10QSB 1 v023492_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ---------- Commission file number 1-11476 WORLD WASTE TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) California 95-3977501 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 13520 Evening Creek Drive, Suite 130, San Diego, California 92128 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (858) 391-3400 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 [_] Number of shares of World Waste Technologies, Inc. Common Stock, $.001 par value, issued and outstanding as of July 15, 2005: 24,533,693. Transitional Small Business Format (Check One): YES [_] NO [X] 1 WORLD WASTE TECHNOLOGIES, INC. Form 10-QSB Table of Contents Page ---- PART I. FINANCIAL INFORMATION .............................................3 Item 1 Financial Statements: .............................................3 Consolidated Balance Sheets .....................................3 Consolidated Statements of Operations ...........................4 Consolidated Statements of Cash Flows ...........................6 Consolidated Statements of Stockholders' Equity..................7 Notes to Financial Statements ...................................9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................18 Item 3 Controls and Procedures ..........................................29 PART II. OTHER INFORMATION ................................................29 Item 6 Exhibits and Reports on Form 8-K .................................30 SIGNATURES ...................................................................32 2 Part I - FINANCIAL INFORMATION Item 1. - Financial Statements World Waste Technologies, Inc. and Subsidiaries (Formerly World Waste of America, Inc.) (A Development Stage Company) Consolidated Balance Sheets

(Unaudited) June 30, December 31 2005 2004 ASSETS: Current Assets: Cash $ 6,033,425 $ 1,128,502 Receivables 584 -- Prepaid expenses 53,477 94,203 ------------ ------------ Total Current Assets 6,087,486 1,222,705 Fixed Assets: Machinery and equipment, net of accumulated depreciation of $24,048 on June 30, 2005 and $16,508 on Dec. 31, 2004 5,020,531 539,401 Deposits on equipment 1,991,414 3,417,959 Construction in progress 4,188,686 1,041,509 ------------ ------------ Total Fixed Assets 11,200,631 4,998,869 Other Assets: Deposit L/T 109,558 114,278 Patent license 450,625 450,625 ------------ ------------ TOTAL ASSETS $ 17,848,300 $ 6,786,477 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: LIABILITIES: Current Liabilities: Accounts payable $ 1,289,566 $ 1,380,791 Accrued salaries payable 96,506 132,703 Accrued litigation payable 107,500 122,500 Other liabilities 360,255 114,242 Current portion of note payable -- 5,343 ------------ ------------ Total Current Liabilities 1,853,827 1,755,579 ------------ ------------ Long Term Liabilities: Note payable, less current portion -- 17,025 Redeemable preferred stock 8,487,859 -- Redeemable preferred stock subscripion receivable (180,000) -- Warrant liability 376,654 -- ------------ ------------ Total Long Term Liabilities 8,684,513 17,025 ------------ ------------ TOTAL LIABILITIES 10,538,340 1,772,604 ------------ ------------ STOCKHOLDERS' EQUITY: Common Stock - $.001 par value: 100,000,000 shares authorized, 24,533,690 and 22,725,190 shares issued and outstanding at June 30, 2005 and at December 31, 2004 24,533 22,725 Stock subscription receivable (150) -- Additional paid-in-capital 12,683,918 8,696,860 Deficit accumulated during development stage (5,398,341) (3,705,712) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 7,309,960 5,013,873 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,848,300 $ 6,786,477 ============ ============

See accompanying notes to consolidated financial statements 3 World Waste Technologies, Inc. and Subsidiaries (Formerly World Waste of America, Inc.) (A Development Stage Company) Unaudited Consolidated Statements of Operations

For Three Months ending ----------------------------- June 30, 2005 June 30, 2004 ------------- ------------- GROSS REVENUE: $ -- $ -- EXPENSES: Research and development (67,410) (108,816) General and administrative: (864,563) (337,763) ------------ ------------ Loss from Operations (931,973) (446,579) ------------ ------------ Interest income/(expense) 26,168 (25,283) Other income 154,091 ------------ ------------ Net loss before provision for income taxes (751,714) (471,862) ------------ ------------ Provision for income taxes -- -- ------------ ------------ Net loss (751,714) (471,862) Preferred stock dividend and amortization of benefical conversion feature (236,933) ------------ ------------ Net loss attributable to common shareholders $ (988,647) $ (471,862) ============ ============ Basic and diluted net loss per share attributable to common shareholders $ (0.04) $ (0.03) ============ ============ Weighted average number of shares outstanding used in calculation 24,418,745 17,054,971 ============ ============

See accompanying notes to consolidated financial statements. 4 World Waste Technologies, Inc. and Subsidiaries (Formerly World Waste of America, Inc.) (A Development Stage Company) Unaudited Consolidated Statements of Operations

For Six Months Ending ------------------------------- June 18, 2002 (Inception) to June 30, 2005 June 30, 2004 June 30, 2005* ------------- ------------- ------------- GROSS REVENUE: $ -- $ -- $ -- EXPENSES: Research and development (129,660) (153,625) (646,986) General and administrative: (1,505,346) (801,249) (4,484,913) ------------ ------------ ------------ Loss from operations (1,635,006) (954,874) (5,131,899) ------------ ------------ ------------ Interest income/(expense) 25,219 (49,573) (116,074) Other Income 154,091 154,091 ------------ ------------ ------------ Net loss before provision for income taxes (1,455,696) (1,004,447) (5,093,882) ------------ ------------ ------------ Provision for income taxes -- -- -- ------------ ------------ ------------ Net Loss (1,455,696) (1,004,447) (5,093,882) Preferred stock dividend and amortization of beneficial conversion feature (236,933) (236,933) ------------ ------------ ------------ Net loss attributable to common shareholders $ (1,692,629) $ (1,004,447) $ (5,330,815) ============ ============ ============ Basic and diluted net loss per share attributable to common shareholders $ (0.07) $ (0.08) $ (0.37) ============ ============ ============ Weighted average number of shares outstanding used in calculation 23,914,740 13,377,902 14,237,308 ============ ============ ============

* 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 consolidated financial statements. 5 World Waste Technologies, Inc. and Subsidiaries (Formerly World Waste of America, Inc.) (A Development Stage Company) Unaudited Consolidated Statements of Cash Flow

June 18, 2002 (Inception) to Six Months Six Months Six Months Ending Ending Ending June 30, 2005 June 30, 2004 June 30, 2005 ---------------------------------------------- Cash flow from operating activities: Net loss $ (1,455,696) $ (1,004,447) $ (5,093,882) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 7,540 3,952 24,048 Interest forgiveness -- -- 135,327 Warrant issued for consulting 10,000 -- 84,566 Amortization of warrants & options 172,571 -- 292,673 Fair value adjustment of warrant liability (154,091) -- (154,091) Changes in operating assets and liabilities: Prepaid expenses 40,142 (31,990) (54,061) Accounts payable (77,029) 68,724 37,701 Accrued salaries (36,197) (36,223) 96,506 Accrued interest -- 48,196 -- Accrued litigation settlement (15,000) 150,000 107,500 Accrued other liabilities (49,221) 167,201 65,021 -------------------------------------------- Net cash used in operating activities (1,556,981) (634,587) (4,458,692) -------------------------------------------- Cash flows from investing activities: Construction in progress (2,645,992) (69,605) (3,906,828) Deposits on equipment (3,282,271) (922,510) (5,747,047) Purchase machinery & equipment -- (23,705) (23,705) Purchase of intangible -- -- (350,000) Deposit 4,720 12,336 (109,558) -------------------------------------------- (5,923,543) (1,003,484) (10,137,138) -------------------------------------------- Cash flows from financing activities: Note payable on vehicle (22,368) (2,423) -- Redeemable preferred stock 9,209,328 9,209,328 Convertible promissory notes -- 16,500 -- Warrants, common stock and additional paid in capital 3,198,487 2,540,483 11,419,927 -------------------------------------------- 12,385,447 2,554,560 20,629,255 -------------------------------------------- Net increase in cash 4,904,923 916,489 6,033,425 Beginning cash 1,128,502 167,619 -- -------------------------------------------- Ending cash $ 6,033,425 $ 1,084,108 $ 6,033,425 ============================================ Interest paid $ (25,219) $ 1,026 $ (18,656) Income taxes paid -- -- --

See accompanying notes to consolidated financial statements. 6 Non-Cash investing and financing activities: - During 2002, the Company issued $67,526 of Convertible Promissory Notes payable for preformation funds received and expended prior to Inception. - The Company issued 125,000 shares of common stock in exchange for $125,000 in common stock subscriptions. - The Company issued warrants to purchase 413,886, and 806,222 for the six month and inception to date periods ending June 30, 2005 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. - The Company issued 1,193,500 shares of common stock upon conversion of the Convertible Promissory Notes payable and accrued interest. - The Company issued warrants to purchase 250,000 shares of its common stock for a modification to the technology license agreement. - The Company transferred $4,485,544 from deposits on equipment to Machinery and Equipment upon delivery of the machinery and equipment. - The Company issued 75,600 shares of Series A Preferred in exchange for a Series A Preferred subscription receivable of $180,000, net of offering costs. See accompanying notes to consolidated financial statements. 7 World Waste Technologies, Inc. and Subsidiaries (Formerly World Waste of America, Inc.) (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Deficit)

Additional Common Stock Accumulated Shares Dollars Paid in Subscription Deficit Total Capital ----------- --------- --------------- ---------------- -------------- ----------- 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 175,191 175,191 Conversion of promissory notes 1,193,500 12 1,193,488 1,193,500 Merger with VPTI 1,200,817 21,062 (21,062) -- 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 195,856 195,856 Net loss - 2004 (2,474,218) (2,474,218) ----------- --------- --------------- ---------------- -------------- ----------- December 31,2004 22,725,190 22,725 8,696,860 0 (3,705,712) 5,013,873 =========== ========= =============== ================ ============== =========== Common stock and warrants net of offering cost (Unaudited) 1,693,500 1,693 3,059,744 3,061,437 Amortization of stock options and warrants (Unaudited 75,752 75,752 Net Loss - March 2005 (Unaudited) (703,982) (703,982) ----------- --------- --------------- ---------------- -------------- ----------- March 31, 2005 (Unaudited) 24,418,690 24,418 11,832,356 0 (4,409,694) 7,447,080 =========== ========= =============== ================ ============== =========== Common Stock and warrants net of offering cost (Unaudited) 115,000 115 9,715 9,830 Amortization of stock options and warrants (Unaudited) 96,819 96,819 Dividend (preferred stock) (Unaudited) 76,911 (219,241) (142,330) Stock subscription receivable (Unaudited) (150) (150) Warrants issued 137,372 137,372 Beneficial conversion feature on redeemable preferred stock (Unaudited) 530,745 530,745 amortization of benefical conversion feature on redeemable preferred stock (Unaudited) (17,692) (17,692) Net Loss - June 2005 (Unaudited) (751,714) (751,714) ----------- --------- --------------- ---------------- -------------- ----------- June 30, 2005 (Unaudited) 24,533,690 $24,533 $ 12,683,918 $ (150) $ (5,398,341) $7,309,960 =========== ========= =============== ================ ============== ===========

See accompanying notes to consolidated financial statements. 8 World Waste Technologies, Inc. and Subsidiaries (Formerly World Waste of America, Inc.) (A Development Stage Company) UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 Note 1. DESCRIPTION OF BUSINESS The accompanying Consolidated Financial Statements include the accounts of World Waste Technologies, Inc. (formerly World Waste of America, Inc.) and its wholly owned subsidiaries World Waste of Anaheim, Inc., and World Waste of California, Inc. (collectively the "Company"). All significant inter-company accounts and transactions have been eliminated upon consolidation. World Waste Technologies, Inc. (WWTI), a California corporation, was formed on June 18, 2002 as World Waste of America, Inc. WWTI holds the United States license from Bio-Products International, Inc. with respect to patented technology developed at the University of Alabama in Huntsville, and other related intellectual property, which technology was designed to convert a large percent of municipal solid waste into a cellulose fiber containing material. It is anticipated that additional value will be realized through the capture of inorganic, recyclable materials such as aluminum, steel, and tin. The Company's plan is to generate revenue from receiving the waste (tipping fees) and from selling cellulose fiber and recyclable materials. In March 2004, World Waste of America, Inc. (WWA), merged with a wholly-owned subsidiary of Waste Solutions, Inc. (WSI), a California corporation, and changed its name to World Waste Technologies, Inc. (WWTI). Cagan McAfee Capital Partners and its affiliates were the controlling shareholders of WSI. Prior to this merger WSI had 7,100,000 shares of common stock outstanding and WWA had 9,100,000 shares of common stock outstanding. This merger was transacted by WSI issuing one of its shares for each share of WWA. After the merger there were 16,200,000 shares outstanding. The transition was accounted for as a reverse merger of WWA, similar to a recapitalization, because the shareholders of WWA became the controlling shareholders of the entity after the exchange. Accordingly, for accounting purposes, the historical financial statements of WWTI presented are those of WWA. In March, 2004, WWTI entered into an Agreement and Plan of Reorganization with Voice Powered Technologies International, Inc., a California corporation ("VPTI"), to merge with and into VPTI. VPTI was a publicly-traded company trading under the stock symbol VPTI.OB. VPTI was a shell corporation with no material operations. The merger with VPTI was completed on August 24, 2004. As part of the merger agreement, WWTI shareholders received 20,063,706 VPTI shares or approximately 95% of the outstanding shares of VPTI in exchange for 20,063,706 WWTI shares, or a one-for-one exchange. Upon completion of the Merger, VPTI changed its name to World Waste Technologies, Inc. As the shareholders of WWTI became the controlling shareholders of VPTI after the exchange, WWTI is treated as the acquirer for accounting purposes, and therefore the transaction was accounted for as a reverse merger. Accordingly, for accounting purposes, the historical financial statements presented are those of WWTI. 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, 2005 of $1,455,696 compared to a net loss of $1,004,447 for the six months ended June 30, 2004, and the Company had an accumulated deficit of $5,398,341 at June 30, 2005. The Company expects to incur substantial additional costs and capital expenditures to complete its initial facility and through the initial quarter of processing. The ability to complete and operate the facility is subject to the Company obtaining funding and/or obtaining equipment financing. If this funding is not obtained the Company may be unable to continue as a going concern for a reasonable period of time. The Company intends to raise additional debt and/or equity financing to sustain its operations and to complete its capital expenditures, although there can be no assurance that it will be able to raise such funds on terms acceptable to the Company, or at all. 9 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 as may be required, and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations. Note 3 - 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 derived no 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 three and six month periods ended June 30, 2005 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 consolidated financial statements for the year ended December 31, 2004, included in the Company's Form 10-KSB filed March 31, 2005. 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. Fixed Assets Machinery and Equipment is stated at cost. Depreciation is computed on the straight-line method over the estimated useful asset lives, to commence when the asset is put in use. The Company is in the process of building its first facility which is expected to cost approximately $14.5 million. The Company has completed a substantial portion of the engineering process for this initial plant in Anaheim, California and is currently installing the equipment, and plans to capitalize all costs directly associated with developing the plant throughout the remainder of construction. Construction is expected to be completed in the fourth quarter of 2005, although no assurance can be given that such construction will be completed by such time or at all. As of June 30, 2005 the Company had capitalized approximately $5 million of machinery and equipment, $4.2 million of construction in progress costs and $2 million of deposits on equipment related to this project. Reclassification Certain amounts for the year ended December 31, 2004 and the three and six month periods ended June 30, 2004 have been reclassified to conform with the presentation of the June 30, 2005 amounts. These reclassifications have no effect on reported net loss. Stock-Based Compensation Employee and Director Options and Warrants During the fourth quarter of 2004, the Company adopted SFAS No. 123R entitled, "Accounting for Stock-Based Compensation." Accordingly, the Company has expensed the compensation cost for the warrants issued based on the fair value at the warrant grant dates. 10 The activity related to officers and employees during the six months ended is summarized as follows: Outstanding at December 31, 2004 407,000 Number issued during the six months ended June 30, 2005 500,000 Weighted average grant date fair value $0.82 Average exercise price $3.46 Exercised during the period 0 Exercisable at June 30, 2005 145,166 Outstanding at June 30, 2005 907,000 The Company recognized expense for the six months ended June 30, 2005 of $57,742 related to the amortization over their vesting period of the value of options and warrants issued to employees and directors. During the year ended December 31, 2004, the Company issued 250,000 warrants to officers of the Company. In addition, during the year ended December 31, 2004, the Company adopted the 2004 Incentive Stock Option Plan (Plan) with 2,000,000 shares available for grant. During 2004, the Company granted options to purchase 157,000 shares under the plan to an officer and to a director. During the six months ended June 30, 2005 the Company granted 500,000 to employees at a weighted average exercise price of $4.50 and a weighted average grant date fair value of $1.01. At June 30, 2005, there were 1,343,000 shares available for grant from the Plan. Options are granted from time to time to officers, directors and consultants. Options granted to date from the plan have been at the market price on the date of the grant and vest over one to four years and are exercisable over a five to ten year period. Non employment stock based compensation The activity related to non-employment warrants during the six months ended June 30, 2005 is summarized as follows: Outstanding at December 31, 2004 988,338 Number issued during the six months ended June,30, 2005 1,160,146 Weighted average grant date fair value $ 1.16 Average exercise price $ 1.74 Exercised during the period 453,700 Exercisable at June 30, 2005 1,694,784 Outstanding at June 30, 2005 1,694,784 The warrants issued during the six months ended June 30, 2005 were as follows: o The Company issued 338,700 warrants at $0.01 as part of the investment units for investments made in the Company. o The Company issued 413,886 warrants at $2.50 to the placement agent in exchange for services rendered. o The Company issued 407,560 warrants at $2.50 as part of the investment in Series A Preferred Stock of the Company. 11 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 6,677,383 at June 30, 2005 and 2,085,034 at June 30, 2004 were not included in the calculation of diluted earnings per share. New Accounting Pronouncements In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement was issued. Management does not expect the implementation of this new standard to have a material impact on our financial position, results of operations or cash flows. In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment"("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements. Note 4. LICENSE AGREEMENT On June 21, 2002, the Company entered into a U.S. technology license agreement with Bio-Products International, Inc., an Alabama corporation with respect to certain intellectual property and patented methods and processes. This agreement was amended on June 21, 2004. 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 sterilize the material and the pressure, and agitation causes a pulping action. This combination is designed to result in a large volume reduction, yielding high-density, sterilized 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. The University of Alabama in Huntsville currently owns the patent for the Technology. This patent was licensed to Bio-Products International, Inc. ("Bio-Products") and this license was assigned to the Company for the United States. Bio-Products is required to continue to make certain payments to the University of Alabama in Huntsville to maintain exclusivity to the patent for the Technology. The license extends for a period of 20 years from the effective date of the agreement. The agreement provides that it is automatically extended until the expiration date of the last patent issued to Bio-Products and/or the University of Alabama in Huntsville covering the Technology. For the license, the Company paid a one-time fee of $350,000, which the Company recorded as an intangible asset. The Patent License will be amortized over the remaining life of the license beginning when the plant is first operational. 12 During June 2004, the Company issued warrants to purchase 250,000 shares of its common stock at $1.50 per share to the owners of Bio-Products in consideration for their assistance in obtaining certain modifications/amendments to the license agreement. The fair value of the warrants of $100,625 was estimated at the date of grant using the option valuation model. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.6%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 26.4%; and a term of 4 years. The company recorded the $100,625 fair value of the warrants as an increase to the capitalized patent license. The Company is also obligated to pay a royalty for every ton of waste processed using the licensed technology as follows: Rate Tons processed per day --------------------- ---------------------------------- $0.50 1 - 2,000 $1.00 2,001 - 10,000 $1.50 10,001 and up The Company is also obligated to pay a bonus to Bio-Products of two and one half percent (2.5%) of the gross sales price in excess of ten dollars ($10.00) per ton for the cellulosic product produced from MSW, utilizing the Technology. As additional consideration and for their experience and know-how regarding the Technology, the Company agreed to pay Bio-Products a monthly payment for technical services of ten thousand dollars ($10,000) per month from January, 2003 to April 2004 and twenty thousand dollars ($20,000) per month thereafter. As of June 30, 2005, all such amounts have been paid. Due to the proprietary nature of the vessel design utilized in the process, the Company also agreed that Bio-Products shall maintain the exclusive right of vessel manufacture, and the Company shall purchase all required process vessels exclusively from Bio-Products at a purchase price of cost plus 15%. Note 5. SIGNIFICANT CONTRACTS In June 2003, the Company signed a 10-year contract, with options for three additional extensions of 5 years each, with Taormina Industries, LLC, a wholly-owned division of Republic Services, Inc., whereby TI has agreed to deliver waste to the Company for processing at its initial facility which will be located on the campus of TI in Anaheim, CA and is expected to be capable of processing 500 tons per day. The second phase of the contract calls for the Company to build up to a 2,000 ton per day plant in the Orange County area at a site mutually agreeable to both parties. It is estimated that the initial facility will cost the Company approximately $14.5 million and is projected to be completed in the fourth quarter of 2005, if the Company is successful in raising the necessary funds in a timely manner. It is estimated that the second phase will cost the Company approximately $45 million, excluding land and building, and is projected to be completed in late 2006 or 2007, if the Company is successful in raising the necessary funds in a timely manner. The agreement also grants TI a right of first refusal for an additional 10 counties throughout California where TI has operations. Under the terms of this first contract, TI will pay a per ton tipping fee to the Company. The ultimate success of the Company is highly dependent on the ability of both parties to the contract to fulfill their obligations, of which there can be no assurance. Effective July 26, 2004, the Company entered into a ten-year operating lease agreement, with options for three additional extensions of 5 years each, with Taormina Industries, LLC for the site of the Company's initial processing facility. The lease requires monthly rent of $15,900. The Company paid the lessor $95,400 upon execution of the lease representing prepaid rent of $63,600 and a $31,800 security deposit. The Company will also be required to lease facilities to complete the second phase of the contract. 13 Note 7. SHAREHOLDERS' EQUITY Prior to the merger with WSI, WSI received $750,000 for the issuance of a promissory note and obtained a commitment for an additional $250,000 from an investor. The investor also received a warrant for the purchase of 133,333 shares of common stock for $0.01 per share in connection with these additional funds. These warrants were exercised in March of 2004. After the merger, the promissory note was exchanged for 500,000 shares of common stock in WWTI. In April, the Company received the additional $250,000 for the purchase of an additional 166,667 shares of common stock. The relative fair value allocated to the warrant was $166,667 using the Black-Scholes calculation. The value of the warrant was estimated using the Black Scholes option pricing model with the following assumptions: average risk free interest of 3.6%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 26.4%; and a term of 4 years. Prior to the merger with VPTI, 500,000 shares of common stock were contributed to the Company by the founder of VPTI in connection with an agreement in which the founder sold approximately 1,000,000 other shares of common stock to accredited investors in a private sale. During the second and third quarters ended June 30, 2004 and September 30, 2004 respectively, the Company obtained through a private placement an additional $3,093,910 from the sale of 2,311,872 shares of common stock net of fees paid of $273,890 (2,245,206 of these shares were issued prior to the merger with VPTI on August 24, 2004). Under a Registration Rights Agreement, the Company agreed to use commercially reasonable efforts to prepare and file a registration statement to register within ninety days of completion of the Merger, August 23, 2004, and use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable registering the shares and the shares underlying the warrants. The registration statement was filed on August 4, 2005, but has not yet been declared effective. During July 2004, the Company issued a warrant to a consultant for the purchase of 50,000 shares of common stock at an exercise price of $0.01 per share in consideration for investment banking, financial structuring and advisory services provided. The fair value of the warrant was $74,567. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.6%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 26.4%; and a term of 4 years. The fair value of the warrant was expensed during the year ended December 31, 2004. The warrants were exercised in September 2004. As discussed above, effective August 24, 2004, WWTI was merged into VPTI. Prior to the merger with VPTI, the holders of the Convertible Promissory Notes Payable converted these notes into 1,193,500 shares of common stock of WWTI. Subsequent to the merger with VPTI, during the third and fourth quarters of the year ended December 31, 2004, in connection with a private placement of securities, the Company sold 1,192,000 units; each unit comprised of one (1) share of common stock in the Company and warrants exercisable for 0.25 shares (298,000 shares) of common stock of the Company at an exercise price of $0.01 per share for 5 years. The fair value of the warrants was $742,153. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.6%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 26.4%; and a term of 1 to 4 years. The consideration paid for the units was $2.50 per unit, for aggregate net proceeds to the Company of $1,879,770. As of December 31, 2004, 152,000 of these warrants had been exercised for net proceeds to the Company of $1,520. Under the Registration Rights Agreement, the Company has agreed to use commercially reasonable efforts to prepare and file a registration statement to register within ninety days of completion of the private placement and use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable registering the shares and shares underlying the warrants. The registration statement was filed on August 4, 2005, but has not yet been declared effective. During the quarter ended March 31, 2005, in connection with the private placements of unregistered securities, the Company raised gross proceeds of $3,387,000 by issuing 1,354,800 units (each unit comprised of one (1) share of common stock in the Company (1,354,800 shares of common stock) and warrants exercisable for 0.25 shares (338,700 warrants)) at a purchase price of $2.50 per unit. The warrants expire five years after the date of the sale of the shares and are exercisable at $0.01 per share, subject to adjustment. All of the warrants were exercised during the quarter ended March 31, 2005. The fair value of the warrants was $843,487. The value of the warrants was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.75%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 19.73%; and a term of 1 year. Under the Registration Rights Agreement, the Company has agreed to use commercially reasonable efforts to prepare and file a registration statement to register within ninety days of completion of the private placement and use commercially reasonable efforts to cause such registration statement to be declared effective by the SEC as soon as practicable registering the shares and the shares underlying the warrants. The registration statement was filed on August 4, 2005, but as of August 14, 2005 has not been declared effective by the SEC. 14 During the quarter ended June 30, 2005, the company recorded a beneficial conversion feature related to its Series A Preferred Series A stock of $530,745. Therefore, Preferred Series A has been debited and additional paid in capital credited by $530,745. Note 8. NOTE PAYABLE Note payable is comprised as follows: June 30, December 31, 2005 2004 -------- ----------- Note Payable, monthly installments of $575, with interest at 7.8%, secured by a vehicle $ -- $ 22,368 Less: Current portion -- 5,343 -------- ----------- $ -- $ 17,025 ======== =========== During the first quarter of 2005, the note was paid in full. Note 9. UNSECURED SENIOR PROMISSORY NOTE On April 11, 2005, the Company executed an unsecured senior promissory note (the "Note"), which provided for a loan to the Company of $750,000. The note bore interest at an annual rate equal to 12% with interest payable at the time the Company paid the principal amount due on the Note. The Note was due in full on the earlier of (a) July 11, 2005 or (b) the closing date of an equity investment in the Company by the note holder or its affiliates resulting in gross proceeds to the Company of at least $8,000,000. The Note was paid in full with accrued interest on April 28, 2005. See below for a description of the equity investment. Note 10. SERIES A CUMULATIVE REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED STOCK On April 28, 2005, the Company entered into a Securities Purchase Agreement whereby the Company sold and issued 4,000,000 shares of newly created 8% Series A Cumulative Redeemable Convertible Participating Preferred Stock of the Company (the "Series A Preferred") and warrants (the "Warrants," and, together with the Series A Preferred, the "Securities") to purchase up to 400,000 shares of common stock of the Company. On May 9, 2005, the Company entered into a Securities Purchase Agreement whereby the Company sold and issued an additional 75,600 shares of Series A Preferred Stock of the Company and Warrants to purchase up to 7,560 shares of common stock of the Company. The gross aggregate proceeds to the Company from the sales of the securities were $10,189,000. The Company is required to apply the proceeds of the sale of the Securities primarily to the construction and operation of the Company's initial plant in Anaheim, California and payment of the Note discussed in Note 9 above. The investors are entitled to recommend for election to the Company's Board of Directors two individuals designated by such investors. Two employee directors have agreed to resign as directors effective upon the appointment or election of the investors' designees. As of August 14, 2005, the two directors had not been named. Holders of Series A Preferred are entitled to receive cumulative dividends, payable quarterly in additional shares of Series A Preferred, at the rate of 8% per annum. This dividend rate is subject to increase to 9% in the event the Company does not comply with certain registration rights provisions. Each share of Series A Preferred is entitled to that number of votes equal to the number of whole shares of the Common Stock into which it is convertible. In addition, so long as at least 50% of the shares of Series A Preferred remain outstanding, the Company is prohibited from taking certain actions without the approval of the holders of a majority of the outstanding shares of Series A Preferred. 15 The holders of a majority of the shares of Series A Preferred have the option to require the Company to redeem all outstanding shares of Series A Preferred on the five year anniversary of issuance at a redemption price equal to $2.50 per share, plus accrued and unpaid dividends to that date. In the event the holders do not exercise this redemption right, all shares of Series A Preferred will automatically convert into shares of Common Stock on such five-year anniversary, as described below. Each share of Series A Preferred will automatically convert into one share of Common Stock (i) in the event the Company consummates an underwritten public offering of its securities at a price per share not less than $5.00 and for a total gross offering amount of at least $10 million, (ii) in the event of a sale of the Company resulting in proceeds to the holders of Series A Preferred of a per share amount of at least $5.00, (iii) in the event that the closing market price of the Common Stock averages at least $7.50 per share over a period of 20 consecutive trading days and the daily trading volume averages at least 75,000 shares over such period, (iv) at any time following the first to occur of September 30, 2006 or the "Operational Date" (generally defined to mean when the Company's initial facility generates operating cash flow of at least $672,000 for any consecutive three month period), (v) upon the approval of a majority of the then-outstanding shares of Series A Preferred, or (iv) unless the Company is otherwise obligated to redeem the shares as described above, on April 28, 2010. Each holder has the right to convert its shares Series A Preferred into shares of Common Stock on a one-for-one basis at any time following the first to occur of September 30, 2006 or the Operating Date. The Warrants are exercisable for a period of five years commencing as of their issuance date, at an exercise price of $4.00 per share. In connection with the issuance of the Securities, on April 28, 2005, the Company entered into a Registration Rights Agreement granting the investors certain demand and piggyback registration rights of the common stock issued upon conversion of the Series A Preferred and exercise of the Warrants. Due to the registration rights the Company has shown the Series A Preferred and the Warrants as liabilities on the Company until such time as the Registration Rights have been met. Once the Registration Rights have been met, the Series A Preferred will be shown as mezzanine equity and the Warrants will be transferred to equity at its then fair value. The Company filed a registration statement with the SEC on August 4, 2005 to register the underlying common stock shares related to the conversion feature of the Series A Preferred and the related Warrants. As of August 14, 2005 the registration statement had not been declared effective by the SEC. Pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's own Stock," the fair value of the warrants at the date of issuance of $530,745 was adjusted to account for the change in fair value from the date of issuance to the balance sheet date of June 30, 2005. The change in fair value from the date of issuance to June 30, 2005 of $ 154,091 has been included in other income. The value of the warrants at date of issuance and at June 30, 2005 was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.6%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 19.73%; and a term of 4 years. Also, as a condition of the Registration Rights Agreement the officers and certain significant shareholders agreed that they would not offer, sell, contract to sell, lend, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of Common Stock, or any options or warrants to purchase any shares of Common Stock with respect to which the holder has beneficial ownership until the earlier of 90 days following the conversion into Common Stock of at least 50% of the shares of Series A Preferred Stock, or 90 days following the closing of a Qualified Public Offering as defined in the agreement. The accounting for the Series A Preferred is as follows: Gross proceeds $10,189,000 Less benefical conversion feature (530,745) Less offering costs (799,673) Less warrant value (530,745) ---------- Subtotal 8,327,837 Amortization of benefical conversion feature 17,692 In kind dividend 142,330 ---------- Balance at June 30, 2005 $8,487,859 16 Note 11. COMMITMENTS AND CONTINGENCIES As of June 30, 2005, the Company has entered into equipment and engineering purchase commitments related to start-up of the initial phase of the Taormina Agreement of $ 13.1 million against which payments have been made of approximately $ 9.4 million. In March, 2004, the Company entered into a lease for office space in San Diego, CA. The lease term is for two years commencing April 1, 2004. Annual rent is $54,943 for year one and $56,634 for year two. In July 2004, the Company entered into a lease for the processing facility in Anaheim, CA. The lease term is for 10 years commencing July 1, 2004, with three five year options for a total of twenty-five years. The monthly base rent of $15,900 adjusts annually based on the Consumer Price Index of Orange County. Minimum lease payments for these operating leases for the remaining 6 months of 2005 and years ending December 31, thereafter are: 2005 $123,717 2006 $204,959 2007 $190,800 2008 $190,800 2009 $190,800 Thereafter $874,500 Note 12. RELATED PARTY TRANSACTIONS In December 2003, the Company entered into an agreement, amended in March 2004 and again in April 2005, with Cagan McAfee Capital Partners, LLC ("CMCP"). The agreement provides for CMCP to provide advisory and consulting services and for NASD broker dealer, Chadbourn Securities Inc. ("Chadbourn"), to provide investment banking services to the Company. The April 2005 amendment terminated as of June 30, 2005 the Company's agreement with Chadbourn Securities. The agreement called for, among other things, the Company to pay to CMCP a monthly advisory fee of $15,000, increased to $20,000 beginning in September 2004. John Pimentel, a member or our Board of Directors, is associated with CMCP. The April 2005 amendment also reduced the monthly advisory fees paid to CMCP to $5,000 and a separate agreement was signed with John Pimentel under which he is paid a monthly advisory fee of $15,000. The total professional fees paid to CMCP for the six months ended June 30, 2005 for advisory services was $90,000. During the six month period ended June 30, 2005, the Company paid John Pimentel, $30,000 for advisory services. Chadbourn and Laird Q. Cagan, a registered representative of Chadbourn, acted as the placement agent (collectively, the "Placement Agent") for us during the quarter ended March 31, 2005 in connection with the private placement of 1,354,800 shares of our common stock and warrants to purchase 338,700 shares of our common stock. In connection with those private placements, we paid the Placement Agent a commission of 8% of the price of all shares sold by it, or approximately $240,210. In addition, we paid the Placement Agent a non-accountable expense allowance (equal to 2% of the purchase price of the shares or approximately $67,740) and issued the Placement Agent, or its affiliates, warrants to purchase 169,350 of our common shares, at an exercise price of $2.50. Mr. Cagan is a Managing Director of Cagan McAfee Capital Partners, LLC and a major stockholder of the Company. The value of the warrants, $95,135, was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.6%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 19.73%; and a term of 4 years. 17 Chadbourn and Laird Q. Cagan, a registered representative of Chadbourn, acted as the placement agent (collectively, the "Placement Agent") for us during the quarter ended June 30, 2005 in connection with the private placement of 4,075,600 shares of our Series A Preferred Stock and warrants to purchase 407,560 shares of our common stock. In connection with those private placements, we paid the Placement Agent a commission of approximately 4% of the price of all shares sold by it, or approximately $400,000. In addition, we paid the Placement Agent a non-accountable expense allowance (equal to approximately 2% of the purchase price of the shares or approximately $200,000) and issued the Placement Agent, or its affiliates, warrants to purchase 244,536 of our common shares, at an exercise price of $2.50. Mr. Cagan is a Managing Director of Cagan McAfee Capital Partners, LLC and a major stockholder of the Company. The value of the warrants, $137,372, was estimated using the Black-Scholes option pricing model with the following assumptions: average risk-free interest of 3.6%; dividend yield of 0%; average volatility factor of the expected market price of the Company's common stock of 19.73%; and a term of 4 years. Note 13. EMPLOYMENT CONTRACTS On April 28, 2005, the Company entered into new employment agreements with four of its executive officers. The new agreements supersede and replace each officer's existing employment agreement with the Company. Pursuant to the new agreements, the officers will continue to serve the Company in the same capacities but on an "at-will" basis. The total annual salaries of the contracts is $877,000. Each 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, each officer is entitled to 12 months salary and continuation of benefits in the event of disability or death during the term of his agreement. Note 14. SUBSEQUENT EVENTS On August 4, 2005, the Company filed a registration statement on form SB-2 with the SEC covering the resale of up to 11,774,756 shares held by certain of our stockholders. This registration statement has not yet been declared effective. Item 2. -- Management's Discussion and Analysis of Financial Condition And Results of Operations SAFE HARBOR STATEMENT In addition to historical information, the information included in this Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as those pertaining to our capital resources, our ability to complete the research and development of our products, and our ability to obtain regulatory approval for our products. Forward-looking statements involve numerous risks and uncertainties and should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates," or "anticipates" or other variations thereof or comparable terminology, or by discussions of strategy, plans or intentions. Such forward-looking statements are necessarily dependent on assumptions, data or methods that may be incorrect or imprecise and may be incapable of being realized. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: need for a significant amount of additional capital, lack of revenue, uncertainty of product development, ability to obtain regulatory approvals in the United States and other countries, and competition. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management's analysis only. We assume no obligation to update forward-looking statements. Overview and Plan of Operations World Waste Technologies, Inc. is a development stage company formed to convert Municipal Solid Waste ("MSW") into valuable, reusable commodities through the application of conventional and licensed patented technology. At June 30, 2005, we were constructing a processing facility in Anaheim, California for this purpose and administered our operations from our office in San Diego, California. 18 WWT is a California corporation with its corporate headquarters in San Diego, California. Its telephone number is 858-391-3400. Our stock is quoted on the OTC Bulletin Board under the symbol of WDWT.OB. On August 24, 2004, a newly formed wholly owned subsidiary of Voice Powered Technology International, Inc., a California corporation ("VPTI"), merged with and into World Waste Technologies, Inc., a California corporation ("Old WWT"). As a result of this merger (the "Merger"), Old WWT became a wholly owned subsidiary of VPTI and VPTI changed its name to "World Waste Technologies, Inc." The Merger occurred pursuant to an Agreement and Plan of Reorganization dated as of March 24, 2004, as amended on August 24, 2004 by and among VPTI, V-CO Acquisition, Inc. and Old WWT. As a result of the Merger, VPTI continued as the surviving corporation, assumed the operations and business plan of Old WWT, and replaced its officers and directors with those of Old WWT, and the stockholders of Old WWT became stockholders of VPTI. VPTI was incorporated in June 1985, and began active operations in January 1990 to develop, market, and distribute low-cost voice recognition and voice activated products. We currently do not plan to conduct any business other than operations heretofore conducted or contemplated to be conducted by Old WWT. As the shareholders of Old WWT became the controlling shareholders of VPTI after the Merger, Old WWT is treated as the acquirer for accounting purposes, and therefore the Merger was accounted for as a reverse merger. Accordingly, for accounting purposes, the historical financial statements presented are those of Old WWT. Since the formation of Old WWT in 2002, our efforts have been principally devoted to research and development activities, raising capital, and recruiting additional personnel and advisors. To date, we have not marketed or sold any product and have not generated any revenues. We do not anticipate generating any revenue until completion of our first facility, which we anticipate in the fourth quarter of 2005, but is dependent on our ability to raise additional capital in a timely manner. We currently are purchasing, and are planning to purchase, certain assets, including additional equipment needed to construct our first facility to process residual municipal solid waste ("RMSW"). WWT licensed a patented technology and other related intellectual property capable of converting MSW into commodities from Bio-Products International, Inc. ("Bio-Products"). This process, known as "pressurized steam classification," uses a sealed, rotating autoclave loaded with MSW. The process converts MSW into separable components of "sterilized" organic and inorganic materials and allows minimal discharges to the air, water and soil. The product of the process is a sanitized cellulose material with significant papermaking fiber content that can be sold to containerboard plants after a screening and cleaning process. The inorganic materials captured are similar to the standard recycled materials of aluminum, tin, and steel. We anticipate that our first facility will be completed in the fourth quarter of 2005, but is dependent on our ability to raise additional capital in a timely matter. We intend to raise additional capital by means of equity and/or debt financing, although there can be no assurance that we will be able to raise such funds on terms acceptable to the Company, in the time required, or at all. As of June 30, 2005, we required an additional $4 to $5 million to complete our first facility and become operational. Our current plan of operation for the next 12 months primarily involves research and development activities, completing the construction of our first facility to process RMSW and operating the facility upon completion. Over the next 12 months, we currently anticipate hiring an additional 40 to 50 employees. The actual amounts we may expend on research and development and related activities during the next 12 months may vary significantly depending on numerous factors, including pace and success of the construction of our first facility, the operating results of our first facility, and the possible acquisition of assets. However, based on our current estimates, we believe that we will need at least an additional several million dollars for operating expenses and working capital to conduct our planned operations beyond the next 12 months. We intend to meet these needs from operations and by raising additional equity and/or debt financing, although there can be no assurance that we will be able to raise such funds on terms acceptable to the Company, in the time required, or at all. Depending on the successful completion of our first facility, we anticipate that we will begin the construction process of our second facility, site location, permitting, design, engineering and the ordering of equipment. We intend to raise additional equity and/or debt financing in order to have the funds required to carry out these activities. There can be no assurance that we will be able to raise such funds on terms acceptable to the Company or at all. You should read this discussion in conjunction with the form 10-KSB filed March 31, 2005 and selected historical financial information and the financial statements and related notes included elsewhere in this report. Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to 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. 19 Our significant accounting policies are summarized in Note 3 to our audited financial statements for the year ended December 31, 2004. 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. We are a new enterprise in the development stage as defined by Statement No. 7 of the Financial Accounting Standards Board, since we have derived no revenues from our 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 fro a fair presentation results 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 consolidated financial statements for the year ended December 31, 2004, included in the Company's Form 10-K filed March 31, 2005. 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. Fixed Assets Machinery and equipment is stated at cost. Depreciation is computed on the straight-line method over the estimated useful asset lives, to commence when the asset is put in use Stock-Based Compensation During the fourth quarter of 2004, we adopted SFAS No. 123 entitled, "Accounting for Stock-Based Compensation." Accordingly, we have expensed the compensation cost for the warrants issued based on the fair value at the warrant grant dates. Results of Operations Comparison of Three and Six month periods ended June 30, 2005 and 2004 During the three and six month periods ended June 30, 2005, we continued research on the licensed process and the intended use of the products from that process, development of our business plan, designed and continued construction of our first facility in Anaheim, CA and continued raising capital. Revenues We did not generate any revenues in the three and six month periods ended June 30, 2005 or 2004. Expenses General and administrative expenses increased by $704,097 to $1,505,346 during the six month period and $566,268 to $904,031 during the three month period ended June 30, 2005 compared to the respective periods ended June 30, 2004 due to an increase in staff and expenses related to the preparation of the Company to become operational, which is expected in the fourth quarter of 2005. Interest income of approximately $25,000 during the six and three month periods of 2005 resulted from the cash received from the sale of the Series A Preferred during the second quarter of 2005. Interest expense of approximately $50,000 and $25,000 for the six and three month periods ended June 30, 2004, respectively, related to the outstanding convertible notes, which converted to common stock during the third quarter of 2004. Other income of $154,091 for the six and three month periods ended June 30, 2005 relates to the adjustment of the Warrant liability to fair value at June 30, 2005. 20 Liquidity and Capital Resources Cash increased $4,904,923 to $6,033,425 at June 30, 2005 compared to December 31, 2004 due primarily to the sale of common stock of approximately $3,000,000 and preferred stock of approximately $9,500,000, net of offering costs less cash used for operations of approximately $1,500,000 and construction and equipment for the Anaheim facility of approximately $6,000,000. As of June 30, 2005, we had cash on hand of $ 6,033,425, purchase orders outstanding related to our first facility of approximately $ 3,700,000, and approximately $ 1,000,000 of additional purchase orders to be issued in order to complete our first facility. We also anticipate that we will need at least an additional $4 to $5 million dollars for operating expenses and working capital to sustain us until cash flow from operations is positive. We intend to meet these needs by raising additional equity and/or debt financing, although there can be no assurance that we will be able to raise such funds on terms acceptable to us, in the time required, or at all. As of June 30, 2005, we had no long-term debt obligations, other than the Series A Preferred, no capital lease obligations, no operating lease obligations, no long term purchase obligations, or other similar long-term liabilities, except for the Taormina Lease Agreement. 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. Factors that May Affect Future Results and Market Price of Our Stock An investment in our common stock is subject to a high degree of risk. The risks described below should be carefully considered, as well as the other information contained in this quarterly report and in the documents incorporated by reference. If any of the following risks actually occur, our business, financial condition or operating results and the trading price or value of our securities could be materially adversely affected. 21 RISKS RELATED TO OUR BUSINESS Our initial facility may not be completed on a timely basis, within budget, or at all. We cannot assure you that our currently planned facility under construction in Anaheim, California will be completed on a timely basis, within budget, or at all. This facility is currently under construction and is expected to be completed in the fourth quarter of 2005. Even if completed, we cannot assure you that the facility will be adequate for our needs or work without difficulties or down times. We currently anticipate that we will need to construct additional facilities to serve our needs and anticipated growth and that such future facilities will require additional capital. Unforeseen difficulties in the planning or completion of our initial facility or any future facility may lead to significant delays in production and the subsequent generation of revenue. For example, we had previously anticipated that the facility would be completed in the third quarter of 2005. However, due to unanticipated construction delays, this time frame has been revised. Our success depends on our ability to protect our proprietary technology. Our success depends, to a significant degree, upon the protection of our, and that of our licensors', proprietary and patented technologies. While we currently have a license with Bio-Products International, Inc. in the U.S. within the scope of our anticipated business to exploit a number of U.S. patents that protect our processes, the need to pursue additional protections for our intellectual property is likely as new products and techniques are developed and as existing products are enhanced, and there is no guarantee that such protections will be attained in a timely manner, or at all. Legal fees and other expenses necessary to obtain and maintain appropriate patent protection in the U.S. could be material. Insufficient funding may inhibit our ability to obtain and maintain such protection. Additionally, if we must resort to legal proceedings to enforce our intellectual property rights, or those of our licensors', the proceedings could be burdensome and expensive and could involve a high degree of risk to our proprietary rights if we are unsuccessful in, or cannot afford to pursue, such proceedings. We also rely on trade secrets and contract law to protect certain of our proprietary technology. We cannot assure you that any such contract will not be breached, or that if breached, we will have adequate remedies. Furthermore, we cannot assure you that any of our trade secrets will not become known or independently discovered by third parties. We cannot assure you that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. In addition, we may be required to obtain licenses to patents or other proprietary rights from third parties. We cannot assure you that any licenses required under any patents or proprietary rights would be made available on acceptable terms, if at all. If we do not obtain required licenses, we may encounter delays in product development or find that the development, manufacture or sale of products requiring such licenses could be foreclosed because we are not able to obtain the licenses on acceptable terms, or at all. Additionally, we may, from time to time, support and collaborate in research conducted by universities and governmental research organizations. We cannot assure you that we will have or be able to acquire exclusive rights to the inventions or technical information derived from such collaborations, or that disputes will not arise with respect to rights in derivative or related research programs conducted by us or our collaborators. We may face delays in the development of our technology and our technology may not work as well as expected or be economically viable. The steam classification and processing technology that we intend to 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. The successful application of the technology at large scale and high volumes to create commercially usable cellulose fiber has yet to be proven. Any inability under our current plan to produce large volumes of commercially usable cellulose fiber may require additional investment in capital equipment and/or increased operating expenses beyond currently contemplated business and construction plans. Unforeseen difficulties in the development or market acceptance of this cellulose fiber may lead to significant delays in production and the subsequent generation of revenue. 22 Our limited operating history makes it difficult to predict future results and increases the risk of an investment in our securities. We are in the development stage and are subject to all the business risks associated with a new enterprise, including uncertainties regarding product development, constraints on our financial and personnel resources, and dependence on and need for third party relationships. We have had no revenues to date and there can be no assurance as to when or whether we will be able to develop sources of revenue or that our operations will become profitable, even if we are able to begin generating revenue. We have not yet sold any products or services or otherwise generated revenue and there can be no assurance that we will be able to do so. We may be unable to obtain the large amount of additional capital that we need to operate our business. We raised approximately $5.2 million, net of offering costs, prior to the closing of the Merger in August 2004 which was used for equipment, leasehold improvements and working capital purposes. In addition, we raised approximately $15.3 million, net of offering costs, between August 2004 and July 2005 which has also been used for equipment, leasehold improvements and working capital purposes. We need to raise additional capital in order to meet our business plan, and the required additional financing may not be available on terms acceptable to us, or at all. To date, we have funded all of our activities through the sale of securities. You should not rely on the prospect of future financings in evaluating us. Any additional funding that we obtain is likely to reduce the percentage ownership of the company held by our existing stockholders. The amount of this dilution may be substantially increased if the trading price of our common stock has declined at the time of any financing from its current levels. We may not be able to obtain or sustain market acceptance for our services and products. We do not intend to engage in advertising during our development phase. Failure to establish a brand and presence in the marketplace on a timely basis could adversely affect our financial condition and operating results. Moreover, we cannot assure you that we will successfully complete the development and introduction of new products or product enhancements or that any new products developed will achieve acceptance in the marketplace. We may also fail to develop and deploy new products and product enhancements on a timely basis. The market for services and products in the solid waste processing and recycling industry is competitive and we may not be able to compete successfully. The market for services and products in the solid waste processing industry is highly competitive. Most of these competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we have, and may be able to respond more quickly than we can to new or changing opportunities and customer requirements. Also, our competitors have greater name recognition and more extensive customer bases that they can leverage to gain market share. These competitors are able to undertake more extensive promotional activities, adopt more aggressive pricing policies and offer more attractive terms to purchasers than we can, which could adversely affect our competitive position and business. The demand for our services may be 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 MSW by various methods including in properly constructed and operated landfills, (b) requirements to attempt to recycle a certain proportion of MSW, and (c) requirements that businesses operating in the solid waste industry comply with applicable land, water and air emission regulations. 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. We will depend on a significant supply of solid waste and timely payment for that solid waste. If we do not obtain a supply of solid waste at quantities and qualities that are sufficient to operate our proposed facilities at the expected operating levels, or if third parties do not promptly pay for the solid waste they deliver to us for processing, our financial condition and operating results could adversely be affected. One or more of the following factors could impact the price and supply of waste: o defaults by waste suppliers under their contracts; o a decline in solid waste supply due to increased recovery by material recovery facilities; o composting of municipal solid waste; 23 o incineration of municipal solid waste; o legal prohibitions against processing of certain types of solid waste in our facilities; or o increased competition from landfills and recycling facilities. The loss of key executives and the failure to attract qualified management could limit our growth and negatively impact our operations. We depend highly upon our senior management team. We will continue to depend on operations management personnel with waste handling and pulp industry experience. At this time, we do not know the availability of such experienced management personnel or how much it may cost to attract and retain such personnel. The loss of the services of any member of senior management or the inability to hire experienced operations management personnel could have a material adverse effect on our operations and financial condition. Our results of operations may be affected by changing resale prices or market requirements for recyclable materials. The resale price for our recycled products, including our wetlap product, aluminum, and steel, will be tied to commodity pricing. Our results of operations may be affected by changing resale prices or market requirements for these recyclable materials. 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. Our revenues and results of operations will fluctuate. Our revenues and results of operations will vary from quarter to quarter in the future. A number of factors, many of which are outside our control, may cause variations in our results of operations, including: o demand and price for our products; o the timing and recognition of product sales; o unexpected delays in developing and introducing products; o unexpected delays in building and permitting our processing facilities; o increased expenses, whether related to marketing, product development or administration or otherwise; o the mix of revenues derived from products; o the hiring, retention and utilization of personnel; o waste collection companies are impacted by seasonal changes that may adversely affect our business and operations; o general economic factors; and o changes in the revenue recognition policies required by generally accepted accounting principles. We may engage in strategic transactions that may fail to enhance stockholder value. From time to time, we may consider possible strategic transactions, including the potential acquisitions of products, technologies and companies, and other alternatives with the goal of maximizing stockholder value. We may never complete a strategic transaction(s) and in the event that we do complete a strategic transaction(s), it may not be consummated on terms favorable to us. Further, such transactions may impair stockholder value or otherwise adversely affect our business. Any such transaction may require us to incur non-recurring or other charges and may pose significant integration challenges and/or management and business disruptions, any of which could harm our results of operation and business prospects. 24 Environmental regulations and litigation could subject us to fines, penalties, judgments and limitations on our ability to expand. We are subject to potential liability and restrictions under environmental laws, including those relating to handling, recycling, treatment, storage of wastes, discharges to air and water, and the remediation of contaminated soil, surface water and groundwater. The waste management industry has been, and will continue to be subject to regulation, including permitting and related financial assurance requirements, as well as to attempts to further regulate the industry through new legislation. Our business is subject to a wide range of federal, state and, in some cases, local environmental, odor and noise and land use restrictions and regulations. If we are not able to comply with the requirements that apply to a particular facility or if we operate without necessary approvals, we could be subject to civil, and possibly criminal, fines and penalties, and we may be required to spend substantial capital to bring an operation into compliance or to temporarily or permanently discontinue, and/or take corrective actions. We may not have sufficient insurance coverage for our environmental liabilities. Those costs or actions could be significant to us and significantly impact our results of operations, as well as our available capital. In addition to the costs of complying with environmental laws and regulations, if governmental agencies or private parties brought environmental litigation against us, we would likely incur substantial costs in defending against such actions. We may be, in the future, a defendant in lawsuits brought by parties alleging environmental damage, personal injury, and/or property damage. A judgment against us, or a settlement by us, could harm our business, our prospects and our reputation. We cannot predict with certainty the extent of future costs under environmental, health and safety laws, and cannot guarantee that they will not be material. We could be liable if our operations cause environmental damage to our properties or to the property of other landowners, particularly as a result of the contamination of drinking water sources or soil. Under current law, we could even be held liable for damage caused by conditions that existed before we acquired the assets or operations involved. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows. We may be unable to obtain required permits. We have obtained all of our environmental permits for our initial facility in Anaheim, California. We cannot assure you that we will successfully retain these permits that are required to operate our initial facility in Anaheim, California or obtain or retain the permits we require to operate our business for our additional facilities. Permits to operate waste processing facilities have become increasingly difficult and expensive to obtain and retain as a result of many factors including numerous hearings and compliance with zoning, environmental and other regulatory measures. The granting of these permits is also often subject to resistance from citizen or other groups and other political pressures. Our failure to obtain or retain the required permits to operate our facilities could have a material negative effect on our future results of operations. A substantial portion of our revenues will be generated from our agreement with Taormina Industries, which agreement may be terminated by Taormina under certain circumstances. In June 2003, we signed a 10-year contract, with options for three additional extensions of five years each, with Taormina Industries, a division of Republic Services, Inc. The agreement provides for Taormina to deliver up to 500 tons of MSW per day to us for processing at our Anaheim facility currently under construction on the campus of Taormina in Anaheim, California. The second phase calls for us to build an additional plant in the Orange County area at which Taormina will deliver up to an additional 2,000 tons of MSW per day. The agreement grants Taormina a right of first refusal to participate in potential additional projects in an additional 10 counties throughout California where Taormina has operations. Under the terms of the agreement, Taormina will pay a per ton tipping fee to the Company. We anticipate that a substantial portion of our revenues will be generated from this agreement for the foreseeable future. If this agreement is terminated for any reason or if we are unable to extend this agreement on terms favorable to us or at all prior to expiration, our business, financial condition and results of operations would be materially harmed. The agreement is terminable by Taormina in the event that, among other things, we do not complete all permitting, approvals and construction of our initial facility by February 8, 2006. We cannot assure you that we will meet this deadline. We may be exposed to litigation in the ordinary course of our business. Since our personnel are expected to routinely handle solid waste materials, we may be subject to liability claims by employees, customers and third parties. We currently have liability insurance in place, however, there can be no assurance that such insurance will be adequate to cover claims asserted against us or that we will be able to maintain or purchase such insurance in the future. 25 Other companies may claim that we infringe their intellectual property or proprietary rights. We do not believe that our products or processes violate third party intellectual property rights. Nevertheless, we cannot assure you that any such third party rights are not being, and will not be, violated. If any of our products or processes is found to violate third party intellectual property rights, we may be required to re-engineer one or more of those products or processes or seek to obtain licenses from third parties to continue offering our products or processes without substantial re-engineering, and such efforts may not be successful. We cannot assure you that we will be able to obtain such licenses at a reasonable cost, if at all. Future patents may be issued to third parties upon which our technology may infringe. We may incur substantial costs in defending against claims under any such patents. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief, which effectively could block our ability to further develop or commercialize some or all of our products or services. and could result in the award of substantial damages against us. In the event of a claim of infringement, we may be required to obtain one or more licenses from third parties. We cannot assure you that we will be able to obtain such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any such license could have a material adverse effect on our business and results of operations. Our license agreement with Bio-Products International, Inc. is not exclusive in all respects and imposes certain requirements on us to maintain exclusivity in specified applications. Our license agreement with Bio-Products International, Inc. ("BPI") grants us the exclusive rights to exploit the technology covered by the license in the United States with respect to most applications. Applications in which the cellulosic product of waste, including municipal solid waste, processed utilizing the licensed technology is either used directly as a fuel source or converted into an end product for energy production are not exclusive and accordingly BPI may grant third parties the right to use the technology for the production of marketable solid combustion fuel end products. In order to maintain exclusivity with respect to the other applications, we are required to continue to improve our initial facility under construction in Anaheim, California on a regular schedule or construct new facilities. Further, BPI is required to make certain payments to the University of Alabama at Huntsville, the assignee of the patent for the technology that it has exclusively licensed to BPI, in order for BPI to maintain its exclusive rights. Our failure to maintain exclusivity of the license could have a material adverse effect on our business, financial condition and results of operations. If we fail to implement new technologies we may not be able to keep up with the industry which could have an adverse affect on our business. We expect to utilize patented steam classification technology in our processing facilities and to adopt other technologies from time to time. Our future growth is partially tied to our ability to improve our knowledge and implementation of waste processing technologies. Inability to successfully implement commercially viable waste processing technologies in response to market conditions in a manner that is responsive to our customers' requirements could have a material adverse effect on our business and results of operation. Changes in stock option accounting rules may adversely affect our reported operating results, our stock price, and our ability to attract and retain employees. In December 2004, the Financial Accounting Standards Board published new rules that require companies to record all stock-based employee compensation as an expense. The new rules apply to stock options grants, as well as a wide range of other share-based compensation arrangements including restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. We will have to apply the new rules in our first annual reporting period beginning after December 15, 2005. As a small company with limited financial resources, we have depended upon compensating our officers, directors, employees and consultants with such stock based compensation awards in the past in order to limit our cash expenditures and to attract and retain officers, directors, employees and consultants. Accordingly, if we continue to grant stock options or other stock based compensation awards to our officers, directors, employees, and consultants after the new rules apply to us, our future earnings, if any, will be reduced (or our future losses will be increased) by the expenses recorded for those grants. These compensation expenses may be larger than the compensation expense that we would be required to record were we able to compensate these persons with cash in lieu of securities. The expenses we will have to record as a result of future options grants may be significant and may materially negatively affect our reported financial results. The adverse effects that the new accounting rules may have on our future financial statements should we continue to rely heavily on stock-based compensation may reduce our stock price and make it more difficult for us to attract new investors. In addition, reducing our use of stock plans to reward and incent our officers, directors and employees, could result in a competitive disadvantage to us in the employee marketplace. In 2004, we adopted this accounting policy. 26 RISKS RELATED TO OUR COMMON STOCK Substantial sales of common stock could cause our stock price to fall. As of July 15, 2005, we had outstanding 28,609,293 shares of common and preferred stock, including, 24,533,693 shares of common stock, all of which were "restricted securities" (as that term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended). Although only approximately 1,200,817 shares are currently freely tradable shares, we recently filed a registration statement with the SEC covering the resale of certain shares of our common stock. Upon the effectiveness of this registration statement, an additional 6,339,373 shares of our currently outstanding common stock will be able to be freely sold on the market, which number will increase to 11,774,756 shares if certain warrants are exercised and our preferred stock is converted to common stock by the holders thereof and the underlying 1,359,783 shares and 4,075,600, respectively, are purchased and converted. Because there currently are only 1,200,817 shares freely tradable shares, the sudden release of 11,774,756 additional freely trading shares onto the market, or the perception that such shares will or could come onto the market, could have an adverse affect on the trading price of our stock. In addition to the foregoing, an additional 20,163,706 shares of restricted stock will become eligible for public resale under Rule 144 commencing in late August 2005. Subject to certain exceptions, the holders of an aggregate of approximately 12,283,500 shares of common stock have agreed not to sell or otherwise dispose of any of such shares until the earlier of (i) 90 days following the conversion of at least 50% of our preferred stock into common stock or (ii) 90 days following the closing of an underwritten public offering of our common stock with a per share price of at least $5.00 and a total gross offering amount of $10 million. Although Rule 144 restricts the number of shares that any one holder can sell during any three-month period under Rule 144, because more than one stockholder holds these restricted shares, a significant number of shares could legally be sold commencing in August 2005. No prediction can be made as to the effect, if any, that sales of the shares included in the registration statement recently filed with the SEC or subject to Rule 144 sales commencing in August 2005, or the availability of such shares for sale, will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for our common stock and could impair our ability to raise capital through the sale of our equity securities. Our stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. Our common stock is thinly-traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Due to these conditions, we can not assure you that you will be able to sell your shares at or near ask prices or at all if you need money or otherwise desire to liquidate your shares. You may have difficulty selling our shares because they are deemed "penny stocks". 27 Since our common stock is not listed on the Nasdaq Stock Market, if the trading price of our common stock remains below $5.00 per share, trading in our common stock will be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with a spouse). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and the ability of holders of the common stock to sell their shares. The holders of our shares of preferred stock have certain rights that could affect the value of our common stock. The holders of shares of our series A preferred stock have the right, under certain circumstances, to elect a majority of the members of our board of directors, and have certain preferences upon a liquidation or sale of our company. Our existing directors, executive officers and principal stockholders hold a substantial amount of our common stock and may be able to prevent other stockholders from influencing significant corporate decisions. As of July 15, 2005 our directors and executive officers and their affiliates beneficially owned over 48.7% of our outstanding common stock. These stockholders, if they act together, may be able to direct the outcome of matters requiring approval of the stockholders, including the election of our directors and other corporate actions such as: o our merger with or into another company; o a sale of substantially all of our assets; and o amendments to our articles of incorporation. The decisions of these stockholders may conflict with our interests or those of our other stockholders. The market price of our stock may be adversely affected by market volatility. The market price of our common stock is likely to be volatile and could fluctuate widely in response to many factors, including: o developments with respect to patents or proprietary rights; o announcements of technological innovations by us or our competitors; o announcements of new products or new contracts by us or our competitors; o actual or anticipated variations in our operating results due to the level of development expenses and other factors; o changes in financial estimates by securities analysts and whether our earnings meet or exceed such estimates; o conditions and trends in the waste industries and other industries; o new accounting standards; o general economic, political and market conditions and other factors; and o the occurrence of any of the risks described in this quarterly report. 28 Item 3. -- Controls and Procedures Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this report (the "Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and sufficient to ensure that information required to be disclosed by us in the reports that we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission's rules and forms. There were no significant changes in our internal controls or other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken. PART II-- OTHER INFORMATION Item 5 -- Other Information Unsecured Senior Promissory Note On April 11, 2005, the Company executed an unsecured senior promissory note (the "Note") provided for a loan to the Company of $750,000 The note bore interest at an annual rate equal to 12% with interest payable at the time the Company paid the principal amount due on the Note. The Note was due in full on the earlier of (a) July 11, 2005 or (b) the closing date of an equity investment in the Company by the note holder or its affiliates resulting in gross proceeds to the Company of at least $8,000,000. The Note was paid in full with accrued interest on April 28, 2005. See below for a discription of the equity investment. Series A Cumulative Redeemable Convertible Participating Preferred Stock On April 28, 2005, the Company entered into a Securities Purchase Agreement whereby the Company sold and issued 4,000,000 shares of newly created 8% Series A Cumulative Redeemable Convertible Participating Preferred Stock of the Company (the "Series A Preferred") and warrants (the "Warrants," and, together with the Series A Preferred, the "Securities") to purchase up to 400,000 shares of common stock of the Company. The gross aggregate proceeds to the Company from the sale of the securities was $10,000,000. The Company sold an additional 75,600 shares of Series A Preferred and Warrants to purchase up to an additional 7,560 shares of Common Stock at a second closing on May 9, 2005. The Company is required to apply the proceeds of the sale of the Securities primarily to the construction and operation of the Company's initial plant in Anaheim, California and payment of the Note discussed above. The investors are entitled to recommend for election to the Company's Board of Directors two individuals designated by such investors. Two employee directors have agreed to resign as directors effective upon the appointment or election of the investors' designees. Holders of Series A Preferred are entitled to receive cumulative dividends, payable quarterly in additional shares of Series A Preferred, at the rate of 8% per annum. This dividend rate is subject to increase to 9% in the event the Company does not comply with certain registration rights provisions. Each share of Series A Preferred is entitled to that number of votes equal to the number of whole shares of the Common Stock into which it is convertible. In addition, so long as at least 50% of the shares of Series A Preferred remain outstanding the Company is prohibited from taking certain actions without the approval of the holders of a majority of the outstanding shares of Series A Preferred. The holders of a majority of the shares of Series A Preferred have the option to require the Company to redeem all outstanding shares of Series A Preferred on the five year anniversary of issuance at a redemption price equal to $2.50 per share, plus accrued and unpaid dividends to that date. In the event the holders do not exercise this redemption right, all shares of Series A Preferred will automatically convert into shares of Common Stock on such five-year anniversary, as described below. Each share of Series A Preferred will automatically convert into one share of Common Stock (i) in the event the Company consummates an underwritten public offering of its securities at a price per share not less than $5.00 and for a total gross offering amount of at least $10 million, (ii) in the event of a sale of the Company resulting in proceeds to the holders of Series A Preferred of a per share amount of at least $5.00, (iii) in the event that the closing market price of the Common Stock averages at least $7.50 per share over a period of 20 consecutive trading days and the daily trading volume averages at least 75,000 shares over such period, (iv) at any time following the first to occur of September 30, 2006 or the "Operational Date" (generally defined to mean when the Company's initial facility generates operating cash flow of at least $672,000 for any consecutive three month period), upon the approval of a majority of the then-outstanding shares of Series A Preferred, or (v) unless the Company is otherwise obligated to redeem the shares as described above, on April 28, 2010. 29 Each holder has the right to convert its shares Series A Preferred into shares of Common Stock on a one-for-one basis at any time following the first to occur of September 30, 2006 or the Operating Date. The Warrants are exercisable for a period of five years commencing as of their issuance date, at an exercise price of $4.00 per share. In connection with the issuance of the Securities, on April 28, 2005, the Company entered into a Registration Rights Agreement granting the investors certain demand and piggyback registration rights of the common stock issued upon conversion of the Series A Preferred and exercise of the Warrants. Also, as a condition of the Registration Rights Agreement certain officers and significant shareholders agreed that they would not offer, sell, contract to sell, lend, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of Common Stock, or any options or warrants to purchase any shares of Common Stock with respect to which the holder has beneficial ownership until the earlier of 90 days following the conversion into Common Stock of at least 50% of the shares of Series A Preferred Stock, or 90 days following the closing of a Qualified Public Offering as defined in the agreement. WWT issued and sold the foregoing securities pursuant to certain exemptions from registration provided by Rule 506 of Regulation D and Section 4(2) and Section 4(6) of the Securities Act of 1933, as amended. Employment Agreements On April 28, 2005, the Company entered into new employment agreements with each of Thomas L. Collins, the Company's Chief Executive Officer, Fred Lundberg, the Company's Senior Vice President, Steven Racoosin, the Company's President, and David Rane, the Company's Chief Financed Officer. The new agreements supersede and replace each officer's existing employment agreement with the Company. Pursuant to the new agreements, the officers will continue to serve the Company in the same capacities but on an "at-will" basis. Messrs. Collins, Lundberg, Racoosin and Rane will receive an annual salary of $224,000, $204,000, $225,000 and $224,000, respectively, and are each entitled to bonuses as may be deemed appropriate by the Board of Directors. Each executive 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, each executive will be entitled to 12 months salary and continuation of benefits in the event of disability or death during the term of his agreement. Item 6. -- Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act (b) On April 15, 2005, the Company filed a Current Report on Form 8-K disclosing the creation of a direct financial obligation pursuant to the entry into of an unsecured senior promissory note. On April 22, 2005, the Company filed a Current Report on Form 8-K disclosing the grant of an option to purchase shares of common stock of Registrant to an executive officer of Company. On May 5, 2005, the Company filed a Current Report on Form 8-K disclosing the sale of unregistered securities pursuant to the entry of material definitive agreements by the Company regarding said sale and that the Company entered into new employment agreements with certain of its executive officers. 30 On June 1, 2005, the Company filed a Current Report on Form 8-K disclosing the sale of unregistered securities pursuant to the entry of material definitive agreements by the Company regarding said sale. 31 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. WORLD WASTE TECHNOLOGIES, INC. (Registrant) Date: August 15, 2005 By: /s/ David Rane ------------------------------- David Rane Chief Financial Officer 32 INDEX TO EXHIBITS Exhibit Number Description -------------------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer 31.2 Certification of Chief Financial Officer 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act