities which profitably transform residual MSW, green waste and other waste streams into usable renewable energy including electricity and synthetic gas, transportation fuels such as ethanol, specialty chemicals and paper pulp. Pursuit of this strategy entails work in the following areas: DEVELOP, TEST, AND PILOT CORE PROCESS TECHNOLOGIES AT OUR ANAHEIM FACILITY Technical feasibility and process characterization of our RMSW-to-pulp process has been achieved at our facility in Anaheim. To support the design of a new plant to produce renewable energy and specialty chemicals from RMSW and other waste streams, we are currently operating the facility in a research mode. We are also investigating the installation of a small-scale gasification unit in Anaheim, or elsewhere, to test and demonstrate our core process of MSW gasification. In conjunction with our research partner, Applied Power Concepts, we are also developing conversion technologies to transform post-recycled MSW into renewable electricity and fuel alcohols, through acid hydrolysis/fermentation as well as proprietary catalytic syngas conversion technologies for the production of ethanol. We anticipate that this phase of our strategy will continue through at least 2008. SEEK AND SECURE COMPETITIVE SITES FOR NEW FACILITIES We are engaged in a process of identifying expansion sites at which, subject to our ability to raise sufficient financing, we intend to build full-scale commercial operations. We are in the process of identifying high priority sites and targeting locations with advantageous MSW tip fees and utilities offering power purchase agreements with premiums for renewable electricity. We have a strategic relationship with Republic Services, the third largest waste hauler in the U.S., with whom we intend to build additional facilities beyond our Anaheim plant. We also have relationships with many independent waste haulers who have a strong interest in finding conversion technologies which reduce their transportation and disposal costs and increase their rate of diversion from landfills. We recently were short-listed in the selection process to provide a total of 60 megawatts of renewable electric power to a major California utility. We have made a good faith deposit to the utility of $60,000 for each of three sites in order to continue negotiations toward completing power purchase agreements (PPAs) with the utility. Even if selected for these projects, we would still need to raise significant additional financing and accomplish many other tasks, including: completion of contracts for the supply of municipal solid waste, establishment of site control, securing the necessary permits, and designing, financing and constructing the facilities. Each of the three projects is expected to produce in excess of 20 megawatts of electricity for sale to utilities. 17 REPLICATE AND ROLLOUT NEW FACILITIES WITH TECHNOLOGIES, PRODUCTS, AND FINANCING TAILORED TO THE LOCATION We anticipate using a suite of technologies, each of which will be specifically applied on a site by site basis to profitably meet the needs of a particular local market. We expect that these needs will change from market to market and will be influenced by many factors, including the materials composition of feedstock at that facility, local permitting and land use requirements, and local political considerations. We plan to seek to develop additional facilities, implementing the most profitable end product platforms on a site by site basis, and to develop facilities in the most favorable locations within the United States. We also anticipate exploring licensing opportunities to accelerate the rollout inside the U.S. and internationally. We plan to leverage experienced engineering and construction partners for the most effective utilization of our resources. Also, we expect each project to operate independently and to possibly have different financial partners and ownership structures. SEEK OUT POTENTIAL ACQUISITIONS WHICH STRENGTHEN OUR EFFORTS AND ACCELERATE IMPLEMENTATION As part of the implementation of our strategy, we may pursue acquisitions. In general, we may seek acquisition candidates with characteristics that include: (a) technology, strategy, or people which complement our specific focus, (b) projects which can be accelerated through participation by us, or (c) established and growing revenue and cash flow. Our ability to implement these strategies will be dependent upon our ability to raise significant additional capital. While the market demand for renewable energy is high, and many investors are seeking quality investments in this sector, there can be no assurance that we will be able to raise the financing necessary to execute this business plan. TRENDS IN OUR BUSINESS The Resource Conservation and Recovery Act of 1991 requires landfills to install expensive liners and other equipment to control leaching toxics. Due to the increased costs and expertise required to run landfills under this Act, many small, local landfills closed during the 1990's. Larger regional landfills were built requiring increased logistics costs for the waste haulers. In addition, state and federal governments have continued to increase the pressure on the industry to improve their recycling percentages. California currently mandates one of the highest standards in the United States by requiring 50% of all incoming MSW to be diverted from landfills. We believe that the trend in state law throughout the U.S. is to migrate toward this California standard. We expect that the resale price of our products, including renewable electricity, synthetic gas, aluminum, steel, plastic, pulp and glass will be tied to commodity markets. The market demand for these materials can be volatile, which can significantly impact our results of operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of our financial condition and plan of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, bad debts, impairment of long-lived assets, including finite lived intangible assets, accrued liabilities and certain expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. 18 Our significant accounting policies are summarized in Note 1 to our audited financial statements for the year ended December 31, 2006 and our unaudited financial statements dated June 30, 2007. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: BASIS OF PRESENTATION The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Company is a new enterprise in the development stage as defined by Statement No. 7 of the Financial Accounting Standards Board, since it has not derived substantial revenues from its activities to date. INTERIM FINANCIAL STATEMENTS The accompanying consolidated financial statements include all adjustments (consisting of only normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation. Operating results for the six months ended June 30, 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. 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. 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 19 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 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 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 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 2007, the Company plans 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." 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. See Note 3 to the accompanying notes to consolidated financial statements. 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 period ended June 30, 2007 or December 31, 2006. 20 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. In January of 2007, the Company changed its plan of operation to focus entirely on research and development projects and consequently recognized no revenue during the first two quarters of 2007. All cash received for tip fees and the sale of recyclables was netted against disposal costs. 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. 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. 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. STOCK-BASED COMPENSATION The Company accounts for stock based compensation in accordance with SFAS No 123R, "Share Based Payments." 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. 21 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. RESULTS OF OPERATIONS COMPARISON OF QUARTERS ENDED JUNE 30, 2007 AND 2006 REVENUES AND COST OF GOODS SOLD During the plant start up phase of our Anaheim plant, we confronted several issues, including an unexpected high level of biological oxygen demand from organic waste in the wastewater from the pulp screening and cleaning process. In January 2007, we decided not to make the capital improvements necessary to the Anaheim plant's wetlap process which the Company considers necessary to operate the plant with the expectation of being profitable. Therefore, beginning in January 2007, we began to operate the plant only as part of research and development projects including but not limited to the development of alternative back end processes such as gasification and acid hydrolysis for the production of ethanol. Consequently, we did not recognize any revenue during the second quarter of 2007. All cash received for tip fees and the sale of recyclables was netted against research and development costs. Revenue and cost of goods sold during the second quarter of 2006 represented revenues earned and the costs incurred during the start-up phase of the Anaheim plant. EXPENSES Research and development expense increased from $60,000 during the quarter ended June 30, 2006 to approximately $800,000 during the comparable quarter in 2007. This was primarily due to the cost of research and development activities related to gasification of approximately $130,000,Anaheim plant costs of approximately $260,000, property tax of approximately $90,000 and plant depreciation of $320,000 in the 2007 period being classified as research and development expense due to the current nature and intent of the plant operations. General and administrative expense increase from $1,037,451 during the quarter ended June 30, 2006 to $1,425,176. This $387,725 increase was primarily the result of an increase in employee stock option expense of approximately $260,000, and professional and consulting fees of approximately $127,000 primarily related to consulting fees related to new technologies and new sites and to the costs of the annual shareholders meeting. The interest income of $105,717 for the second quarter of 2007 represents the interest earned on the cash received for the issuance of the Series B Preferred Stock in May of 2006. Interest expense of $290,190 for the three month period ended June 30, 2006 related to interest on the Senior Secured Debt which was issued in November of 2005 and February of 2006. All of the Senior Secured Debt was extinguished in May of 2006. Financing expense in the second quarter of 2006 was comprised of the unamortized warrant value and offering costs of $1,593,758 related to the Senior Secured Debt expensed upon the early extinguishment of the Debt which occurred in the second quarter of 2006 and the change in the fair value of $4,201,418 of the conversion feature of the Series A Preferred due to the modification of its conversion price as a result of the application of an anti-dilution adjustment and the change in fair value of the Series A Warrants which occurred in the second quarter of 2006. Change in fair value of warrant liability in the second quarter of 2006 of $135,642 relates to the fair value of warrants to purchase common stock issued with registration rights as part of our Series A Preferred Stock offering in 2005. In accordance with SFAS 133 and EITF 00-19, the fair value of the warrants was required to be recorded as a liability until the Company satisfies specified registration requirements. The registration rights requirements were met by the Company in December 2006; therefore, there is no warrant liability expense in 2007. Preferred stock dividend and amortization of beneficial conversion feature, warrant discount and offering costs increased to $3,347,388 in the quarter ended June 30, 2007 from $1,507,775 during the comparable period in 2006 due to the issuance of the Series B Preferred Stock at the end of May 2006. 22 COMPARISON OF SIX MONTHS ENDED JUNE 30, 2007 TO THE SIX MONTHS ENDED JUNE 30, 2006 REVENUES AND COST OF GOODS SOLD During the plant start up phase of our Anaheim plant, we confronted several issues, including an unexpected high level of biological oxygen demand from organic waste in the wastewater from the pulp screening and cleaning process. In January 2007, we decided not to make the capital improvements necessary to the Anaheim plant's wetlap process which the Company considers necessary to operate the plant with the expectation of being profitable. Therefore, beginning in January 2007, we began to operate the plant only as part of research and development projects including but not limited to the development of alternative back end processes such as gasification and acid hydrolysis for the production of ethanol. Consequently, we did not recognize any revenue during the first six months of 2007. All cash received for tip fees and the sale of recyclables was netted against research and development costs. Revenue and cost of goods sold during the six months ended June 30, 2006 revenues earned and the costs incurred during the start-up phase of the Anaheim plant which began in April 2006. EXPENSES Research and development expense increased from $120,000 for the six months ended June 30, 2006 to $1,722,952 for the six months ended June 30, 2007. This was primarily due to the cost of research and development activities related to gasification of approximately $150,000, Anaheim plant costs of approximately $750,000, and plant depreciation of $630,000 in the 2007 period being classified as research and development expense due to the current nature and intent of the plant operations. General and administrative expense increased from $2,006,117 for the six months ended June 30, 2006 to $2,408,667 for the comparable period in 2007. This $402,550 increase was primarily the result of an increase in employee stock option expense of $170,000 and consulting fees of approximately $220,000 primarily related to technologies and new sites and to the costs of the annual shareholders meeting. The interest income of approximately $235,000 for the six months ended June 30, 2007 represents the interest earned on the cash received for the issuance of the Series B Preferred Stock in May of 2006. Interest expense of approximately $275,000 for the six month period ended June 30, 2006 related to interest on the Senior Secured Debt which was issued in November of 2005 and February of 2006. All of the Senior Secured Debt was extinguished in May of 2006. Financing expense during the six month period ended June 30, 2006 was comprised of: a) $1,647,250 attributable to the value of warrants issued to the holders of the Series A Preferred Stock for their consent to issue additional Senior Secured Debt and agreement to waive certain of their veto rights and contractual rights to facilitate the Company's next round of financing which occurred in the first quarter of 2006; b)the unamortized warrant value and offering costs of $1,593,758 related to the Senior Secured Debt expensed upon the early extinguishment of the Debt which occurred in the second quarter of 2006; and c) the change in the fair value of $4,201,418 of the conversion feature of the Series A Preferred due to the modification of its conversion price as a result of the application of an anti-dilution adjustment and the change in fair value of the Series A Warrants which occurred in the second quarter of 2006. Change in fair value of warrant liability for the six month period ended June 30, 2006 of approximately $255,000 relates to the fair value of warrants to purchase common stock issued with registration rights as part of our Series A Preferred Stock offering in 2005. In accordance with SFAS 133 and EITF 00-19, the fair value of the warrants was required to be recorded as a liability until the Company satisfies specified registration requirements. The registration rights requirements were met by the Company in December 2006; therefore, there is no warrant liability expense in 2007. Preferred stock dividend and amortization of beneficial conversion feature, warrant discount and offering costs increased to $7,051,028 for the first six months ended June 30, 2007 from $2,048,261 from the comparable period in 2006 due to the issuance of the Series B Preferred Stock in May of 2006. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2007, we had cash and cash equivalents on hand of $1,893,855 and short term investments of approximately $9,811,183, a decrease of approximately $2.6 million from December 31, 2006. 23 During the first six months of 2007, net cash used for operating activities was approximately $2,500,000. The use of cash was primarily for (i) research and development activities of approximately $900,000 net of non cash items primarily comprised of depreciation, and (ii)general and administrative expenses of approximately $1,600,000 net of non cash items primarily comprised of the amortization of employee options and warrants and accrued expenses for consulting. During the first six months of 2007, net cash used for investing activities was approximately $9,965,000. This was primarily due to $9,815,000 used to purchase short-term marketable securities and approximately $150,000 for the purchase of equipment. We estimate that our cash will sustain operations through approximately December 2008, based on our current expected burn rate, exclusive of any significant costs to install gasification equipment in our Anaheim facility for research and development purposes, if we choose to do so. As of June 30, 2007, the only long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations, or other similar long-term liabilities, were our agreement with Taormina, the monthly payment due BPI as part of the license agreement, and the one capital lease described in Note 6 to the unaudited consolidated financial statements. Due to contract disputes, the Company suspended payments to BPI in January 2007. We are not a party to any off-balance sheet arrangements, and we do not engage in trading activities involving non-exchange traded contracts. In addition, we have no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of our assets. We do not believe that inflation has had a material impact on our business or operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. As of June 30, 2007, we had cash and short term investments of $11.7 million. A portion of our investments may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our investments are short-term in duration, we believe our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of out portfolio. We actively monitor changes in interest rates. We did not have any financial instruments sensitive to changes in interest rates at June 30, 2007 or December 31, 2006. We currently do not conduct any business outside of the United States and therefore are not subject to risks from changes in foreign currency exchange rates. If and when we begin to generate substantive revenues from our operations, we anticipate that we will be exposed to price changes in the commodity goods we sell in the ordinary course of our business, which changes could have a significant impact on our results of operations. We may in the future use financial instruments to manage our exposure to changes in commodity prices. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 24 There was no change in the Company's internal control over financial reporting during the six months ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1A - RISK FACTORS The following risk factors, which were disclosed in Form 10-K/A for the year ended December 31, 2006 (the "2006 Form 10-K"), have been modified to provide additional disclosure related to changes since we filed the 2006 Form 10-K and the Form 10-Q for the quarter ended March 31, 2007. Please refer to the 2006 Form 10-K for a discussion of other risks facing our company. WE FACE DELAYS IN THE DEVELOPMENT OF OUR TECHNOLOGY, WE NEED TO DEVELOP AND/OR ACQUIRE NEW TECHNOLOGIES, AND ANY TECHNOLOGY WE USE MAY NOT WORK AS WELL AS EXPECTED, IF AT ALL, OR EVER BE ECONOMICALLY VIABLE. The steam classification and processing technology that we may use has not yet been widely applied within the municipal solid waste industry and may not work as well as expected or be economically viable. We also need to develop or identify and acquire other technologies to enable us to continue to pursue our updated strategy. The successful application of technology at a large scale and high volumes to create commercially usable cellulose fiber, electricity, ethanol or other products has yet to be proven. In particular, most of the gasification technologies that we are aware of are in the very early stages of commercialization. Any inability to operate in a manner that will produce large volumes of commercially usable products would require additional investment in capital equipment and/or increased operating expenses beyond currently contemplated business and construction plans. Potential issues may include, but are not limited to, handling large quantities of textiles and other debris, unforeseen labor and energy costs, and higher than expected contamination levels of the water discharge to the sewer. Unforeseen difficulties in the development or market acceptance of any products we may produce may lead to significant delays in production and the subsequent generation of revenue. For example, laboratory testing of the cellulose biomass created during trials since December 2005 indicated that higher than anticipated levels of BOD will result from our fiber cleaning and screening process, leading to our determination not to expend any additional funds to address this problem and thus resulting in the refocusing of our efforts to research and development activities and acquisition of technologies to enable us to produce other products. In any event we will need to raise additional financing which, if not available, could force us to curtail or cease operations altogether. IF WE FAIL TO IMPLEMENT NEW TECHNOLOGIES, WE WILL NOT BE ABLE TO KEEP UP WITH OUR INDUSTRY, WHICH COULD HAVE AN ADVERSE AFFECT ON OUR BUSINESS. We plan to develop and acquire technologies designed to enable us to execute our updated business strategy. Our ability to achieve profitability and future growth is dependant on our ability to improve our knowledge and implementation of waste processing and energy development technologies. In this regard, for example, we hope to build a demonstration-scale gasifier at our existing facility. Inability to successfully implement commercially viable waste processing technologies, as a result of insufficient capital or otherwise, will have a material adverse effect on our business and results of operation. THE DEMAND FOR OUR SERVICES MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL LAWS AND REGULATIONS. To a certain extent, demand for our services is created by environmental laws and regulations, including (a) requirements to safely dispose of RMSW by various methods including in properly constructed and operated landfills, (b) requirements to attempt to recycle a certain proportion of RMSW, (c) requirements that businesses operating in the solid waste industry comply with applicable land, water and air emission regulations, and (d) regulations surrounding the production of renewable energy. The lack of environmental laws and regulations, or the loosening or non-enforcement of existing regulations, would decrease demand for our services and may have a material adverse affect on our business. 25 OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY CHANGING RESALE PRICES OR MARKET REQUIREMENTS FOR OUR PRODUCTS. The resale price for our recycled products, including our unbleached fiber product, aluminum and steel, as well as for our renewable energy products, will be tied to commodity pricing. Our results of operations may be adversely affected by changing resale prices or market requirements for these products. The resale, and market demand for, these materials can be volatile due to numerous factors beyond our control, which may cause significant variability in our period-to-period results of operations. THE HOLDERS OF OUR PREFERRED STOCK HAVE CERTAIN RIGHTS THAT COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE ADDITIONAL CAPITAL. Under our articles of incorporation, our board of directors has the power, without further action by the holders of our common stock, to designate the relative rights and preferences of the preferred stock, and to issue the preferred stock in one or more series as designated by our board of directors. The designation of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be dilutive of the interest of the holders of our common stock or the preferred stock of any other series. The issuance of preferred stock may have the effect of delaying or preventing a change in control of our company without further stockholder action and may adversely affect the rights and powers, including voting rights, of the holders of our common stock. We currently have two such series of preferred stock, designated as "8% Series A Cumulative Redeemable Convertible Participating Preferred Stock" and "8% Series B Cumulative Redeemable Convertible Participating Preferred Stock." The holders of a majority of the shares of each such series of Preferred Stock have the option to require our company to redeem all outstanding shares of each such series on April 10, 2010, at a price equal to the original issuance price (with accrued but unpaid dividends being treated as outstanding for purposes of calculating the total redemption price). Based on the number of shares of Preferred Stock outstanding as of June 30, 2007, the total redemption payment obligation would equal approximately $50.0 million. In addition, certain issuances by our company of equity at below specified prices will trigger the "anti-dilution" provisions in the Preferred Stock that would result in adjustments in the conversion ratios. These adjustments could result in significant dilution to our common stockholders. The foregoing provisions of the Preferred Stock will likely have a material impact on our company's ability to raise additional capital. The rights, preferences and privileges of our preferred stock are described in more detail in note 9 to our 10-K/A. 26 ITEM 6. EXHIBITS Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2007 WORLD WASTE TECHNOLOGIES, INC. (Registrant) By: /s/ David Rane ------------------------------ David Rane Chief Financial Officer 28 INDEX TO EXHIBITS Exhibit Number Description ------ ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act 29