e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
001-33304
Converted Organics
Inc.
(Exact Name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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20-4075963
(I.R.S. Employer
Identification No.)
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137A Lewis Wharf, Boston, MA 02110
(Address of Principal Executive
Offices and Zip Code)
(617) 624-0111
(Registrants telephone
number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock $0.0001 Par Value
Class B Warrants to purchase one share of Common Stock
Class H Warrants to purchase one share of Common Stock
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NASDAQ Capital Market
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by checkmark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by checkmark whether the registrant (1) has filed
all reports required to be filed by Section 13 of 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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by checkmark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day
of the registrants most recently completed second fiscal
quarter was $21,152,236.
The number of shares outstanding of common stock of the
Registrant as of March 29, 2010 was 38,020,708.
Documents Incorporated by Reference:
Portions of the registrants definitive proxy statement to
be filed subsequent to the date hereof in connection with the
registrants 2010 annual meeting are incorporated by
reference into Part III of this Report.
PART I
Forward-Looking
Statements
The SEC encourages companies to disclose forward-looking
information so that investors can better understand a
companys future prospects and make informed investment
decisions. This report contains such forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
Words such as may, potential,
anticipate, could, estimate,
expects, projects, intends,
plans, believes and words and terms of
similar substance used in connection with any discussion of
future operating or financial performance identify
forward-looking statements. All forward-looking statements are
managements present expectations of future events and are
subject to a number of risks and uncertainties that could cause
actual results to differ materially from those described in the
forward-looking statements. Some of the factors which could
cause our results to differ materially from our expectations
include the following:
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the demand for organic fertilizer and the resulting prices that
customers are willing to pay;
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the availability of an adequate supply of food waste stream
feedstock and the competition for such supply;
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the unpredictable cost of compliance with environmental and
other government regulation;
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the time and cost of obtaining USDA, state or other organic
product labeling designations, and changes to such labeling
requirements that may adversely affect our ability to market our
products;
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our ability to manage expenses;
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our ability to remain in compliance with standards set by the
National Organic Program;
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supply of organic fertilizer products from the use of competing
or newly developed technologies;
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our ability to attract and retain key personnel;
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to the extent we complete any acquisitions, our ability to
finance those acquisitions, and our ability to efficiently
integrate future acquisitions, if any, or any other new lines of
business that we may enter in the future;
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adoption of new accounting regulations and standards;
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adverse changes in the securities markets;
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our ability to sell sufficient quantities of product to cover
operating expenses.
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our ability to maintain production levels sufficient to meet
customer demand
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our ability to comply with continued listing requirements of the
NASDAQ Capital Market; and
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the availability of, and costs associated with, sources of
liquidity (including working capital requirements), as well as
our ability to obtain bond financing for future facilities.
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Please also see the discussion of risks and uncertainties under
the heading Risk Factors.
In light of these assumptions, risks and uncertainties, the
results and events discussed in the forward-looking statements
contained in this report might not occur. Investors are
cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this report. We
are not under any obligation, and we expressly disclaim any
obligation, to update or alter any forward-looking statements,
whether as a result of new information, future events or
otherwise.
Overview
Converted Organics Inc. (Converted Organics,
we, our, the Company)
operates processing facilities that use food waste and other raw
materials to manufacture all-natural fertilizer and soil
amendment products
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combining nutritional and disease suppression characteristics.
In addition to our sales in the agribusiness market, we sell and
distribute our products in the turf management and retail
markets. We also hope to achieve additional revenue by licensing
the use of our technology to others. We currently operate two
facilities:
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Woodbridge facility. A facility in Woodbridge,
New Jersey that we have equipped as our first internally
constructed organic waste conversion facility (the
Woodbridge facility). Operations at the Woodbridge
facility began in late June of 2008 and we are processing solid
waste and are producing both liquid and dry fertilizer and soil
enhancement products. Due to odor and corrosion issues that were
faced during 2009, our Woodbridge facility currently operates at
approximately 20% of its potential production capabilities.
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Gonzales facility. A facility in Gonzales,
California that we acquired in January 2008, which is
operational and produces liquid fertilizer products (the
Gonzales facility). The Gonzales facility began to
generate revenue in February 2008. The facility currently
produces at approximately 60% of potential production capacity
to accommodate current sales demand.
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We were incorporated under the laws of the state of Delaware in
January 2006. In February 2006, we merged with our predecessor
organizations, Mining Organics Management, LLC (MOM)
and Mining Organics Harlem River Rail Yard, LLC
(HRRY), in transactions accounted for as a
recapitalization. These predecessor organizations provided
initial technical and organizational research that led to the
foundation of the current business plan.
On February 16, 2007, we successfully completed an initial
public offering of stock and successfully completed a bond
offering with the New Jersey Economic Development Authority. The
net proceeds of the stock offering of $8.9 million,
together with the net proceeds of the bond offering of
$16.5 million, were used to develop and construct the
Woodbridge facility, fund our marketing and administrative
expenses during the construction period and fund specific
principal and interest reserves as specified in the bond
offering. Of the total net proceeds of the stock and bond
offerings of $25.4 million, $14.6 million was used
towards the construction of the Woodbridge facility. In addition
we have incurred an additional $10 million to complete the
Woodbridge facility for a total cost of approximately
$24.6 million. We have also completed several additional
financings to cover construction costs and working capital
requirements which are discussed in detail in Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS under Recent Financing Activities.
On January 24, 2008, we acquired the assets, including the
intellectual property, of Waste Recovery Industries, LLC
(WRI). This acquisition makes us the exclusive owner
of the proprietary technology and process known as the High
Temperature Liquid Composting (HTLC) system, which
processes various biodegradable waste products into liquid and
solid organic-based fertilizer and feed products.
Also on January 24, 2008, we acquired the net assets of
United Organic Products, LLC (UOP), which was under
common ownership with WRI. With this acquisition, we acquired a
leading liquid fertilizer product line, as well as the Gonzales
facility, which is a production facility that services a West
Coast agribusiness customer base through established
distribution channels.
Our
Revenue Sources
Our revenue comes from two sources: tip fees and
product sales. Waste haulers pay tip fees to us for accepting
food waste generated by food distributors such as grocery
stores, produce docks, fish markets and food processors, and by
hospitality venues such as hotels, restaurants, convention
centers and airports. Revenue also comes from the customers who
purchase our products. Our products possess a combination of
nutritional, disease suppression and soil amendment
characteristics. The products are sold in both dry and liquid
form and are stable with an extended shelf life compared to
other organic fertilizers. Among other uses, the liquid product
is expected to be used to mitigate powdery mildew, a leaf fungus
that restricts the flow of water and nutrients to plants. Our
products can be used either on a stand-alone basis or in
combination with more traditional petrochemical-based
fertilizers and crop protection products. Based on growth trials
we have conducted with local farmers, company-sponsored
research, increased environmental awareness and trends in
consumer food preferences, we believe our products will have
demand in the agribusiness, turf management and retail markets.
We also expect to benefit from increased regulatory focus on
food waste processing and on environmentally friendly growing
practices.
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Our
Woodbridge Facility
On June 2, 2006, we obtained a long-term lease for a site
in a portion of an industrial building in Woodbridge, New Jersey
that the landlord modified and that we equipped as our first
internally constructed waste conversion facility. Our conversion
process has been approved and is included in the Middlesex
County and New Jersey State Solid Waste Management Plan. We have
a Class C recycling permit, which is the primary
environmental permit for this project. We are currently
producing both liquid and dry product at the facility. Our
Woodbridge facility receives raw material from the New
York-Northern New Jersey metropolitan area. It is located near
the confluence of two major highways in northern New Jersey,
providing efficient access for the delivery of feedstock from
throughout this geographic area.
During the second quarter 2008, we began to record tip fee and
during the fourth quarter 2008 we began to record product sales
revenue. Nevertheless we are currently operating at less than
full capacity at the facility. At full capacity, the Woodbridge
facility is expected to process approximately 78,000 tons of
food waste and produce approximately 9,900 tons of dry product
and approximately 10,000 tons of liquid annually. During 2009,
we generated revenue from this facility in the form of tip fees
of approximately $127,000 and product sales of approximately
$349,000. In order for this facility to be cash flow positive,
we estimate that product and tip fee sales would need to be in a
range of $450,000 to $550,000 per month. We estimate that the
product can be sold in the range of $400 to $700 per ton based
on the market to which it is sold. Based on the above, we would
have to produce and sell approximately
45-55% of
the capacity of the Woodbridge facility to be cash flow positive
and until our sales and production volume reach that level, we
will not be cash flow positive and therefore we have allocated
some of the funds raised in our October 2009 public offering for
future working capital purposes.
In early November 2009, during routine maintenance, we
discovered corrosion in the walls of one of our 120,000 gallon
International Bio Recovery (IBR) digesters and determined that
the corrosion was due to our manufacturing process and the
unsatisfactory performance of a protective coating that was
applied at the time of installation. Through subsequent wall
thickness testing we determined that the corrosion was
significant in two digesters and that we would not be able to
use those digesters for their intended purpose in our
manufacturing process and that they would have to be repaired or
replaced. The IBR digesters were operated using the Enhanced
Autothermal Thermophilic Aerobic Digestion (EATAD) technology
which was granted to us pursuant to an exclusive know-how
license agreement under which we could use IBRs
proprietary EATAD technology for the design, construction and
operation of facilities within a 31.25 mile radius from
City Hall in New York City for the conversion of food waste into
solid and liquid organic material.
We considered the most cost effective solutions to the corrosion
matter, including the installation of stainless steel liners
into the two 120,000 gallon digesters or the installation of
additional CLF digesters, two of which are already installed and
working at the facility. We determined the most cost effective
and efficient solution is to utilize the CLF digesters, which
are the digester units used at our Gonzales facility and are the
ones which operate using our proprietary HTLC technology. These
digesters are smaller in capacity and they have shown through
the operation of our Gonzales facility, to be reliable and
effective in the production of organic fertilizer products.
Currently, the Woodbridge facility is operating at approximately
20% of capacity. Our plan is to gauge the demand for our liquid
product, and as the demand increases, we will add production
capacity by adding additional CLF digesters. We anticipate that
it will take 8 CLF digesters to bring the facility to 100%
capacity at a cost of approximately $1.8 million. While we
had previously used the IBR digester tanks at the Woodbridge
facility, we believe that the CLF digesters that utilize our
proprietary technology provide for a more efficient operation at
the Woodbridge facility. We believe the CLF digesters are easier
to operate and maintain, and we have found that using the CLF
digester tanks has minimized or eliminated the odor issues
previously faced by the Woodbridge facility. Throughout 2009,
our production at the plant was limited by odor issues to
approximately 20% of capacity and therefore the corrosion issues
we faced in fourth quarter 2009 has not affected our ability to
produce product and meet current sales demand. However, because
we believe that we have corrected the odor issues and we
anticipate increased sales throughout 2010, we may face a timing
related issue regarding increasing production capabilities and
fulfilling the sales orders increase. If such a timing issue
should occur, we may be unable to generate positive cash flow
from the Woodbridge facility as quickly as we had originally
anticipated. During this period of diminished production
capacity we are looking at and acting to lower operating costs
at the facility in order to decrease cash requirements.
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Our decision to bring the Woodbridge facility up to 100%
capacity by utilizing our proprietary technology instead of the
EATAD technology has caused us to recognize that certain
equipment and systems originally installed at the facility will
no longer be utilized. The net book value cost of the equipment,
systems and related technology licenses is approximately
$3.9 million. We have recognized an impairment charge
related to those assets in our consolidated statement of
operations for the year ended December 31, 2009, which is
further discussed in Item 7. MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and in the footnotes to our consolidated financial statements.
We feel that over time, assuming an increase in sales, this
expense will be offset by lower operating costs related to the
HTLC technology. In addition, we are investigating various
alternative legal remedies that we may have under warranty.
As of December 31, 2009, we had five outstanding term notes
due to our New Jersey construction vendors of approximately
$3.2 million. We owed approximately $2.0 million to
one construction vendor and on November 19, 2009 we entered
into an agreement with this construction vendor that required us
to pay a total of $2,029,000, with the first payment of
$1,000,000 paid upon execution of the term note and the balance
of $1,029,000 payable in eighteen level monthly payments of
principal and interest calculated at 6% per annum. The monthly
payments began January 1, 2010. This construction vendor
had previously filed a construction lien on our Woodbridge
facility and had commenced a lawsuit to enforce that lien.
According to terms of the agreement, the construction lien claim
and related lawsuit was suspended during the eighteen month
payment period and will be released completely upon final
payment. There are no outstanding claims by any construction
vendors at the Woodbridge facility.
Our
Gonzales Facility
On January 24, 2008, we acquired the net assets of UOP
which was under common ownership with WRI. With this
transaction, we acquired a leading liquid fertilizer product
line, as well as the Gonzales facility, which is a
state-of-the-art
production facility that services a strong West Coast
agribusiness customer base through established distribution
channels. This facility is operational and began to generate
revenues for us in February 2008. The purchase price of
$2,500,000 was paid in cash of $1,500,000 and a convertible note
payable of $1,000,000. The note matures on January 1, 2011,
has an interest rate of 7% per annum, is payable monthly in
arrears, and is convertible into our common stock at the option
of the holder at a price equal to the average closing price of
our common stock on the NASDAQ Capital Market for the five days
preceding conversion. As of December 31, 2009, the
convertible note payable had a remaining principal balance of
approximately $373,000 and the holder had converted
approximately $316,000 in principal and interest on the note
into 281,500 shares of our common stock.
On January 24, 2008, we entered into a
10-year
lease for land in Gonzales, California, where our Gonzales
facility is located. The land is leased from Valley Land
Holdings, LLC, or VLH, a California limited liability company
whose sole member is a former officer and director of Converted
Organics Inc. The lease provides for an initial monthly rent of
$9,000 for 2008, after which the lease payments increase by 3%
per year during the term of the lease. The lease is also
renewable for three five-year terms after the expiration of the
initial
10-year
term. In addition, we own the Gonzales facility and the
operating equipment used in the facility. The consolidated
financial statements included VLH because VLH had been deemed to
be a variable interest entity of the Company as it was the
primary beneficiary of that variable interest entity following
the acquisition of the net assets of UOP. VLHs assets and
liabilities consist primarily of cash, land and a mortgage note
payable on the land on which the California facility is located.
Its operations consist of rental income on the land from the
Company and related operating expenses. In 2009, the sole member
of VLH contributed cash and property to VLH in a
recapitalization. VLH has henceforth been sufficiently
capitalized and is no longer considered to be a variable
interest entity of the Company. The Company has deconsolidated
VLH as a variable interest entity as of April 1, 2009 in
its financial statements.
The Gonzales facility generated revenue during 2009 of
approximately $2.1 million. We plan to continue to increase
sales by channeling efforts into the turf and retail markets,
which we believe to be more profitable, by generating tip fees
from receiving additional quantities of food processing waste
and by reducing the amount of raw material and freight costs
currently associated with the production process. In addition,
we have plans to add capacity to the Gonzales plant, whereby the
plant will be able to produce approximately three times its
current production and, depending upon market demand for solid
fertilizer products, will be capable of producing both liquid
and solid products. We have completed certain aspects of the
planned upgrades which allow us to receive solid food waste for
processing but have delayed the upgrades which would allow us to
produce dry product. The
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remaining upgrades have been delayed due to possessing and
obtaining the proper building permits and market demand for a
solid fertilizer product from the Gonzales facility.
The Gonzales facility began to generate positive cash flow from
operations in June 2009 and since that time has remained cash
flow positive. We estimate that the facility, in its current
configuration and based on current market prices, has the
capacity to generate monthly sales in the range of $350,000 to
$400,000. If sales increase above the current per month level,
we expect the additional cash flow from the Gonzales facility
will be used to offset operating expenses at the corporate level.
Pro Forma
Financial Information
Introduction
The unaudited pro forma condensed consolidated financial
information gives effect to the Gonzales facility acquisition
and related financings as if they had occurred on
January 1, 2008 and is based upon available information and
certain assumptions that we believe are reasonable. The
unaudited supplemental pro forma information does not purport to
represent what our financial condition or results of operations
would actually have been had these transactions in fact occurred
as of the dates indicated above or to project our results of
operations for the period indicated or for any other period.
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Year Ended
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December 31, 2008
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Revenues (in thousands)
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$
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1,548
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Net loss (in thousands)
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(16,232
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Net loss per share basic and diluted
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(2.71
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Current assets (in thousands)
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7,230
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Total assets (in thousands)
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32,618
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Current liabilities (in thousands)
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(9,474
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Total liabilities (in thousands)
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(27,571
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Total equity (deficit) (in thousands)
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5,047
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5
Future
Expansion of Business
In addition to our Gonzales and Woodbridge facilities, our
strategic plan calls for the continued development of our
licensing program, the production of a smaller capacity unit to
be used by us or sold to third parties, the construction of
additional facilities and the potential acquisition of other
environmentally sustainable companies that would further our
sustainable business model.
To date, we have undertaken the following activities in the
following markets to prepare for future expansion of business:
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We have begun the development of smaller capacity operating
units, namely the Scalable Modular AeRobic Technology (SMART)
units that are suitable for processing 5 to 50 tons of waste per
day, depending on owner/user preference. The semi-portable units
will be capable of operating indoors or outdoors, depending on
certain criteria, and may be as sophisticated or as basic in
design and function as the owner/user requires. The SMART system
will be delivered to each jobsite in a number of pre-assembled,
pre-tested components, and will include a license to use our
proprietary technology. Our target market is users who seek to
address waste problems on a smaller scale than would be
addressed by a large processing facility. Our plan contemplates
that purchasers of the SMART units would receive tip fees for
accepting waste and would sell fertilizer and soil amendment
products in the markets where their units operate. We plan to
market and sell the SMART units in both the United States and
abroad.
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We are currently developing a licensing program that will allow
third parties to use our proprietary HTLC technology for the
development of fertilizers suitable for use in organic crop
production and to date we have entered into a letter of intent
for one such license.
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We are actively investigating businesses suitable for
acquisition targets or joint venture partners to help facilitate
the growth of our business. Since our October 2009 secondary
offering, we have been investigating acquisition candidates that
share our eco-friendly, green business model. The acquisition
candidates that most appeal to us are those that share business
objectives based upon innovative environmentally sustainable
models, have a need for additional capital which we could help
raise or provide, and have a strong management team.
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In January 2010, we created Converted Organics of Mississippi,
LLC for the purposes of expanding our business by adding a
chicken litter based fertilizer product to our existing product
line. There have been no significant operations to date.
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In March 2010, we entered into a license agreement with
Heartland Technology Partners, LLC (HTP) under which
we were granted an exclusive, irrevocable license for the use of
HTPs waste water processing technology. In addition, we
have hired a senior executive in the waste water processing
industry and have begun to develop plans to establish this line
of business.
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To date, we undertook the following activities in the following
markets to prepare for the development of additional facilities:
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In 2006, The Rhode Island Industrial Facilities Corporation gave
initial approval to our Revenue Bond Financing Application for
up to $15 million for the construction of a Rhode Island
facility. Subsequently, the Rhode Island Resource Recovery
Corporation gave us final approval to lease nine acres of land
in the Lakeside Commerce Industrial Park in Johnston, RI. We
filed an application with the Rhode Island Department of
Environmental Management for the operation of a Putrescible
Waste Recycling Center at that site. As a result, we formed
Converted Organics of Rhode Island, LLC (Converted
Organics of RI) of which we are 92.5% owners. The
non-controlling interest is owned by a local business man who
has assisted us with the process of developing a Rhode Island
facility. In order to facilitate the development of Converted
Organics of RI, on February 25, 2010 we signed a letter of
intent with the non-controlling interest owner to sell
substantially all of the assets and a limited select amount of
liabilities of Converted Organics of RI, a transaction that
would include a lease assignment of our lease with RIRRC.
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In Massachusetts, we performed initial development work in
connection with construction of three manufacturing facilities
to serve the eastern Massachusetts market. The Massachusetts
Strategic Envirotechnology
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Partnership Program has completed a favorable review of our
technology. In March 2009 Converted Organics received a permit
from the Commonwealth of Massachusetts Department of
Environmental Protection to operate a food waste processing
facility at the site. Two of our proposals to develop facilities
are currently under review by property owners, the third
proposal has evolved into negotiations with MassOrganics I,
LLC (MassOrganics I) regarding the use of Converted
Organics proprietary technology for the manufacture of
organic fertilizer products. On February 25, 2010, we
signed a memorandum of understanding under which MassOrganics I
would install and operate the system at a new manufacturing
facility to be constructed at The Sutton Commerce Park in
Sutton, Massachusetts. MassOrganics I has agreed to enter into a
licensing agreement, under which MassOrganics I will pay a
licensing fee to Converted Organics.
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Conversion
Process
During 2009, we used two processes in our Woodbridge facility to
convert food waste into our fertilizer products. The first,
which is no longer used at our Woodbridge facility due to a
corrosion issue in the related digester, is based on technology
called Enhanced Autothermal Thermophilic Aerobic Digestion, or
EATAD. In addition, we use our own HTLC technology. We acquired
the proprietary rights to the HTLC technology in 2008 and began
to incorporate it into the operations at our Woodbridge
facility. We have used the HTLC technology at our Gonzales
facility since inception. In simplified terms, both technologies
work in a similar fashion in that once the prepared foodstock is
heated to a certain temperature, it self-generates additional
heat (autothermal), rising to very high, pathogen-destroying
temperature levels (thermophilic). Bacteria added to the
feedstock use oxygen (aerobic) to convert the food waste
(digestion) to a rich blend of nutrients and single cell
proteins. Foodstock preparation, digestion temperature, rate of
oxygen addition, acidity and inoculation of the microbial regime
are carefully controlled to produce products that are highly
consistent from batch to batch.
The products we manufacture are as follows:
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Solid base products with plant nutrition, disease suppression
and soil enhancement (amendment) benefits. The solid base
product can then be used by us to produce a variety of products
with various nitrogen (N), phosphorous (P), and potassium
(K) compositions. In describing the composition of
fertilizer, the nitrogen (N), phosphorus (P), and potassium
(K) composition is identified. Presently, we produce both
an 8-1-4 and a 4-1-8 solid granular product. These figures refer
to the ratio of nitrogen (N), phosphorus (P), and potassium (K),
respectively, in the products.
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Liquid base products with plant nutrition, disease suppression
and soil enhancement (amendment) benefits. The liquid base
product can then be used to produce a variety of products with
various nitrogen, phosphorous and potassium compositions (NPK).
We produce a variety of liquid products including: Converted
Organics 521, Converted Organics GP, Converted Organics XP,
Converted Organics XK, Converted Organics LC 1-1-1, Converted
Organics NC, SoilStart 7-1-1, Soil Start 6-0-0 and Pacific
Choice Hydrolyzed Fish 1-4-0.
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The efficacy of our products has been demonstrated both in
university laboratories and multi-year growth trials. These
field trials have been conducted on more than a dozen crops
including potatoes, tomatoes, squash, blueberries, grapes,
cotton and turf grass. While these studies have not been
published, peer-reviewed or otherwise subject to third-party
scrutiny, we believe the trials and other data show our solid
and liquid products have several valuable attributes:
Plant nutrition. Historically, growers have
focused on the nitrogen (N), phosphorous (P) and potassium
(K) content of fertilizers. As agronomists have gained a
better understanding of the importance of soil culture, they
have turned their attention to humic and fulvic acids,
phytohormones and other micronutrients and growth regulators not
present in petrochemical-based fertilizers.
Disease suppression. Based on field trials
using product produced by the licensed technology, we believe
our products combine nutrition with disease suppression
characteristics to eliminate or significantly reduce the need
for fungicides and other crop protection products. The
products disease suppression properties have been observed
under controlled laboratory conditions and in documented field
trials. We also have other field reports that have shown the
liquid concentrate to be effective in reducing the severity of
powdery mildew on grapes, reducing verticillium pressure on
tomatoes and reducing scab in potatoes.
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Soil amendment. As a result of its
slow-release nature, our dry fertilizer product increases the
organic content of soil, improving granularity and water
retention and thus reducing NPK leaching and run-off.
Pathogen-free. Due to high processing
temperatures, our products are virtually pathogen-free and have
extended shelf life.
The HTLC technology can be used in all of our future operating
plants. As the exclusive owner of the HTLC technology, we expect
to achieve the same or better operating results as we would with
the licensed EATAD technology at a lower operating cost.
Pursuant to the terms of the acquisition of the assets in
Gonzales, California, we pay a fee for each ton of additional
capacity added to our current facilities. The per ton fee is not
payable on the Woodbridge facility, or the Gonzales facility
acquired in the acquisition or the currently planned addition
thereto, except to the extent that capacity (in excess of the
currently planned addition) is added to those facilities in the
future. We anticipate that over time this fee will be less than
the royalty expense paid for use of the previously used licensed
EATAD technology. In addition, we believe the product produced
by the HTLC technology will be equal to or better in terms of
quality than products made through the use of the EATAD
technology.
We have achieved Organic Materials Review Institute
and/or
Washington State Department of Agriculture certification for our
GP, LC, 521, NC, XK, XP, PC Fish and Soil Start fertilizer
products, which means that these products are approved for use
in certified organic farming. In addition to the products
currently listed, we have also submitted applications for review
and approval of our 8-1-4, 8-1-4 Lawn and Turf, 4-1-8 and 4-1-8
Flower and Garden products. We believe obtaining certification
for all of our products will have a positive impact on pricing.
However, in addition to the organic market, we believe our
products are positioned for the commercial market as a
fertilizer supplement or as a material to be blended into
traditional nutrition and disease suppression applications.
Marketing
and Sales
Target
Markets
According to the U.S. Fertilizer Institute, as of June
2007, U.S. fertilizer demand equaled approximately
58 million tons per year, with agribusiness consuming the
majority of product and the professional turf and retail
segments consuming the remainder. The concern of farmers,
gardeners and landscapers about nutrient runoffs, soil health
and other long-term effects of conventional chemical fertilizers
has increased demand for organic fertilizer. We have identified
three target markets for our products:
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Agribusiness: conventional farms, organic
farms, horticulture, hydroponics and aquaculture;
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Turf management: professional lawn care and
landscaping, golf courses, sod farms, commercial, government and
institutional facilities; and
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Retail sales: home improvement outlets, garden
supply stores, nurseries, Internet sales and shopping networks.
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Agribusiness: We believe there are two primary
business drivers influencing commercial agriculture. First,
commercial farmers are focused on improving the economic yield
of their land: maximizing the value derived from crop output
(quantity and quality). Second, commercial farmers are focused
on reducing the use of chemical products, while also meeting the
demand for cost-effective, environmentally responsible
alternatives. We believe this change in focus is the result of:
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Consumer demand for safer, higher quality food;
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The restriction on use of registered chemical products. Several
U.S. government authorities, including the Environmental
Protection Agency, the Food and Drug Administration, and the
USDA regulate the use of fertilizers;
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Environmental concerns and the demand for sustainable
technologies;
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Demand for more food for the growing world population; and
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The cost effectiveness and efficacy of non-chemical based
products to growers.
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Consumer demand for organic food products increased throughout
the 1990s to date at approximately 20% or more per annum. In the
wake of USDAs implementation of national organic standards
in October 2002, the organic food industry has continued to
grow. According to the Organic Trade Association, United
States sales of organic food and beverages have grown from
$1 billion in 1990 to approximately $24.6 billion in
2008 and are expected to grow at an average of 18% per year
through 2010. Furthermore, the Organic Trade Association reports
that organic foods represented approximately 2.8% of total food
and beverage sales in 2006, growing 20.9% in 2006, one of the
fastest growing categories. According to the Nutrition Business
Journal, consumer demand is driving organic sector expansion,
particularly for fruit, vegetables and dairy products. This
demand, in turn, is driving commercial farmers to shift more of
their acreage from conventional practices, which predominantly
use synthetic fertilizers, to organic practices, which require
the use of certified organic fertilizers or other natural
organic materials to facilitate crop growth. The USDAs
Economic Research Service reports that the number of certified
organic farm acres has grown from 0.9 million in 1992 to
4.1 million in 2005, a compound annual growth rate of 12%
per year.
We believe farmers are facing pressures to change from
conventional production practices to more environmentally
friendly practices. U.S. agricultural producers are turning
to certified organic farming methods as a potential way to lower
production costs, decrease reliance on nonrenewable resources
such as chemical fertilizers, increase market share with an
organically grown label and capture premium prices,
thereby boosting farm income.
Turf management: We believe that the more than
16,000 golf courses in the U.S. will continue to reduce
their use of chemicals and chemical-based fertilizers to limit
potentially harmful effects, such as chemical fertilizer runoff.
The United States Golf Association, or USGA, provides guidelines
for effective environmental course management. These guidelines
include using nutrient products and practices that reduce the
potential for contamination of ground and surface water.
Strategies include using slow-release fertilizers and selected
organic products and the application of nutrients through
irrigation systems. Further, the USGA advises that the selection
of chemical control strategies should be utilized only when
other strategies are inadequate. We believe that our
all-natural, slow-release fertilizer products will be well
received in this market.
Retail sales: The Freedonia Groups
report on Lawn & Garden Consumables indicates that the
U.S. market for packaged lawn and garden consumables is
$7.5 billion and is expected to grow 4.5% per year to
$9.3 billion in 2012. Fertilizers are the largest product
category, generating $2.85 billion, or 38%, of total lawn
and garden consumables sales. Fertilizers, mulch and growing
media will lead gains, especially rubber mulch, colored mulch
and premium soils. Organic formulations are expected to
experience more favorable growth than conventional formulations
across all product segments, due to increased consumer concern
with regard to how synthetic chemical fertilizers and pesticides
on lawns and gardens may affect human/pet health and the
environment. Further, in 2009, The National Gardening
Association reported that 40% of the nations
100 million households with a yard say they are likely to
use all-natural methods in the future due largely to
environmental and health concerns.
Product
Sales and Distribution
We sell and distribute our products through our sales
organization, comprised of twelve employees, which targets large
purchasers of fertilizer products for distribution in our target
geographic and product markets. Key activities of the sales
organization include introduction of our products and the
development of relationships with targeted clients and us. In
addition, we have signed distribution agreements with six
distributors to sell our products to numerous outlets in all of
our target markets. Due to our small size, we believe the most
efficient method for distribution of our products is through
regional distributors. This method of distribution currently
accounts for the majority of our sales. To the extent we make
sales directly to customers, we generally require our customers
to handle delivery of the product. We have also had preliminary
discussions with manufacturers representatives to explore
sales of our products in appropriate retail outlets. A portion
of proceeds from our October 2009 offering was used towards
hiring additional sales team employees. To work together with
our Vice President of Marketing and our existing sales
employees, since October 2009, we have hired eight new sales
employees, including a Director of Sales. We believe our sales
team location throughout the United States gives us strategic
placement for sales into both the organic and conventional
agriculture, retail and turf markets.
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Environmental
Impact of Our Business Model
Food waste, the raw material of our manufacturing process, comes
from a variety of sources. Prior to preparation, food must be
grown or raised, harvested, packaged, shipped, unpacked, sorted,
selected and repackaged before it finds its way into markets,
restaurants or home kitchens. Currently, this process creates a
large amount of food waste, particularly in densely populated
metropolitan areas such as New York City, Northern New Jersey,
and Eastern Massachusetts. Traditionally, the majority of food
waste is disposed of in either landfills or incinerators that do
not produce a product from this recyclable resource. We use a
demonstrated technology that is environmentally benign to
convert waste into valuable all-natural soil amendment and
fertilizer products.
According to the Environmental Protection Agency food waste
comprises 18% of the nations waste stream. Disposing of or
recycling food waste should be simple, since organic materials
grow and decompose readily in nature. However, the large volumes
of food wastes generated in urban areas combined with a lack of
available land for traditional recycling methods, such as
composting, make disposal of food wastes increasingly expensive
and difficult. Landfill capacity is a significant concern,
particularly in densely populated areas. In addition, landfills
may create negative environmental effects including liquid
wastes migrating into groundwater, landfill gas, consumption of
open space, and air pollution associated with trucking waste to
more remote sites. The alternative of incineration may produce
toxic air pollutants and climate-changing gases, as well as ash
containing heavy metals. Incineration also fails to recover the
useful materials from organic wastes that can be recycled.
Traditional composting is a slow process that uses large tracts
of land, may generate offensive odors, and may attract vermin.
In addition, composting usually creates an inconsistent product
with lower economic value than the fertilizer products we
produce.
Our process occurs in enclosed digesters housed
within a building that uses effective emissions control
equipment, which results in minimal amounts of dust and noise.
By turning food waste into a fertilizer product using an
environmentally benign process, we are able to reduce the total
amount of solid waste that goes to landfills and incinerators,
which in turn reduces the release of greenhouse gases such as
methane and carbon dioxide.
During the
start-up
phase at our Woodbridge facility, we experienced odor-related
issues. As a result of these issues, we have been assessed fines
from the Health Department of Middlesex County, New Jersey, and
have been named a party in a lawsuit by a neighboring business.
Based on a change in operational procedures and working with two
outside odor-control consultants, we believe we have
significantly reduced the odor issues. However, if we are
unsuccessful in controlling odor-related issues, we may be
subject to further fines or litigation, and our operations may
be interrupted or terminated.
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The following table summarizes some of the advantages of our
process compared with currently available methods employed to
dispose of organic food waste:
Comparison
of Methods for Managing Food Waste
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Method
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Environmental Impacts
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Products
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Landfilling
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Loss of land
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Landfill gas (minimal energy generation at some landfills)
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Groundwater threat
Methane gas
Air pollution from trucks
Useful materials not recycled
Undesirable land use
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Incineration
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Air pollution
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Electricity (only at some facilities)
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Toxic emissions
Useful materials not recycled
Disposal of ash still required
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Composting
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Groundwater threat
Odor
Vermin
Slow takes weeks
Substantial land required
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Low value compost
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Converted Organics
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No air pollution or solid waste
No harmful by-products
Removal of waste from waste stream
Consumption of electricity and natural gas
Discharge of treated wastewater into sewage system
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Natural fertilizer
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Environmental regulators and other governmental authorities in
our target markets have also focused more recently on the
potential benefits of recycling increased amounts of food waste.
For example, the New Jersey Department of Environmental
Protection, or the NJDEP, estimates nearly 1.5 million
tons, or approximately 7.4% of the states total waste
stream, is food waste, but in 2003, only 221,000 tons were
recycled, which represented just over 15% of the recycled waste.
The 2006 NJDEP Statewide Solid Waste Management Plan focused
particularly on the food waste recycling stream as
one of the most effective ways to create significant increases
in recycling tonnages and rates. In New York, state and local
environmental agencies are taking measures to encourage the
diversion of organic materials from landfills and are actively
seeking processes consistent with health and safety codes. The
goal is to further reduce the amount of waste going to landfills
and other traditional disposal facilities, particularly waste
that is hauled great distances, especially in densely populated
areas in the Northeast. In 2005, the Rhode Island Resource
Recovery Corporation, or the RIRRC, began an examination of the
bulk food waste processing technology of our technology licensor
to determine whether using our licensed technology would be
economically feasible, cost-effective, practicable, and an
appropriate application in Rhode Island. The RIRRC completed its
review and included the technology in its 2006 Solid Waster
Master Plan. In Massachusetts, the 2006 State Solid Waste Master
Plan has also identified a need for increased
organics-processing capacity within the state and has called for
a streamlined regulatory approval path.
Competition
We operate in a very competitive environment in our
businesss three dimensions organic waste
stream feedstock, technology and end products each
of which is quickly evolving. We believe we will be able to
compete effectively because of the abundance of the supply of
food waste in our geographic markets, the pricing of our tip
fees and the quality of our products and technology.
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Organic Waste Stream Feedstock. Competition
for the organic waste stream feedstock includes landfills,
incinerators, animal feed, land application and traditional
composting operations. Organic waste streams are generally
categorized as pre- and post-consumer food waste, lawn and
garden waste (sometimes called green waste), and bio-solids,
including sewage sludge or the by-product of wastewater
treatment. Some states, including New Jersey, have begun to
regulate the manner in which food waste may be composted. New
Jersey has created specific requirements for treatment in tanks
or in-vessel, and we believe our Woodbridge facility is the
first approved in-vessel processing facility in the state. In
Massachusetts, state regulators are considering a ban on the
disposal of organic materials at landfills and incinerators once
sufficient organic processing capacity exists within the state,
which, if adopted, would provide a competitive advantage for
organic processes such as our process.
Technology. There are a variety of
technologies used to treat organic wastes including composting,
digestion, hydrolysis and thermal processing. Companies using
these technologies may compete with us for organic material.
Composting is a natural process of decomposition that can be
enhanced by mounding the waste into windrows to retain heat,
thereby accelerating decomposition. Large-scale compost
facilities require significant amounts of land for operations
that may not be readily available or that may be only available
at significant cost in major metropolitan areas. Given the
difficulties in controlling the process or the consistent
ability to achieve germ-killing temperatures, the resulting
compost is often inconsistent and generally would command a
lower market price than our product.
Digestion may be either aerobic, like the HTLC or EATAD
processes, or anaerobic. Anaerobic digestion is, in simple
terms, mechanized in-vessel composting. In addition to compost,
most anaerobic digestion systems are designed to capture the
methane generated. While methane has value as a source of
energy, it is generally limited to
on-site use,
as it is not readily transported.
Hydrolysis is an energy-intensive chemical process that produces
a by-product, most commonly ethanol. Thermal technologies
extract the British thermal unit, or BTU, content of the waste
to generate electricity. Food waste, which is typically 75%-90%
water, is generally not a preferred feedstock. Absent
technological breakthroughs, neither hydrolysis nor thermal
technologies are expected to be accepted for food waste
processing on a large-scale in the near term.
End Products. The organic fertilizer business
is relatively new, highly fragmented, under-capitalized and
growing rapidly. We are not aware of any dominant producers or
products currently in the market. There are a number of single
input, protein-based products, such as fish, bone and cottonseed
meal, that can be used alone or mixed with chemical additives to
create highly formulated fertilizer blends that target specific
soil and crop needs. In this sense they are similar to our
products, and provide additional competition in the organic
fertilizer market. In the future, large producers of non-organic
fertilizer may also increase their presence in the organic
fertilizer market. These companies are generally better
capitalized than us and have greater financial and marketing
resources than us.
Most of the 58 million tons of fertilizer consumed annually
in North America is mined or derived from natural gas or
petroleum. These petroleum-based products generally have higher
nutrient content (NPK) and cost less than organic fertilizers.
Traditional petrochemical fertilizers are highly soluble and
readily leach from the soil. Slow release products that are
coated or specially processed command a premium. However, the
economic value offered by petrochemicals, especially for field
crops including corn, wheat, hay and soybeans, will not be
supplanted in the foreseeable future. We compete with large
producers of non-organics fertilizers, many of which are
significantly larger and better capitalized than us. In
addition, we compete with numerous smaller producers of
fertilizer.
Despite a large number of new products in the end market, we
believe that our products have a unique set of characteristics.
We believe positioning and branding the combination of nutrition
and disease suppression characteristics will differentiate our
products from other organic fertilizer products to develop
market demand, while maintaining or increasing pricing. In view
of the barriers to entry created by the supply of food waste,
regulatory controls and the cost of constructing facilities, we
do not foresee a dominant manufacturer or product emerging in
the near-term.
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Government
Regulation
Our end products are regulated by federal, state, county and
local governments as well as various agencies thereof, including
the United States Department of Agriculture.
In addition to the regulations governing the sale of our end
products, our facilities are subject to extensive regulation. We
have obtained permits to operate solid waste or recycling
facilities as well as permits for our sewage connection, water
supply, land use, air emission, and wastewater discharge. The
specific permit and approval requirements are set by the state
and the various local jurisdictions, including but not limited
to city, town, county, and township and state agencies having
control over the specific properties. Any proposed changes to
our plants or procedures require additional permit modifications.
For our Woodbridge facility, we have obtained various permits
and approvals to operate a recycling center and a manufacturing
facility, including among others: a Class C recycling
permit; land use and site plan approval; an air quality permit;
a discharge permit; treatment works approval and a storm water
runoff permit; building construction permits; a soil
conservation district permit and our certificate of occupancy.
Environmental regulations will also govern the operation of our
facilities. Regulatory agencies may require us to remediate
environmental conditions at our locations.
We have contracted with a company to explore our ability to
create carbon credits as a result of our manufacturing process
and our diverting food waste from landfills. As of the filing of
this report we have not determined the value, if any, of the
potential carbon credits associated with our business.
Employees
As of March 31, 2010, we had 46 employees ( not
including 2
sub-contract
employees), 12 of whom were in sales, 13 in management and
administration and 21 in operations (7 employees at our
Gonzales facility and 14 employees at our Woodbridge
facility). During this current time of limited production at our
Woodbridge facility we have reduced the number of
sub-contract
employees from 18 at this time last year to 2. A portion of
proceeds from our October 2009 secondary offering was to be used
towards hiring additional sales team employees. Since the close
of our secondary offering, we have been able to hire 8 new sales
employees, including a Director of Sales. These employees bring
over 130 years of combined sales experience to Converted
Organics and we believe their locations across the United States
give us strategic placement for sales into the organic and
conventional agricultural markets.
You should carefully consider the risks, uncertainties and other
factors described below because they could materially and
adversely affect our business, financial condition, operating
results and prospects and could negatively affect the market
price of our securities. Also, you should be aware that the
risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that we do not yet
know of, or that we currently think are immaterial, may also
impair our business operations. You should also refer to the
other information contained in this Annual Report on
Form 10-K,
including our consolidated financial statements and the related
notes.
We may
need to raise additional capital to fund our operations through
the near term, and we do not have any commitments for that
capital.
For the year ended December 31, 2009, we incurred a net
loss of approximately $21.1 million, and had an accumulated
deficit of $49.9 million. We may need additional capital to
execute our business strategy, and if we are unsuccessful in
raising additional capital, we may be unable to fully execute
our business strategy on a timely basis, if at all. We expect
the funds received from our October 2009 offering will be
sufficient to operate our current business through 2010 until we
are cash flow positive, assuming that our sales levels can
increase by approximately $5.5 million over 2009 levels and
assuming that we do not encounter any unforeseen costs or
expenses. If our sales levels do not increase or if we encounter
unforeseen costs or expenses, we will require additional
financing prior to such date for which we have no commitments.
We do not know whether any financing, if obtained, will be
adequate
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to meet our capital needs and to support our growth. If adequate
capital cannot be obtained on satisfactory terms, we may curtail
or delay the implementation of updates to our facilities or
delay the expansion of our sales and marketing capabilities, any
of which could cause our business to fail.
If we raise additional capital through the issuance of equity
securities, such issuances will likely cause dilution to our
stockholders, particularly if we are required to do so during
periods when our common stock is trading at historically low
price levels. If we raise additional capital through the
issuance of debt securities, the debt securities may be secured
and any interest payments would reduce the amount of cash
available to operate and grow our business.
We
will need to obtain additional debt and equity financing to
complete subsequent stages of our business plan.
We will require significant financing to increase the capacity
of our Woodbridge facility to its permitted 500 tons per
day capacity from the current full processing capacity of 250
tons per day and to invest in the construction of new
facilities. Our long-term business strategy contemplates the
expansion of our Woodbridge facility and the construction of new
facilities, and we do not have any commitments for the financing
required to complete such projects. Any new facility will likely
be individually financed and require considerable debt. While we
believe state government-sponsored debt programs may be
available to finance our requirements, public or private debt
may not be available at all or on terms acceptable to us for the
development of future facilities. We do not intend to utilize
the proceeds from our October 2009 offering to finance any new
manufacturing facilities or to expand our Woodbridge facility to
the 500 tons per day operating capacity.
In addition to financing any new manufacturing facilities or to
expand our Woodbridge facility, to the extent we acquire any
businesses or enter into any strategic alliances, we may require
additional financing to facilitate the transaction, and we do
not have any commitments for that capital.
To meet our future capital requirements, we may issue additional
securities in the future with rights, terms and preferences
designated by our Board of Directors, without a vote of
stockholders, which could adversely affect stockholder rights.
Additional financing will likely cause dilution to our
stockholders and could involve the issuance of securities with
rights senior to our currently outstanding shares. There is no
assurance that such financing will be sufficient, that the
financing will be available on terms acceptable to us and at
such times as required, or that we will be able to obtain the
additional financing required, if any, for the continued
operation and growth of our business. Any inability to raise
necessary capital will have a material adverse effect on our
ability to implement our business strategy and will have a
material adverse effect on our revenues and net income.
Constructing
and equipping our Woodbridge facility has taken longer and cost
more than we expected, which has resulted in significant amounts
being owed to construction vendors for which we did not have the
cash resources to satisfy and for which we entered into deferred
payment plans.
Our Woodbridge facility became operational in June 2008. We
incurred approximately $5.7 million in construction costs
and design change overruns on an initial budget of
$19.6 million. These design changes and upgrades are
substantially complete, but we can offer no assurance that we
will not experience additional overruns and delays before total
completion.
Of the $5.7 million in upgrades, design changes and
construction costs discussed above, we were able to fund
approximately $500,000 in costs. To finance the remaining
$5.2 million in upgrades, design changes and construction
costs, we entered into agreements with various construction
vendors regarding payment plans, which generally provide that we
pay interest only for six months with the remaining principal
balance and interest thereon to be repaid in 18 monthly
installments. We have successfully entered into agreements with
all of our construction vendors to whom we owe money. In
November 2009 we entered into our final agreement with a
construction vendor that required us to pay a total of
$2,029,000, with the first payment of $1,000,000 paid
November 19, 2009 and the balance of $1,029,000 payable in
eighteen level monthly payments of principal and interest
calculated at 6% per annum. The monthly payments began
January 1, 2010. This construction vendor had previously
filed a construction lien on our Woodbridge facility and had
commenced a lawsuit to enforce that lien. According to terms of
the
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agreement, the construction lien claim and related lawsuit is
now suspended during the eighteen month payment period and will
be released completely upon final payment.
We
have limited operating history, and our prospects are difficult
to evaluate.
We have not operated any facility other than our Gonzales
facility, which we purchased in January 2008, and our Woodbridge
facility, which became operational in June 2008. Our activities
to date have been primarily limited to developing our business,
and consequently there is limited historical financial
information related to operations available upon which you may
base your evaluation of our business and prospects. The revenue
and income potential of our business is unproven. If we are
unable to develop our business, we will not achieve our goals
and could suffer economic loss or collapse, which may have a
material negative effect on our financial performance.
We
expect to incur significant losses for some time, and we may
never operate profitably.
From inception through December 31, 2009, we incurred an
accumulated net loss of approximately $49.9 million. The
revenues that we began to generate from our Gonzales facility in
February 2008 and from our Woodbridge facility have not yet
resulted in our earning a profit, and we will continue to incur
significant losses for at least the near future. There is no
assurance that our operations will ever become profitable.
If we
are unable to manage our transition to an operating company
effectively, our operating results will be adversely
affected.
Failure to manage effectively our transition to an operating
company will harm our business. To date, substantially all of
our activities and resources have been directed at developing
our business plan, arranging financing, licensing technology,
obtaining permits and approvals, securing a lease for our
Woodbridge facility and options for additional facilities,
hiring and training a sales force and purchasing our Gonzales
facility. The transition to a converter of waste and
manufacturer and vendor of fertilizer products requires
effective planning and management. In addition, future expansion
will be expensive and will likely strain our management and
other resources. We may not be able to easily transfer our
skills to operating a facility or otherwise effectively manage
our transition to an operating company.
If the
National Organic Program changes its standards with respect to
the use of corn steep liquor in organic crop production, we may
no longer be allowed to sell certain of our products into the
organic markets, which would materially lower our sales at our
Gonzales facility.
In November 2010, the National Organic Program (NOP) and
National Organic Standards Board (NOSB) is expected to make a
decision regarding the status of corn steep liquor as a
synthetic or non-synthetic product, and whether it can remain as
an accepted ingredient in organic crop production. A decision by
the NOP and NOSB that corn steep liquor is a synthetic
ingredient no longer allowed in organic crop production would
have a significant negative effect on approximately 60% of our
current sales from the Gonzales facility. Our GP and 521
products are both derived from corn steep liquor and currently
account for the majority of our sales from the Gonzales facility
into the organic agriculture market. If the NOP and NOSB issue a
non favorable decision, it is unlikely we would see sales growth
in 2010 and we may face a loss in sales for that time period. In
addition, we would have to reformulate our highest selling
products and then have the products certified for sale into the
organic market. Organic certification can take months to achieve
and it is unclear if we would be able to find an ingredient
suitable to replace corn steep liquor.
We are
dependent on a small number of major customers for our revenues
and the loss of any of these major customers would adversely
affect our results of operations.
Our Gonzales and Woodbridge facilities rely on a few major
customers for a majority of their revenues. During 2009,
approximately 70% of the revenues generated by the Gonzales
facility were from a total of three customers. During 2009,
approximately 48% of the revenues generated by the Woodbridge
facility, excluding tip fees, were from a total of
two customers. We do not have any long-term agreements with any
of our customers. The loss of any of our major customers could
adversely affect our results of operations.
15
Problems
with our production equipment could negatively affect
sales.
In early November 2009, we noticed corrosion in the walls of one
of our 120,000 gallon digesters at our Woodbridge facility and
determined that the corrosion was due to our manufacturing
process and the unsatisfactory performance of a protective
coating that was applied at the time of installation. Through
subsequent ultrasound wall thickness testing we determined that
the corrosion was significant in two digesters and that we would
not be able to use those digesters for their intended purpose in
our manufacturing process and that they would have to be
repaired or replaced.
We determined the most cost effective and efficient solution to
this matter is to utilize the CLF digesters, which are the
digester units used at our Gonzales facility and utilize our
proprietary HTLC technology. These digesters are smaller in
capacity and will reduce the operating capacity of our
Woodbridge facility. Throughout 2009, our production at the
plant was limited by odor issues to approximately 20% of
capacity and therefore the corrosion has not affected our
ability to produce product to meet current demand. However,
because we believe we have corrected the odor issues and we
anticipate increased sales during 2010, if we cannot increase
production capabilities before the sales increases happen, we
may be unable to generate positive cash flow from the Woodbridge
facility according to the planned schedule. To be become cash
flow positive, the Woodbridge facility has to increase
production levels to approximately
45-55% of
full capacity.
We are
exposed to risks from legislation requiring companies to
evaluate internal control over financial
reporting.
Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404) required our management to begin
to report on the operating effectiveness of our internal control
over financial reporting for the year ended December 31,
2008. CCR LLP, our independent registered public accounting
firm, will be required to opine on the effectiveness of our
internal control over financial reporting for the year ending
December 31, 2010 under current legislation. We must
continue an ongoing program to perform the system and process
evaluation and testing necessary to comply with these
requirements. We expect that this program will require us to
incur significant expenses and to devote additional resources to
Section 404 compliance on an ongoing annual basis.
We continue to evaluate internal assessments in anticipation of
our independent registered public accounting firm opining on the
effectiveness of our internal control over financial reporting
in 2010. Due to financial constraints, we have not yet retained
any outside consultants to assist us, although we intend to hire
such consultants in the future. As a result, we may not be able
to complete the assessment process on a timely basis each year.
In the event that our Chief Executive Officer, Chief Financial
Officer or independent registered public accounting firm
determines that our internal control over financial reporting is
not effective as defined under Section 404, we cannot
predict how regulators will react or how the market prices of
our securities will be affected.
Our
future success is dependent on our existing key employees and
hiring and assimilating new key employees; our inability to
attract or retain key personnel in the future would materially
harm our business and results of operations.
Our success depends on the continuing efforts and abilities of
our current management team. In addition, our future success
will depend, in part, on our ability to attract and retain
highly skilled employees, including management, technical and
sales personnel. We may be unable to identify and attract highly
qualified employees in the future. In addition, we may not be
able to successfully assimilate these employees or hire
qualified personnel to replace them if they leave the Company.
The loss of services of any of our key personnel, the inability
to attract or retain key personnel in the future, or delays in
hiring required personnel could materially harm our business and
results of operations.
We
have little or no experience in the food waste conversion or
fertilizer industries, which increases the risk of our inability
to build our facilities and operate our business.
We are currently, and are likely for some time to continue to
be, dependent upon our present management team. Most of these
individuals are experienced in business generally, and in
governing and operating public companies. However, our present
management team does not have experience in organizing the
construction, equipping and
16
start up of a food waste conversion facility, except for our
Gonzales and Woodbridge facilities. In addition, none of our
directors has any prior experience in the food waste conversion
or fertilizer products industries. As a result, we may not
develop our business successfully.
Our
Woodbridge and Gonzales facility sites, as well as future
facility sites, may have unknown environmental problems that
could be expensive and time-consuming to correct.
There can be no assurance that we will not encounter hazardous
environmental conditions at the Woodbridge and Gonzales facility
sites or at any additional future facility sites that may delay
the construction of our food waste conversion facilities or
require us to incur significant
clean-up or
correction costs. Upon encountering a hazardous environmental
condition, our contractor may suspend work in the affected area.
If we receive notice of a hazardous environmental condition, we
may be required to correct the condition prior to continuing
construction. The presence of a hazardous environmental
condition will likely delay construction of the particular
facility and may require significant expenditures to correct the
environmental condition. If we encounter any hazardous
environmental conditions during construction that require time
or money to correct, such event could delay our ability to
generate revenue.
We
have recently commenced operations and may not be able to
successfully operate our Woodbridge or Gonzales
facility.
We believe our Woodbridge facility is the first commercial
facility of its kind in the United States to recycle food waste
into fertilizer, and it therefore may not function as
anticipated. We have produced our products at our Gonzales
facility since February 2008 and have had limited production
from our Woodbridge facility since June 2008. As such, we have
limited operating experience, and may be unable to successfully
operate these facilities. In addition, the control of the
manufacturing process will require operators with extensive
training and experience that may be difficult to attain.
Our
lack of business diversification may have a material negative
effect on our financial performance.
We have two products to sell to customers to generate revenue:
dry and liquid soil fertilizer products. Although we also
receive tip fees from food waste haulers, our lack
of business diversification could have a material adverse effect
on our operations.
We may
not be able to produce products from our facilities in
commercial quantities or sell them at competitive
prices.
We have produced our products at our Gonzales facility since
February 2008 and have had limited production from our
Woodbridge facility since June 2008. Accordingly, our ability to
produce our products in commercial quantities at a competitive
cost is unproven. We may not be able to produce products from
our facilities in commercial quantities or sell them at prices
competitive with other similar products.
We may
be unable to establish marketing and sales capabilities
necessary to commercialize and gain market acceptance for our
products.
We currently have limited resources with which to expand our
sales and marketing capabilities. We have recently hired
additional sales personnel and believe they have the expertise
in the markets that we intend to address, however, given their
recent hires, their sales capabilities and the results they will
bring to the Company are currently unknown. Co-promotion or
other marketing arrangements to commercialize our planned
products could significantly limit the revenues we derive from
our products, and the parties with whom we would enter into such
agreements may fail to commercialize our products successfully.
Our products address different markets and can be offered
through multiple sales channels. Addressing each market
effectively will require sales and marketing resources tailored
to the particular market and to the sales channels that we
choose to employ, and we may not be able to develop such
specialized marketing resources.
17
Pressure
by our customers to reduce prices and agree to long-term supply
arrangements may adversely affect our net sales and profit
margins.
Our current and potential customers, especially large
agricultural companies, are often under budgetary pressure and
are very price sensitive. Our customers may negotiate supply
arrangements with us well in advance of delivery dates, thereby
requiring us to commit to product prices before we can
accurately determine our final costs. If this happens, we may
have to reduce our conversion costs and obtain higher volume
orders to offset lower average sales prices. If we are unable to
offset lower sales prices by reducing our costs, our gross
profit margins will decline, which could have a material
negative effect on our financial performance.
The
fertilizer industry is highly competitive, which may adversely
affect our ability to generate and grow sales.
Chemical fertilizers are manufactured by many companies, are
plentiful and are relatively inexpensive. In addition, there are
over 1,700 crop products registered as
organic with the Organic Materials Review Institute,
a number that has more than doubled since 2002. If we fail to
keep up with changes affecting the markets that we intend to
serve, we will become less competitive, thereby adversely
affecting our financial performance.
Defects
in our products or failures in quality control could impair our
ability to sell our products or could result in product
liability claims, litigation and other significant events with
substantial additional costs.
Detection of any significant defects in our products or failure
in our quality control procedures may result in, among other
things, delay in
time-to-market,
loss of sales and market acceptance of our products, diversion
of development resources, and injury to our reputation. The
costs we may incur in correcting any product defects may be
substantial. Additionally, errors, defects or other performance
problems could result in financial or other damages to our
customers, which could result in litigation. Product liability
litigation, even if we prevail, would be time consuming and
costly to defend, and if we do not prevail, could result in the
imposition of a damages award. We presently maintain product
liability insurance; however, it may not be adequate to cover
any claims.
Energy
and fuel cost variations could adversely affect operating
results and expenses.
Energy costs, particularly electricity and natural gas,
constitute a substantial portion of our operating expenses. The
price and supply of energy and natural gas are unpredictable and
fluctuate based on events outside our control, including demand
for oil and gas, weather, actions by OPEC and other oil and gas
producers, and conflict in oil-producing countries. Price
escalations in the cost of electricity or reductions in the
supply of natural gas could increase operating expenses and
negatively affect our results of operations. We may not be able
to pass through all or part of the increased energy and fuel
costs to our customers.
We may
not be able to obtain sufficient material to produce our
products, and we are dependent on a small number of waste
haulers to provide the food waste we use to produce our
products.
Our revenue comes from two sources: tip fees and
product sales. We are dependent on a stable supply of food waste
in order to produce our products and to utilize our available
capacity. Waste haulers pay the tip fees to us for accepting
food waste generated by food distributors such as grocery
stores, produce docks, fish markets and food processors, and by
hospitality venues such as hotels, restaurants, convention
centers and airports. Insufficient food waste feedstock will
adversely affect our efficiency and may cause us to increase our
tip fee discount from prevailing rates, which is the discount we
pay to haulers that provide larger quantities of food waste,
likely resulting in reduced revenues and net income. Competing
disposal outlets for food waste and increased demand for
applications such as biofuels may develop and adversely affect
our business. In addition, if alternate uses for food waste are
developed in the future, these alternate uses could increase the
competition for food waste.
Successful
infringement claims by third parties could result in substantial
damages, lost product sales and the loss of important
proprietary rights.
We may have to defend ourselves against patent and other
infringement claims asserted by third parties regarding the
technology we have licensed, resulting in diversion of
management focus and additional expenses for
18
the defense of claims. In addition, if a patent infringement
suit was brought, we might be forced to stop or delay the
development, manufacture or sales of potential products that
were claimed to infringe a patent covering a third partys
intellectual property unless that party granted us rights to use
its intellectual property. We may be unable to obtain these
rights on terms acceptable to us, if at all. If we cannot obtain
all necessary licenses or other such rights on commercially
reasonable terms, we may be unable to continue selling such
products. Even if we are able to obtain certain rights to a
third partys patented intellectual property, these rights
may be non-exclusive, and therefore our competitors may obtain
access to the same intellectual property. Ultimately, we may be
unable to commercialize our potential products or may have to
cease some or all of our business operations as a result of
patent infringement claims, which could severely harm our
business.
Our
HTLC technology imposes obligations on us related to
infringement actions that may become burdensome.
If the use of our HTLC technology is alleged to infringe the
intellectual property of a third party, we may become obligated
to defend such infringement action. In such an event, we may
become obligated to find alternative technology or to pay a
royalty to a third party in order to continue to operate.
If a third party is allegedly infringing any of our HTLC
technology, then we may attempt to enforce our intellectual
property rights. In general, our possession of rights to use the
know-how related to our HTLC technology will not be sufficient
to prevent others from employing similar technology that we
believe is infringing. Any such enforcement action against
alleged infringers may be required at our expense. The costs of
such an enforcement action may be prohibitive, reduce our net
income, if any, or prevent us from continuing operations.
We
have provided a bond guaranty to the holders of the bonds issued
in connection with our Woodbridge facility, and the terms of the
guaranty may hinder our ability to operate our business by
imposing restrictive covenants, which may prohibit us from
taking actions to manage or expand our business.
The terms of the bond guaranty executed by us on behalf of
Converted Organics of Woodbridge LLC prohibit us from repaying
debt and other obligations that funded our working capital until
certain ratios of EBITDA to debt service are met. We are
required to achieve a debt service ratio coverage of 2.0 to 1.0.
We did not meet the required debt service ratio coverage in
2009, and if we do not meet the ratio in 2010, our bond guaranty
will remain outstanding and we will continue to be prohibited
from repaying debt and other obligations that funded our working
capital.
Mandatory
redemption of our bonds issued in connection with our Woodbridge
facility could have a material adverse effect on our liquidity
and cash resources.
The bonds issued to construct our Woodbridge facility are
subject to mandatory redemption by us if the Woodbridge facility
is condemned, we cease to operate the facility, the bonds become
taxable, a change in control occurs or under certain other
circumstances. Depending upon the circumstances, such an event
could require a payment to our bondholders ranging between 100%
and 110% of the principal amount of the bonds outstanding, plus
interest. If we are required to redeem our bonds, such
redemption will have a material adverse effect on our liquidity
and cash resources, and may impair our ability to continue to
operate.
The
communities where our facilities may be located may be averse to
hosting waste handling and manufacturing
facilities.
Local residents and authorities in communities where our
facilities may be located may be concerned about odor, vermin,
noise, increased truck traffic, air pollution, decreased
property values, and public health risks associated with
operating a manufacturing facility in their area. These
constituencies may oppose our permitting applications or raise
other issues regarding our proposed facilities or bring legal
challenges to prevent us from constructing or operating
facilities.
During the
start-up
phase at the Woodbridge facility, we experienced odor-related
issues. As a result of these issues, we were assessed fines from
the Health Department of Middlesex County, New Jersey and have
been named as a party in a lawsuit by a neighboring business.
With respect to the fines assessed by the Health Department, we
19
have negotiated a settlement agreement for the full amount of
fines assessed. With respect to the litigation, the plaintiff
has alleged various causes of action connected to the odors
emanating from the facility and in addition to monetary damages,
is seeking enjoinment of any and all operations which in any way
cause or contribute to the alleged pollution. If we are
unsuccessful in defending the above litigation or any new
litigation, we may be subject to judgments or fines, or our
operations may be interrupted or terminated.
Our
facilities will require certain permits to operate, which we may
not be able to obtain at all or obtain on a timely
basis.
For our Woodbridge facility and Gonzales facility, we have
obtained the permits and approvals required to operate the
facilities. We may not be able to secure all the necessary
permits for future facilities on a timely basis or at all, which
may prevent us from operating such facilities according to our
business plan.
For our facilities, we may need certain permits to operate solid
waste or recycling facilities, as well as permits for our sewage
connection, water supply, land use, air emission, and wastewater
discharge. The specific permit and approval requirements are set
by the state and the various local jurisdictions, including but
not limited to city, town, county, township and state agencies
having control over the specific properties. Permits once given
may be withdrawn. Inability to obtain or maintain permits to
construct, operate or maintain our facilities will severely and
adversely affect our business.
Changes
in environmental regulations or violations of such regulations
could result in increased expense and could have a material
negative effect on our financial performance.
We are subject to extensive air, water and other environmental
regulations and need to maintain the environmental permits we
have received to operate our Woodbridge and Gonzales facilities,
and need to obtain a number of environmental permits to
construct and operate our planned facilities. If for any reason
any of these permits are not maintained or granted, construction
costs for our food waste conversion facilities may increase, or
the facilities may not be constructed at all. Additionally, any
changes in environmental laws and regulations, both at the
federal and state level, could require us to invest or spend
considerable resources in order to comply with future
environmental regulations. We have been fined for alleged
environmental violations in connection with the operation of our
Woodbridge facility, and are currently contesting certain
alleged environmental violations. Our failure to comply with
environmental regulations could cause us to lose our required
permits, which could cause the interruption or cessation of our
operations. Furthermore, the expense of compliance could be
significant enough to reduce our net income and have a material
negative effect on our financial performance.
Risks
Related to Investment in Our Securities
We
have a significant number of warrants outstanding, and while
these warrants are outstanding, it may be more difficult to
raise additional equity capital. Additionally, certain of these
warrants contain anti-dilution and price-protection provisions
that may result in the reduction of their exercise prices in the
future.
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2,516,810 Class B warrants to purchase a total of
3,699,711 shares of common stock at $7.48 per share, and
2,284,409
Class B-1
warrants to purchase a total of 2,284,409 shares of common
stock at $11.00 per share;
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885,000 Class C warrants exercisable at $1.00 per share;
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415,000 Class D warrants exercisable at $1.02 per share;
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1,500,000 Class E warrants exercisable at $1.63 per share;
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585,000 Class F warrants exercisable at $1.25 per share;
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2,500,000 Class G warrants exercisable at $1.25 per
share; and
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17,550,000 Class H warrants exercisable at $1.30 per share
(this includes 300,000 Class H warrants underlying
underwriter purchase options issued in our October 2009
offering).
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The holders of those warrants are given the opportunity to
profit from a rise in the market price of our common stock. In
addition, the Class B, C, D and H warrants are not
redeemable by us. We may find it more difficult to raise
20
additional equity capital while these warrants are outstanding.
At any time during which these public warrants are likely to be
exercised, we may be able to obtain additional equity capital on
more favorable terms from other sources.
Furthermore, the Class C, D and G warrants contain
price-protection provisions under which, if we issue securities
at a price lower than the exercise price of such warrants, the
exercise price of the warrants will be reduced, with certain
exceptions, to the lower price; provided that the Class G
warrants have a minimum exercise price of $1.08 per share,
unless we receive stockholder approval for a lower price.
If we
issue shares of preferred stock, your investment could be
diluted or subordinated to the rights of the holders of
preferred stock.
Our Board of Directors is authorized by our Certificate of
Incorporation to establish classes or series of preferred stock
and fix the designation, powers, preferences and rights of the
shares of each such class or series without any further vote or
action by our stockholders. Any shares of preferred stock so
issued could have priority over our common stock with respect to
dividend or liquidation rights. The issuance of shares of
preferred stock, or the issuance of rights to purchase such
shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred
stock might impede a business combination by including class
voting rights that would enable a holder to block such a
transaction. In addition, under certain circumstances, the
issuance of preferred stock could adversely affect the voting
power of holders of our common stock. Although our Board of
Directors is required to make any determination to issue
preferred stock based on its judgment as to the best interests
of our stockholders, our Board could act in a manner that would
discourage an acquisition attempt or other transaction that
some, or a majority, of our stockholders might believe to be in
their best interests or in which such stockholders might receive
a premium for their stock over the then-market price of such
stock. Presently, our Board of Directors does not intend to seek
stockholder approval prior to the issuance of currently
authorized preferred stock, unless otherwise required by law or
applicable stock exchange rules. Although we have no plans to
issue any shares of preferred stock or to adopt any new series,
preferences or other classification of preferred stock, any such
action by our Board of Directors or issuance of preferred stock
by us could dilute your investment in our common stock and
warrants or subordinate your holdings to such shares of
preferred stock.
Future
issuances or sales, or the potential for future issuances or
sales, of shares of our common stock, the exercise of warrants
to purchase our common stock, or the conversion of convertible
notes into our common stock, may cause the trading price of our
securities to decline and could impair our ability to raise
capital through subsequent equity offerings.
During 2009, we have issued a significant number of shares of
our common stock, warrants to acquire shares of our common
stock, and convertible notes that may be converted into our
common stock in connection with various financings and the
repayment of debt, and we anticipate that we will continue to do
so in the future. The additional shares of our common stock
issued and to be issued in the future upon the exercise of
warrants or options or the conversion of debt could cause the
market price of our common stock to decline, and could have an
adverse effect on our earnings per share if and when we become
profitable. In addition, future sales of a substantial number of
shares of our common stock or other securities in the public
markets, or the perception that these sales may occur, could
cause the market price of our common stock and our Class H
and Class B warrants to decline, and could materially
impair our ability to raise capital through the sale of
additional securities.
We may
not be able to adequately raise the bid price of our common
stock to remain compliant with NASDAQ listing
standards.
On December 4, 2009, we received notice from the NASDAQ
Stock Market stating that the closing bid price of our common
stock had fallen below $1.00 for thirty consecutive business
days and that therefore, we were not in compliance with NASDAQ
Listing Rule 5550(a)(2) as of December 3, 2009. We
have been provided a 180 day grace period, through
June 2, 2010, to regain compliance with the Rule. To regain
compliance, the bid price for our common stock must close at
$1.00 or higher for a minimum of 10 consecutive business days
within the grace period. At the close of the grace period, if we
have not regained compliance, we may be eligible for an
additional 180 day grace period if we meet the initial
listing standards, with the exception of bid price, for the
NASDAQ Capital
21
Market. If we are not eligible for an additional grace period,
we will receive notification that our securities are subject to
delisting, and we may then appeal the delisting determination to
a hearings panel. During January 2010, our stock price closed at
$1.00 or greater for 10 consecutive trading days, however,
NASDAQ did not remove the delisting notification.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
We entered a
10-year
lease on June 2, 2006 and subsequently in February 2007
exercised an option to renew for an additional 10 years on
property located in an industrial area of Woodbridge, New
Jersey, on which our Woodbridge facility is located. The lease
covers 60,000 square feet of a 300,000 square foot
building. The rent is $34,259 per month for the first
5 years. In year 6, the rent increases by 5% and will
increase 2% per year in years 7 through 10. On January 18,
2007, we executed a lease amendment to compensate the landlord
for costs incurred in connection with a buildout of the leased
space. During years 2 through 10, we will pay an additional
$45,402 per month under the amendment, for total rent expense of
$79,661 per month. In year 11, the rent will increase by 5% and
will increase an additional 2% per year in years 12 through 15.
The rent will increase 5% in year 16 and thereafter, will
increase 2% per year through the remainder of the term. We are
responsible for payment of common area maintenance fees and
taxes based upon our percentage of use relative to the whole
facility and for our separately metered utilities. The
additional rent associated with the buildout of the facility is
approximately $4.6 million and will be repaid as discussed
above. This buildout allowance represents additional financing
to the Company and is not included in the estimated costs of
$14.6 million to initially complete the Woodbridge facility
or the additional $5.7 million in upgrades, design changes
and unanticipated construction costs. In June 2008, we executed
a second lease amendment to accommodate the landlords
construction and operation of a Solar Photovoltaic Generating
System (the Solar System), under which we agreed to
restrict our roof access so to not interfere with the operation
of the Solar System. On March 31, 2009, we executed a third
lease amendment to compensate the landlord for certain work that
the landlord completed on the leased premises. In the third
lease amendment and related promissory note, we agreed to pay
$790,718.64 plus 9% interest per annum payable in quarterly
installments of $263,572.88 with the first payment due on
September 30, 2009 and total outstanding balances due by
March 31, 2010.
On January 24, 2008, we entered into a
10-year
lease for land in Gonzales, California, where our Gonzales
facility is located. The land is leased from VLH, a California
LLC whose sole member is a former officer and director of the
Company. The lease provides for a monthly rent of $9,000. The
lease is renewable for three
5-year terms
after the expiration of the initial
10-year
term. In addition, we own the Gonzales facility and the
operating equipment used in the facility. In 2009, the sole
member of VLH contributed cash and property to VLH in a
recapitalization. VLH has henceforth been sufficiently
capitalized and is no longer considered to be a variable
interest entity of the Company. We have deconsolidated VLH as a
variable interest entity as of April 1, 2009.
On November 24, 2009 we signed a lease for office space for
our headquarters in Boston, Massachusetts. The lease is for
3 years and provides 4,510 square feet of usable space
for a monthly rent of $9,772. We currently lease, on a
month-to-month
basis, approximately 2,500 square feet of additional office
space in Boston, Massachusetts. We pay rent of $2,800 per month
for this space. We may terminate the office lease at any time
upon 30 days advance written notice.
On September 1, 2008, we signed a lease with Rhode Island
Resource Recovery Corporation (RIRRC) for a parcel
of land in Rhode Island. We had planned to construct a third
operating facility on the land parcel, and formed Converted
Organics of Rhode Island, LLC (Converted Organics of
RI) to facilitate the construction and operation of the
planned Rhode Island facility. We pay rent of $9,167 per month
and the lease term is for 20 years. To facilitate the
development of Converted Organics of RI, on February 25,
2010, we signed a letter of intent with the person who is the
non-controlling interest in the entity to sell substantially all
of the assets and a limited select amount of liabilities of
Converted Organics of RI, a transaction that would include a
lease assignment of our lease with RIRRC.
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ITEM 3.
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LEGAL
PROCEEDINGS
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On December 11, 2008, we received notice that a complaint
had been filed in a putative class action lawsuit on behalf of
59 persons or entities that purchased units pursuant to a
financing terms agreement, or FTA, dated April 11, 2006,
captioned Gerald S. Leeseberg, et al. v. Converted
Organics, Inc., filed in the U.S. District Court for the
District of Delaware. The lawsuit alleges breach of contract,
conversion, unjust enrichment, and breach of the implied
covenant of good faith in connection with the alleged failure to
register certain securities issued in the FTA, and the
redemption of our Class A warrants in November 2008. The
lawsuit seeks damages related to the failure to register certain
securities, including alleged late fee payments, of
approximately $5.25 million, and unspecified damages
related to the redemption of the Class A warrants. In
February 2009, we filed a Motion for Partial Dismissal of
Complaint. On October 7, 2009, the Court concluded that
Leeseberg has properly stated a claim for actual damages
resulting from our alleged breach of contract, but that
Leeseberg has failed to state claims for conversion, unjust
enrichment and breach of the implied covenant of good faith, and
the Court dismissed such claims. On November 6, 2009, we
filed our answer to the Complaint with the Court. On
March 4, 2010, the parties participated in a Fed.R.Civ.P.
26(f) conference, and began discussing discovery issues. We plan
to vigorously defend this matter and are unable to estimate any
contingent losses that may or may not be incurred as a result of
this litigation and its eventual disposition. Accordingly, no
contingent loss has been recorded related to this matter.
Related to the above matter, in December 2009, we filed a
complaint in the Superior Court of Massachusetts for the County
of Suffolk, captioned Converted Organics Inc. v.
Holland & Knight LLP. We claim that in the event we
are required to pay any monies to Mr. Leeseberg and his
proposed class in the matter of Gerald S. Leeseberg, et
al. v. Converted Organics, Inc., that Holland &
Knight should make us whole, because its handling of the
registration of the securities at issue in the Leeseberg lawsuit
caused any loss that Mr. Leeseberg and other putative class
members claim to have suffered. Holland & Knight has
not yet responded to the complaint. It has threatened to bring
counterclaims against Converted Organics for legal fees
allegedly owed, which we would contest vigorously. At this early
stage in the case, we are unable to predict the likelihood of an
unfavorable outcome, or to estimate the amount or range of
potential loss.
On May 19, 2009, we received notice that a complaint had
been filed in the Middlesex County Superior Court of New Jersey,
captioned Lefcourt Associates, Ltd., et al. v. Converted
Organics of Woodbridge, et al. The lawsuit alleges private and
public nuisances, negligence, continuing trespasses and consumer
common-law fraud in connection with the odors emanating from our
Woodbridge facility and our alleged, intentional failure to
disclose to adjacent property owners the possibility of our
facility causing pollution and was later amended to allege
adverse possession, acquiescence and easement. The lawsuit seeks
enjoinment of any and all operations which in any way cause or
contribute to the alleged pollution, compensatory and punitive
damages, counsel fees and costs of suit and any and all other
relief the Court deems equitable and just. In response to these
allegations, we have filed opposition papers with the Court and
have complied with the plaintiffs requests for
information. We have also paid to the Middlesex County Health
Department penalties in the amount of $157,718.75 related to
odor emissions. We plan to vigorously defend this matter and are
unable to estimate any contingent losses that may or may not be
incurred as a result of this litigation and its eventual
disposition. Accordingly, no contingent loss has been recorded
related to this matter.
On May 28, 2009, we received notice that a Lien Claim
Foreclosure Complaint had been filed in the Middlesex County
Superior Court of New Jersey, captioned Armistead Mechanical,
Inc. v. Converted Organics Inc., et al. Armistead filed
this Lien Claim Foreclosure Complaint in order to perfect its
previously filed lien claim. The Complaint also alleges breach
of contract, reasonable value, demand for payment, unjust
enrichment, and breach of the implied covenant of good faith and
fair dealing, and seeks compensatory, consequential and
incidental damages, attorneys fees, costs, interest, and
other fair and equitable relief. On July 10, 2009, we
received an Amended Lien Claim Foreclosure Complaint from
Armistead Mechanical. The amended complaint did not make any
substantial changes to the suit. On August 4, 2009, we
filed a response to the complaint whereby we denied certain
claims and at this time we are unable to estimate any contingent
losses. On August 28, 2009, the court entered an order
staying the litigation pending the outcome of arbitration. In
connection with the Complaint, Armistead has filed a demand for
arbitration with the American Arbitration Association in order
to preserve its status quo and right to submit a contract
dispute claim to binding arbitration. On October 30, 2009,
our response to the demand was due with the consent of
Armistead. No arbitrator has yet been appointed. On
November 19, 2009, we signed a Settlement
23
Agreement with Armistead for a total of $2,029,000, with the
first payment of $1,000,000 due upon closing (closing occurred
on November 19, 2009) and the balance of $1,029,000
payable in eighteen level monthly payments of principal and
interest calculated at 6% per annum. The monthly payments began
January 1, 2010. According to terms of the Settlement
Agreement, the construction lien claim and related lawsuit will
be suspended during the eighteen month payment period and will
be released completely upon final payment.
The Middlesex County Health Department (MCHD) issued us a number
of notices of violation, or NOV, following the commencement of
our operations at our Woodbridge facility, for alleged
violations of New Jersey State Air Pollution Control Act, which
prohibits certain off-site odors. The NOV alleged that odors
emanating from our Woodbridge facility had impacted surrounding
businesses and those odors were of sufficient intensity and
duration to constitute air pollution under the act. As of the
date of filing, the total amount of fines levied by the MCHD
equaled $379,375, of which we have paid $159,468.75 (of which
$157,718.75 were related to odor emissions), and currently have
an unpaid balance of $219,906.25. We recorded a liability of
$268,500 in our financial statements as of December 31,
2009 relating to the unpaid potion of the penalties. Based on a
change in operational procedures and working with two outside
odor-control consultants, we believe we have significantly
rectified the odor issues. MCHD recognized that we have made
substantial efforts and improvements at our Woodbridge facility
in odor control and as a result, negotiated a sixteen month
payment plan for the odor violations issued from May 2009
through July 22, 2009 for an amount totaling $268,500.
The New Jersey Department of Environmental Protection
(NJDEP) Bureau of Air Compliance and Enforcement
issued us an Administrative Order in June 2009 for alleged
violations of the air permit issued to us pursuant to the Air
Pollution Control Act. The Administrative Order alleged that we
were not operating in compliance with our air permit and that we
had violated the New Jersey Administrative Code for various
pre-constructions without permits. No penalties were assessed in
the Administrative Order. However, the Administrative Order
remains an open matter because, as the NJDEP stated in the
Administrative Order, the provisions of the order remain in
effect during pendency of the hearing request. Additionally,
while we have taken corrective actions, such actions do not
preclude the State from initiating a future enforcement action
or seeking penalties with respect the violations listed in the
Administrative Order.
The NJDEP Bureau of Solid Waste Compliance and Enforcement
issued us a NOV for alleged violations of the New Jersey State
Solid Waste Management Act in June 2009. The NOV alleged that
our Woodbridge facility was not operating in accordance with the
terms of the General Class C Permit Approval. No penalties
were assessed by the NOV. However, the NOV constituted
notification that the facility is allegedly out of compliance
with certain provisions of the General Class C Permit
and/or the
NJDEP Solid Waste regulations. The NOV remains an open matter
because, as NJDEP stated in the NOV, while we have taken
corrective actions, such actions do not preclude the State from
initiating a future enforcement action with respect the
violations listed in the NOV.
PART II
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|
ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock has been listed on the NASDAQ Capital Market
under the symbol COIN since March 16, 2007.
Prior to March 16, 2007, there was no public market for our
common stock. The following table sets forth the range of high
and low closing prices per share as reported on NASDAQ for the
periods indicated.
|
|
|
|
|
|
|
|
|
2009
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
4.05
|
|
|
$
|
.76
|
|
Second Quarter
|
|
$
|
2.19
|
|
|
$
|
.76
|
|
Third Quarter
|
|
$
|
1.48
|
|
|
$
|
.95
|
|
Fourth Quarter
|
|
$
|
1.30
|
|
|
$
|
.59
|
|
24
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
14.17
|
|
|
$
|
3.52
|
|
Second Quarter
|
|
$
|
10.37
|
|
|
$
|
4.50
|
|
Third Quarter
|
|
$
|
7.83
|
|
|
$
|
2.99
|
|
Fourth Quarter
|
|
$
|
6.46
|
|
|
$
|
2.00
|
|
Holders
As of March 26, 2010, there were approximately 7,000
beneficial holders of the Companys common stock.
Dividends
Beginning with the first quarter of 2007, at the end of each
calendar quarter holders of record of our common stock received
a 5% common stock dividend until the Woodbridge facility
commenced commercial operations on June 30, 2008. We did
not issue fractional shares as a part of the dividend program
nor did we issue shares with respect to the calendar quarter in
which we commenced commercial operations. We also issued a
special 15% common stock dividend, payable on December 1,
2008 for all holders of record of our common stock on
November 17, 2008. During 2008, we issued
1,232,552 shares as stock dividends.
We have not declared or paid any cash dividends and do not
intend to pay any cash dividends in the foreseeable future. We
intend to retain any future earnings for use in the operation
and expansion of our business. Any future decision to pay cash
dividends on common stock will be at the discretion of our Board
of Directors and will depend upon, our financial condition,
results of operation, capital requirements and other factors our
Board of Directors may deem relevant.
Recent
Sales of Unregistered Securities
During the fourth quarter 2009, we issued 30,000 shares of
common stock for consulting services. This transaction was
exempt for the registration requirement of the 1933 Act
pursuant to Section 4(2) under the 1933 Act, as the
recipient is an accredited investor as defined in
the 1933 Act.
Use of
Proceeds from Registered Securities
See the discussion below under Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Purchase
of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
None.
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|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
As a smaller reporting company, we are not required to provide
information typically disclosed under this section.
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|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion of our plan of operation should be read
in conjunction with the consolidated financial statements and
related notes to the consolidated financial statements included
elsewhere in this report. This discussion contains
forward-looking statements that relate to future events or our
future financial performance. These statements involve known and
unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied by these forward-looking statements. These risks and
other factors include, among others, those listed under
Risk Factors and those included elsewhere in this
document.
25
Background
Introduction
Our operating structure is composed of our parent company,
Converted Organics Inc., two wholly-owned operating
subsidiaries, a wholly-owned sales subsidiary and a 92.5% owned
non-operating subsidiary. The first operating subsidiary is
Converted Organics of Woodbridge, LLC, which includes the
operation of our Woodbridge, New Jersey facility. The second
operating subsidiary is Converted Organics of California, LLC,
which includes the operating activity of our Gonzales,
California facility. The 92.5% owned subsidiary is Converted
Organics of Rhode Island, LLC which currently has no operating
activity. The wholly-owned sales subsidiary is Converted
Organics of Mississippi, LLC which was established in January
2010 for the purpose of employing salesmen and selling a chicken
littler based fertilizer product which is produced for us by a
third party supplier. We transitioned from a development stage
company (first reported revenues were in February 2008) to
a fully operational company that constructs and operates
processing facilities that will use food waste as raw material
to manufacture all-natural soil amendment products combining
nutritional and disease suppression characteristics. We have
current sales in the agriculture, retail and turf management
markets.
We were a development stage company through June 30, 2008.
During the second quarter of 2008, our Gonzales facility began
operating near capacity and recognized revenue from the sale of
its product. Also during the second quarter of 2008, the tip
floor of the Woodbridge facility commenced operations and began
to accept food waste on a limited basis recognizing tip fee
revenue. During the second half of 2008, operation increased at
both facilities and we exited our development stage.
Woodbridge
Facility
We obtained a long-term lease for a site in a portion of an
industrial building in Woodbridge, New Jersey that the landlord
has modified and that we have equipped as our first internally
constructed organic waste conversion facility. We are currently
producing both liquid and dry products at the facility. At full
capacity, the Woodbridge facility is expected to process
approximately 78,000 tons of organic food waste and produce
approximately 9,900 tons of dry product and approximately 10,000
tons of liquid concentrate annually. We have two revenue
streams: (1) tip fees that in our potential markets range
from $40 to $80 per ton, and (2) product sales. Tip fees
are paid to us to receive the food waste stream from waste
haulers; the hauler pays us, instead of a landfill, to take the
waste. If the haulers source, separate and pay in advance, they
are charged tip fees that are up to 20% below market. During
2009 we generated revenue from this facility in the form of tip
fees of approximately $127,000 and product sales of
approximately $349,000. In order for this facility to be cash
flow positive, we estimate that product and tip fee sales would
need to be in a range of $450,000 to $550,000 per month. We
estimate that the product can be sold in the range of $400 to
$700 per ton based on the market to which it is sold. Therefore,
based on the foregoing product price ranges, the potential
monthly sales from this facility, at approximately
44-55%
capacity would allow us to be cash flow positive.
We had budgeted approximately $14.6 million for the design,
building, and testing of our facility, including related
non-recurring engineering costs. The capital outlay of
$14.6 million came from the $25.4 million raised by
our initial public offering of stock and the issuance of New
Jersey Economic Development Bonds, both of which closed on
February 16, 2007, and does not include $4.6 million
of capital improvements provided by the landlord of the
Woodbridge facility, which are being financed over the term of
the lease by increased lease payments at an imputed interest
rate of 4%. The total cost of the plant exceeded the estimate of
$14.6 million by approximately $2.2 million (which did
not include $4.6 million of lease financing discussed
above). Also, we purchased additional equipment, which will
allow us to produce additional dry product, which is in high
demand by the retail market. The cost of this additional
equipment was approximately $1.5 million. We decided to
incorporate the HTLC technology acquired from WRI into the
Woodbridge facility. These costs were approximately
$2.0 million, bringing the total plant cost to
$20.3 million, not including lease financing. Installation
of the HTLC technology and additional equipment was dependent on
our ability to raise additional capital and negotiate extended
payment terms with our construction vendors. We negotiated
revised payment terms with all of our construction vendors, and,
as of December 31, 2009, we had outstanding notes due to
our New Jersey construction vendors of approximately
$3.2 million. A party that leases equipment to us has a
lien on the equipment to secure payment of the approximately
$41,000 to be paid over the remaining life of the lease. We
added the HTLC technology to the Woodbridge facility because we
believe it will significantly lower operating costs, most
notably utility costs, as the need to evaporate
26
significant amounts of liquid byproduct would no longer be
necessary, and the non-evaporated liquid can be used in the
production process and sold as additional product.
In early November 2009, during routine maintenance, we
discovered corrosion in the walls of one of our 120,000 gallon
digesters and determined that the corrosion was due to our
manufacturing process and the unsatisfactory performance of a
protective coating that was applied at the time of installation.
Through subsequent ultrasound wall thickness testing we
determined that the corrosion was significant in two digesters
and that we would not be able to use those digesters for their
intended purpose in our manufacturing process and that they
would have to be repaired or replaced.
We considered the most cost effective solutions to this matter,
including the installation of stainless steel liners into the
two 120,000 gallon digesters or the installation of additional
CLF digesters, two of which are already installed and working at
the facility. We determined the most cost effective and
efficient solution is to utilize the CLF digesters, which are
the digester units used at our Gonzales facility and are the
ones which operate using our proprietary technology. These
digesters are smaller in capacity and they have shown through
the operation of our Gonzales facility, to be reliable and
effective in the production of organic fertilizer products.
Currently, the Woodbridge facility is operating at approximately
20% of capacity and our plan is to gauge the demand for our
liquid product. As demand increases we will add production
capacity by adding additional CLF digesters. We anticipate that
it would take 8 CLF digesters to bring the facility to 100%
capacity at a cost of approximately $1.8 million. While we
had previously used the IBR digester tanks at the Woodbridge
facility, we believe that the CLF digesters that utilize our
proprietary technology provide for a more efficient operation at
the Woodbridge facility. We believe the CLF digesters are easier
to operate and maintain, and we have found that using the CLF
digester tanks has minimized or eliminated the odor issues
previously faced by the Woodbridge facility. Throughout 2009,
our production at the plant was limited by odor issues to
approximately 20% of capacity and therefore the corrosion has
not affected our ability to produce product and meet current
sales demand. However, because we believe that we have corrected
the odor issues and we anticipate increased sales during 2010,
there may be a timing related issue between increasing
production capabilities and fulfilling any sales increase. If
that happens we may be unable to generate positive cash flow
from the Woodbridge facility as quickly as we had originally
anticipated. During this period of diminished production
capacity we are working to lower operating costs at the facility
in order to decrease cash requirements.
Our decision to bring the Woodbridge facility up to 100%
capacity by utilizing our HTLC technology instead of the EATAD
technology has caused us to recognize that certain equipment and
systems originally installed at the facility will no longer be
utilized. The net book value of the equipment, systems and
related technology licenses is approximately $3.9 million;
we have recognized an impairment charge related to those assets
in our consolidated statement of operations for the year ended
December 31, 2009. We feel that over time, assuming an
increase in sales, this expense will be offset by lower
operating costs related to the HTLC technology.
In addition, as we have decided not to continue with the use of
the EATAD technology we have written off the unamortized portion
of the New Jersey operating license (approximately $553,000) and
the $139,978 non-refundable deposit for a second operating
plant. The expenses associated with this write off are reflected
in our statement of operations for the year ended
December 31, 2009.
During the start up phase at the Woodbridge facility, we
experienced emissions violations related to odor issues, which
we believe may have been largely attributed to the IBR digester
tanks. Since moving from the use of the IBR tanks to using the
CLF digesters, we have noticed a significant decrease in odor
levels, which tests reveal are at negligible levels. We were
fined by the Middlesex County Health Department (MCHD) for the
violations received and we subsequently hired consultants to
assist with the correction process. In late July 2009, we began
implementing operational procedures at the plant which were
recommended by the odor control consultants and since then we
have not experienced significant odor issues; however, we have
not obtained release from the MCHD concerning this issue and
there is no assurance that we can obtain such a release. MCHD
recognized that we have made substantial efforts and
improvements at our Woodbridge facility in odor control and as a
result, has negotiated a sixteen (16) month payment plan
for the odor violations issued from May 2009 through
July 22, 2009 for an amount totaling $268,500. As of
December 31, 2009, the total amount of fines levied by the
MCHD totaled $379,375. We have paid $159,468.75 (of which
$157,718.75 were related to odor emissions), and we have an
27
unpaid balance of $219,906.25. The financial statements at
December 31, 2009 include an accrued liability of $268,500
related to the unpaid balance. Since October 2009 through the
date of this report, we have not received further odor
violations from the MCHD. In addition, we are investigating any
legal remedies that we may have under warranty.
Our
Gonzales Facility
On January 24, 2008, we acquired the net assets of United
Organic Products, LLC (UOP), which was under common
ownership with WRI. With this acquisition, we acquired a leading
liquid fertilizer product line, as well as the Gonzales
facility, which is a
state-of-the-art
production facility that services a strong West Coast
agribusiness customer base through established distribution
channels. The purchase price of $2,500,000 was paid in cash of
$1,500,000 and notes payable of $1,000,000. The note matures on
February 1, 2011, has an interest rate of 7% per annum, is
payable monthly in arrears, and is convertible into our common
stock six months after the acquisition date for a price equal to
the average closing price of the stock on NASDAQ for the five
days preceding conversion.
The Gonzales facility generated revenue during 2009 of
approximately $2,109,000 with a positive operating margin of
approximately $38,000 (based on no allocation of corporate
overhead). As 2009 progressed, the Gonzales facility continued
to improve its revenues and in the six month period ended
December 31, 2009, the Gonzales facility generated revenues
of approximately $1,030,000 and a positive gross margin (based
on no allocation of corporate overhead) of $115,000, or 11%. We
plan to continue to improve this operating margin by channeling
sales into the turf and retail markets, which we believe to be
more profitable, by generating tip fees from receiving
additional quantities of food processing waste and by reducing
the amount of raw material and freight costs currently
associated with the production process. In addition, as a part
of our use of proceeds from our October 2009 secondary offering,
we have plans to add capacity to the Gonzales plant, whereby the
plant will be able to produce approximately three times its
current production and will be capable of producing both liquid
and solid products. We have completed certain aspects of the
planned upgrades which allow us to receive solid food waste for
processing but have delayed the upgrades which would allow us to
produce dry product. The remaining upgrades have been delayed
due to a lack in market demand for a dry product within the area
the Gonzales facility serves. Because we will have to obtain the
proper building permits for continued expansion, further
development of the Gonzales facility will be delayed until those
permits are obtained, which we believe will be during the second
half of 2010 or in early 2011.
The Gonzales facility began to generate cash flow in June of
2009 and continued that trend through December 2009. We estimate
that the plant in its current configuration, and based on
current market prices, has the capacity to generate monthly
sales in the range of $350,000 to $400,000. If sales increase
above the current per month level, we expect the additional cash
flow from the Gonzales facility will be used to offset operating
expenses at the corporate level.
On January 24, 2008, we also acquired the net assets,
including the intellectual property, of WRI. This acquisition
makes us the exclusive owner of the proprietary technology and
process known as the High Temperature Liquid Composting, or
HTLC, system, which processes various biodegradable waste
products into liquid and solid food waste-based fertilizer and
feed products. The purchase price of $500,000 was paid with a 7%
short-term note that matured and was paid on May 1, 2008.
In addition, the purchase price provides for a technology fee
payment of $5,500 per ton of waste-processing capacity for
capacity that is either added to plants that were not planned at
the time of this acquisition and that use this technology. There
is a 10 year cap for these $5,500 per ton of waste
processing capacity charges with no minimum payment required.
The per ton fee is not payable on the Woodbridge facility or the
Gonzales facility acquired in the acquisition or the currently
planned addition thereto, except to the extent that capacity (in
excess of the currently planned addition) is added to those
facilities in the future. For example, if we construct a new 100
ton per day facility that was not planned at the time of the WRI
acquisition and we use the HTLC technology at the facility, the
$5,500 per ton of waste processing capacity charge would be
$550,000 payable as follows: $275,000 (50%) when the facility
comes on line and the remaining $275,000 (50%) payable in
royalty payments equal to 50% of product sales. The purchase
agreement also provides for a 50% profit share with WRIs
sellers on any portable facilities. The purchase agreement
provides further that if we decide to exercise our right,
obtained in the WRI acquisition, to enter into a joint venture
with Pacific Seafoods Inc. for the development of a fish
waste-processing product, we will pay 50% of our profits, which
is less the 50% of the profits
28
paid to Pacific Seafoods Inc., earned from this product to the
seller of WRI. Combined payments of both the $5,500 per ton
technology fee and the profits paid from the fish
waste-processing product, if any, is capped at $7.0 million
with no minimum payment required. In April 2008, we entered into
an agreement with Pacific Seafoods Inc. whereby we will pay
Pacific Seafoods Inc. 50% of the profits from the fish
waste-processing product. To date, no profits have been earned
from the fish waste-processing product. It is our intention to
expense the payments, if any, that are paid on either the
profits from the fish waste-processing product or the $5,500
per-ton technology fee.
Financing
Activities
January
2008, March 2009, May 2009, July 2009, September 2009 and
October 2009 Financings
On January 24, 2008, we entered into private financing with
three investors, in which we received $4,050,000 in proceeds,
referred to herein as the 2008 Financing. We used the proceeds
to fund the acquisition of the assets described above, to fund
further development activities and to provide working capital.
The 2008 Financing was offered at an original issue discount of
10%. The investors were issued convertible debentures in the
principal amount of $4,500,000, with interest accruing at 10%
per annum and with the principal balance to be paid by
January 24, 2009, which deadline was extended to
July 24, 2009. In addition, we initially issued to the
investors an aggregate of 750,000 Class A warrants and
750,000 Class B warrants exercisable at $8.25 and $11.00
per warrant share, respectively. Of these warrants, 50% were
returned to us when we obtained shareholder approval for the
2008 Financing, in compliance with the rules of the NASDAQ Stock
Market. A placement fee of $225,000 was paid out of the proceeds
of this loan to Chardan Capital Markets, LLC. The investors had
the option, at any time on or before the extended maturity date
of July 24, 2009 to convert the outstanding principal of
the convertible debentures into shares of our common stock at
the rate per share equal to 70% of the average of the three
lowest closing prices of common stock during the
20-day
trading period immediately prior to a notice of conversion. As
of June 30, 2009, the investors converted the entirety of
the debentures into 7,366,310 shares, reducing the
principal amount of the debt to $0. In addition, the investors
received 131,834 shares of common stock as interest on the
debentures during the pay-off period. On January 1, 2009,
pursuant to the adoption of guidance described in ASC 815
related to derivatives and hedging activities, we determined
that the conversion features within the convertible notes
payable issued in the January 2008 financing to be an embedded
derivative which was required to be bifurcated and shown as a
derivative liability subject to
mark-to-market
adjustment each reporting period. The fair value of the
conversion feature was determined using a Black-Scholes model
and resulted in a fair value of $5,083,108. The effect of the
derivative instruments in the year ended December 31, 2009
was recorded in our consolidated statements of operation and was
a derivative gain of $3,565,091. No derivative liability related
to this transaction is recorded as of December 31, 2009 as
all underlying instruments have been converted into common stock.
On March 6, 2009, we entered into an agreement with the
holders of our $17.5 million New Jersey Economic
Development Authority bonds to release $2.0 million for
capital expenditures on our Woodbridge facility and to defer
interest payments on the bonds through July 30, 2009. These
funds had been held in a reserve for bond principal and interest
payments along with a reserve for lease payments. As
consideration for the release of the reserve funds, we issued
the bond holders 2,284,409 Class B warrants. The
Class B warrants are exercisable at $11.00 per warrant.
These warrants are not registered and cannot be traded.
On May 7, 2009, we entered into an agreement with an
institutional investor, wherein we agreed to sell to the
investor, for the sum of $1,182,500, six-month non-convertible
original issue discount notes with principal amounts totaling
$1,330,313 (the May Notes). The agreement provided
that if we raised over $1.33 million while the May Notes
were outstanding, the first $1,330,313 must be used to repay the
May Notes. Additionally, in connection with the May Notes issued
pursuant to the agreement, the investor received five-year
warrants to purchase 750,000 shares and 350,000 shares
of our common stock, with exercise prices of $1.00 per share and
$1.50 per share, respectively, (Class C and D warrants,
respectively) subject to certain anti-dilution provisions.
Chardan Capital Markets, LLC, our placement agent for the
transaction, was issued 135,000 Class C warrants and 65,000
Class D warrants. These warrants are subject to certain
anti-dilution right for issuance below the exercise prices and
are not registered and cannot be traded. We have determined that
the warrant provisions providing for protection for issuances
below the warrant exercise prices could result in modification
of the exercise price based on a variable that is not an input
to the fair value for a
fixed-for-fixed
option. Therefore we have determined that the warrants issued in
connection with this financing to be a derivative instrument
which is required to be shown as a derivative liability subject
to
29
mark-to-market
adjustment each reporting period. The fair value of the warrants
on May 7, 2009 was determined using a Black-Scholes model
with the following assumptions: risk-free interest rate of
2.05%; no dividend yield; volatility of 96.7%. The resulting
derivative liability was approximately $1,841,100 of which
$1,558,000 was recorded as interest expense and $283,000 was
recorded as general and administrative expense on the
consolidated statements of operations for the year ended
December 31, 2009. The liability was revalued as of
December 31, 2009 using a Black-Scholes model and the
following assumptions: risk-free interest rate of 2.35%; no
dividend yield; volatility of 98.6%, resulting in a revalued
liability of approximately $563,517 and a derivative gain of
approximately $590,561. The gain is included on the consolidated
statements of operations for the year ended December 31,
2009. Based on the price protection provisions described above
and as a result of the July 15, 2009 transaction that is
described below, all Class D warrants were re-priced at a
$1.02.
On May 19, 2009, we entered into an agreement with four
institutional investors whereby the investors agreed to purchase
1,500,000 shares of our common stock for $1.40 per share,
providing $2.1 million before fees and expenses. The
May 7, 2009 nonconvertible short-term note described above
was immediately repaid with the proceeds of the May 19,
2009 offering as required under such an instrument. In addition,
and as an inducement to enter into this transaction, we issued
the investors 1,500,000 warrants, with a strike price of $1.40
per share and a
90-day term.
We made the offering and sale of these shares and the shares
underlying the warrants pursuant to a shelf registration
statement.
On May 26, 2009, we entered into an amended agreement with
the same four institutional investors, discussed in the prior
paragraph, pursuant to which the warrants exercisable at $1.40
per share were exercised in full for aggregate proceeds of
$2.1 million. Pursuant to such amended agreement, we agreed
to issue to these investors in the aggregate Class E
warrants to purchase an additional 1,500,000 shares of our
common stock at an exercise price of $1.63 per share. We may
redeem these warrants at any time after our common stock has
closed at or above $2.42 for five consecutive trading days. The
Class E warrants expire on May 27, 2014. We made the
offering and sale of these warrants and the shares underlying
the warrants pursuant to a shelf registration statement.
On July 15, 2009, we sold 1,961,000 shares of common
stock at $1.02 per share under our shelf registration statement
for an aggregate of $2,000,220. In addition, we issued 585,000
Class F warrants with an exercise price of $1.25 per share.
The Class F warrants have a five-year life from the date of
issuance. We paid a fee of $121,948 associated with this
transaction, which was charged to additional paid-in capital.
On September 8, 2009, we entered into an agreement with an
institutional investor, wherein we agreed to sell to the
investor, for the sum of $1,400,000, six-month convertible
original issue discount notes with principal amounts totaling
$1,540,000 (the September Notes). The agreement
provided that if we raised over $1.54 million while the
September Notes were outstanding, the first $1,540,000 must be
used to repay the September Notes. The September Notes were
repaid from our October 2009 public offering. Additionally, in
connection with the September Notes issued pursuant to the
agreement, the investor received a five-year warrant to purchase
2,500,000 shares of our common stock, with an exercise
price of $1.25 per share, subject to certain anti-dilution
rights for issuances below such exercise price; provided that
absent shareholder approval, the exercise price may not be
reduced to less than $1.08 per share. These warrants are not
registered and cannot be traded. We have determined that the
warrant provisions providing for issuances below the warrant
exercise price could result in modification of the exercise
price based on a variable that is not an input to the fair value
for a
fixed-for-fixed
option. We have determined that the warrants issued in
connection with this financing are a derivative instrument which
is required to be shown as a derivative liability subject to
mark-to-market
adjustment each reporting period. The fair value of the
derivative liability was determined at September 8, 2009
using a Black-Scholes model and the following assumptions;
risk-free interest rate of 2.38%; no dividend yield; volatility
of 94.3%. The resulting liability of approximately $1,987,000
was recorded as a discount on the Note to the extent of the Note
balance of $1.4 million, and is being amortized over the
six month note term, and the remaining approximately $587,000
was recorded as interest expense on the consolidated statements
of operations in the year ending December 31, 2009. The
derivative liability was revalued as of December 31, 2009
using a Black-Scholes model and the following assumptions:
risk-free interest rate of 2.35%; no dividend yield; volatility
of 98.6%, resulting in a revalued liability of approximately
$1,063,200. The derivative gain of $923,800 is recorded on the
consolidated statement of operations for the year ended
December 31, 2009.
30
On October 20, 2009 we closed a secondary public offering
of 17,250,000 units priced at $1.06 per unit and which
included the 2,250,000 units that reflect the exercise in
full of the underwriters over-allotment option. Each unit
consists of one share of common stock and one newly created
Class H warrant, with each Class H warrant exercisable
for one share of common stock at an exercise price of $1.30 per
share. The warrants became exercisable on December 14,
2009, and will expire on October 14, 2014. We received
approximately $16.4 million in net proceeds, after
deducting the underwriting discounts and commissions and other
estimated offering expenses. We plan to use such proceeds for
further development and execution of the Companys sales
and marketing plan, strategic growth initiatives, other general
corporate purposes, and to repay the six-month note the Company
issued in September 2009 in the principal amount of $1,540,000.
Sales
and Marketing
Throughout 2009, we have worked to further develop and execute
our sales, marketing and distribution plan and have dedicated a
portion of the net proceeds of the October 2009 offering to
further this goal. Since the closing of our October 2009
offering, we have hired 8 sales representatives, including a
Director of Sales, who together bring to Converted Organics a
combined 130 years of sales experience. By hiring
additional sales representatives we believe we have created a
network of highly qualified experts who are strategically
positioned throughout the United States to proactively leverage
sales in all of our critical markets. Also, in the fourth
quarter 2009 we signed an agreement with Crossbow Group, Inc.,
an advertising agency, to develop high impact advertising and
marketing communications programs targeted to the retail lawn
and garden, agriculture, professional lawn care and golf course
markets. We believe this advertising program will generate
qualified sales leads, expand the number of distributors of our
products in the agriculture market, increase our bulk sales to
professional lawn care companies and increase sales of our
liquid products to golf course distributors and golf courses.
Acquisitions
We are actively investigating businesses suitable for
acquisition targets or joint venture partners to help facilitate
the growth of our business. Since our October 2009 secondary
offering, we have been investigating acquisition candidates that
share our eco-friendly, green business model. The acquisition
candidates that most appeal to us are those that share business
objectives based upon innovative environmentally sustainable
models, have a need for additional capital which we could help
raise or provide, and have a strong management team.
In March 2010, we entered into a license agreement with
Heartland Technology Partners (HTP) under which we
were granted an exclusive, irrevocable license for the use of
HTPs waste water processing technology. In addition, we
have hired a senior executive in the waste water processing
industry and have begun to develop plans to establish this line
of business.
Future
Development
We have developed smaller capacity operating units, namely the
Scalable Modular AeRobic Technology (SMART) units that are
suitable for processing 5 to 50 tons of waste per day, depending
on owner/user preference. The semi-portable units are capable of
operating indoors or outdoors and may be as sophisticated or as
basic in design and function as the owner/user requires. The
SMART units will be delivered to jobsites in pre-assembled,
pre-tested components, and will include a license to use the
HTLC technology. Our target market is users who seek to address
waste problems on a smaller scale than would be addressed by a
large processing facility. Our plan contemplates that purchasers
of the SMART units would receive tip fees for accepting waste
and would sell fertilizer and soil amendment products in the
markets where their units operate. We plan to market and sell
the SMART units in both the United States and abroad.
We have also begun the development of a licensing program, under
which we will license to third parties, the right to use our
proprietary technology. The licensing program consists of a
know-how license, which could be complemented with SMART unit
sales so that any individual or entity buying a SMART unit would
also receive a license agreement to use our technology. We are
working to patent our process and technology and anticipate that
we will expand upon the licensing program when the necessary
patent registrations are achieved. We are currently in
negotiations with MassOrganics I, LLC (MassOrganics
I) regarding the use of Converted Organics
proprietary
31
technology for the manufacture of organic fertilizer products.
On January 25, 2010, we signed a memorandum of
understanding under which MassOrganics I would install and
operate the system at a new manufacturing facility to be
constructed at The Sutton Commerce Park in Sutton,
Massachusetts. MassOrganics I has agreed to enter into a
licensing agreement under which MassOrganics I will pay a
licensing fee to Converted Organics.
Our long-term strategic plan calls for the development and
construction of facilities in addition to our Gonzales and
Woodbridge facilities. In connection with this plan, we have
already done preliminary work aimed at establishing facilities
in Rhode Island and Massachusetts. In Rhode Island, the Rhode
Island Industrial Facilities Corporation gave initial approval
to our Revenue Bond Financing Application for up to
$15.0 million for the construction of our proposed Rhode
Island facility. On September 1, 2008, we entered into a
lease with Rhode Island Resource Recovery Corporation (RIRRC)
for nine acres of land in the newly created Lakeside Commerce
Industrial Park in Johnston, Rhode Island. We previously filed
an application with the Rhode Island Department of Environmental
Management for the operation of a Putrescible Waste Recycling
Center at that site. As part of our efforts to establish a Rhode
Island facility, we have established Converted Organics of Rhode
Island, LLC, of which we are 92.5% owners. The non-controlling
interest is owned by a local businessman who has assisted us
with the process of developing a Rhode Island facility To
facilitate the development of Converted Organics of Rhode
Island, LLC, on February 25, 2010 we signed a letter of
intent with the same individual to sell substantially all of the
assets and a limited select amount of liabilities of Converted
Organics of RI, a transaction that would include the assignment
of our lease with RIRRC. In Massachusetts, we have performed
initial development work in connection with construction of
three manufacturing facilities to serve the eastern
Massachusetts market. Two of our proposals to develop facilities
are currently under review by the property owners. The third
proposal has evolved into the MassOrgnaics I transaction
described in the paragraph above. The Massachusetts Strategic
Envirotechnology Partnership Program has completed a review of
our technology.
Trends
and Uncertainties Affecting our Operations
We will be subject to a number of factors that may affect our
operations and financial performance. These factors include, but
are not limited to, the available supply and price of organic
food waste, the market for liquid and solid organic fertilizer,
increasing energy costs, the unpredictable cost of compliance
with environmental and other government regulation, and the time
and cost of obtaining USDA, state or other product labeling
designations. Demand for organic fertilizer and the resulting
prices customers are willing to pay also may not be as high as
our market studies suggest. In addition, supply of organic
fertilizer products from the use of other technologies or other
competitors may adversely affect our selling prices and
consequently our overall profitability. Furthermore our plan
calls for raising additional debt
and/or
equity financing to construct additional operating facilities.
Currently there has been a slowdown in lending in both the
equity and bond markets which may hinder our ability to raise
the required funds.
Liquidity
and Capital Resources
At December 31, 2009, we had total current assets of
approximately $12.6 million consisting primarily of cash
and cash equivalents, restricted cash, inventories and prepaid
assets, and had current liabilities of approximately
$6.2 million, consisting primarily of term notes payable,
accounts payable and accrued expenses leaving us with working
capital of approximately $6.4 million. Non-current assets
totaled approximately $22.6 million and consisted primarily
of deposits, property and equipment and intangible assets.
Non-current liabilities consist primarily of derivative
liabilities, notes payable and bonds payable totaling
approximately $20.1 million at December 31, 2009. We
have an accumulated deficit at December 31, 2009 of
approximately $50 million. Owners equity at
December 31, 2009 was approximately $8.8 million. For
2009, we generated revenues from operations of approximately
$2.6 million. During 2008, we generated revenues from
operations of approximately $1.5 million.
Our plan to become cash flow positive before depleting our
available cash is as follows:
We currently have manufacturing capabilities in our Woodbridge
and Gonzales facilities as a means to generate revenues and
cash, although at the present time, due to design and
construction issues with our digesters discussed in
Background Introduction Woodbridge
Facility above, only the Gonzales facility has the current
capacity to generate positive cash flow from operations. In
addition we have begun to sell a poultry litter-based organic
fertilizer product which is produced for us by a third party
supplier. Sales of this product began in 2010; we generate a
positive
32
operating margin and we anticipate positive cash flow from the
sales of this product. Our estimated cash requirements for 2010
on a monthly basis are approximately $400,000 at the corporate
level, $500,000 for Woodbridge and $200,000 for Gonzales. The
monthly cash requirement for corporate has increased from the
previously reported requirements due to increased sales and
marketing efforts along with higher insurance and public company
expenses. Currently our cash requirement leaves us with a cash
shortfall of approximately $900,000 per month. We estimate that
at the current production capacity at Woodbridge and Gonzales,
we could provide enough product to achieve additional revenues
of $600,000 to $750,000 per month, which would not provide
sufficient cash flow to cover our cash requirements. Our plan to
achieve positive cash flow is to increase production capacity at
our Woodbridge facility and to increase sales levels of all
product that we either manufacture ourselves or purchase from an
outside supplier, including the poultry litter-based organic
fertilizer product. If we are unable to increase production
capacity or sales levels or if expenses exceed anticipated
amounts then we will need to seek additional financing in order
to cover our cash shortfall.
During the first half of 2009, we reduced the entire
$4.5 million convertible debenture balance from our
January 24, 2008 financing by converting the balance into
shares of our common stock. In addition, during the first
quarter of 2009, the holders of the New Jersey Economic
Development Authority bonds released $2.0 million of
escrowed funds for us to use and we obtained $1.3 million
of secured debt financing. We raised another $4.2 million
in capital through the issuance of common stock and the exercise
of warrants. In September 2009, we raised $1.4 million by
the issuance of a convertible note in principal amount of
$1.54 million, which included an original issue discount of
10%, and the issuance of warrants to purchase
2,500,000 shares of common stock at an exercise price of
$1.25 per share. In addition, we have a shelf registration
statement which would allow us to sell securities into the
market to raise additional financing. On October 20, 2009,
we raised approximately $16.4 million after expenses
through a secondary public offering of 17,250,000 units.
The units were priced at $1.06 and each is composed of one share
of the Companys common stock and one newly created
Class H Warrant. As discussed above, we are using the
proceeds from the debt and equity offerings we completed during
the year to fund strategic growth initiatives, for general
corporate purposes, to repay the $1.54 million loan
discussed above, to provide working capital and to further the
development and execution of the Companys sales and
marketing plan.
We believe the funds received through our secondary public
offering will be sufficient to operate our current business
until we are cash flow positive assuming we achieve our desired
production capacity and sales levels and assuming we do not
encounter additional costs or expenses, either unforeseen or
through any proposed mergers
and/or
acquisitions. To reach our desired production capacity we would
have to add additional capacity of at least three HTLC digesters
at our Woodbridge facility for a total cost of approximately
$650,000. We plan to add additional capacity at the Woodbridge
facility as product demand and product sales from this facility
increase. If we do not achieve our desired production capacity
or sales levels or if we encounter unforeseen costs or expenses
(including costs or expenses required to complete future
acquisitions), we may require additional financing for which we
have no commitments. There is no assurance that capital in any
form would be available to us, and if available, on terms and
conditions that are acceptable. Moreover, we are not permitted
to borrow any future funds unless we obtain the consent of the
holders of the New Jersey Economic Development Authority bonds.
We have obtained such consent for prior financing, but there is
no guarantee that we can obtain such consent in the future.
Critical
Accounting Policies and Estimates
Our plan of operation is based in part upon the Companys
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of financial
statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
including the recoverability of tangible and intangible assets,
disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of
expenses during the periods covered. A summary of accounting
policies that have been applied to the historical financial
statements can be found in the notes to the consolidated
financial statements.
We evaluate our estimates on an on-going basis. The most
significant estimates relate to intangible assets, deferred
financing and issuance costs, and the fair value of financial
instruments. We base our estimates on historical Company and
industry experience and on various other assumptions that we
believe to be reasonable under the
33
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 those estimates.
The following is a brief discussion of our critical accounting
policies and methods, and the judgments and estimates used by us
in their application:
Revenue
Recognition
Revenue is recognized when each of the following criteria is met:
Persuasive evidence of a sales arrangement exists;
Delivery of the product has occurred;
The sales price is fixed or determinable; and
Collectability is reasonably assured.
In those cases where all four criteria are not met, the Company
defers recognition of revenue until the period these criteria
are satisfied. Revenue is generally recognized upon shipment of
product.
Share-Based
Compensation
We account for equity instruments exchanged for services in
accordance with ASC Section 718 regarding share-based
compensation. Under the provisions Section 718, share-based
compensation issued to employees is measured at the grant date,
based on the fair value of the award, and is recognized as an
expense over the requisite service period (generally the vesting
period of the grant). Share-based compensation issued to
non-employees is measured at grant date, based on the fair value
of the consideration received or the fair value of the equity
instruments issued, whichever is more readily measurable, and is
recognized as an expense over the requisite service period.
Estimates and judgments used in the preparation of our
consolidated financial statements are, by their nature,
uncertain and unpredictable, and depend upon, among other
things, many factors outside of our control, such as the results
of our operations and other economic conditions. Accordingly,
our estimates and judgments may prove to be incorrect and actual
results may differ, perhaps significantly, from these estimates
under different estimates, assumptions or conditions.
Long-Lived
Assets
We account for our long-lived assets (excluding goodwill) in
accordance with ASC Section 360 which requires that
long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable, such as
technological changes or significantly increased competition. If
undiscounted expected future cash flows are less than the
carrying value of the assets, an impairment loss is to be
recognized based on the fair value of the assets, calculated
using a discounted cash flow model. There is inherent
subjectivity and judgments involved in cash flow analyses such
as estimating revenue and cost growth rates, residual or
terminal values and discount rates, which can have a significant
impact on the amount of any impairment.
Other long-lived assets, such as identifiable intangible assets,
are amortized over their estimated useful lives. These assets
are reviewed for impairment whenever events or circumstances
provide evidence that suggests that the carrying amount of the
assets may not be recoverable, with impairment being based upon
an evaluation of the identifiable undiscounted cash flows. If
impaired, the resulting charge reflects the excess of the
assets carrying cost over its fair value. As described
above, there is inherent subjectivity involved in estimating
future cash flows, which can have a significant impact on the
amount of any impairment. Also, if market conditions become less
favorable, future cash flows (the key variable in assessing the
impairment of these assets) may decrease and as a result we may
be required to recognize impairment charges in the future.
Estimates and judgments used in the preparation of our financial
statements are, by their nature, uncertain and unpredictable,
and depend upon, among other things, many factors outside of our
control, such as the results of our operations and other
economic conditions. Accordingly, our estimates and judgments
may prove to be incorrect and actual results may differ, perhaps
significantly, from these estimates under different estimates,
assumptions or conditions.
34
Capitalization
of Interest Costs
We have capitalized interest costs, net of certain interest
income, in accordance with ASC Section 835 related to our
New Jersey Economic Development Authority Bonds of approximately
$1.1 million as of December 31, 2009 and 2008.
Interest costs capitalized during the construction phase are
included in construction in progress on the consolidated balance
sheets net of amortization.
Construction-in-Progress
Construction-in-progress
includes amounts incurred for construction costs and equipment
purchases for items still under construction related to the
upgrade of our Gonzales facility.
Construction-in-progress
for 2008 also includes amounts incurred for construction costs
and equipment purchases related to the Woodbridge facility.
Restricted
Cash
As of December 31, 2009, we had remaining approximately
$613,000 of restricted cash as required by our bond agreement. A
portion of this cash was raised in our initial public offering
and bond financing, both of which closed in February 2007, and a
portion has been funded by us pursuant to our obligations under
the bond agreement. We placed in escrow approximately $30,000 to
fund the bond interest payment paid on February 1, 2010.
The remaining $583,000 is set aside in reserve for bond interest
and principal payments along with a reserve for lease payments.
We have classified this restricted cash as non-current to the
extent that such funds are to be used to acquire non-current
assets or are to be used to service non-current liabilities.
Third party trustee approval is required for disbursement of all
restricted funds.
Fair
Value of Financial Instruments
On January 1, 2008, we adopted FASB ASC 820, which defines
fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. FASB ASC
820 applies to reported balances that are required or permitted
to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any
new fair value measurements of reported balances. The adoption
of FASB ASC 820 did not have a material effect on the carrying
values of our assets.
FASB ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, FASB ASC 820
establishes a fair value hierarchy that distinguishes between
market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable
inputs that are classified within Levels 1 and 2 of the
hierarchy) and the reporting entitys own assumptions about
market participant assumptions (unobservable inputs classified
within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets
and liabilities in active markets, as well as inputs that are
observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and
yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or
liability which are typically based on an entitys own
assumptions, as there is little, if any, related market
activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair
value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value
measurement in its entirety. Our assessment of the significance
of a particular input to the fair value measurement in its
entirety requires judgment, and considers factors specific to
the asset or liability.
Income
Taxes
We consider the valuation allowance for the deferred tax assets
to be a significant accounting estimate. In applying the FASB
ASC 740, management estimates future taxable income from
operations and tax planning
35
strategies in determining if it is more likely than not that we
will realize the benefits of our deferred tax assets. Management
believes the Company does not have any uncertain tax positions.
Results
of Operations
For the year ended December 31, 2009 we had an after tax
net loss of $21.1 million compared to $16.2 million
for the year ended December 31, 2008. The increase in the
net loss of $4.9 million is made up of the following
favorable and (unfavorable) major components, with further
explanation and details following the chart:
|
|
|
$1.1 million
|
|
Increase in sales
|
$(4.9) million
|
|
Increase in Cost of Goods sold
|
$(0.8) million
|
|
Increase in G&A Expenses
|
$(.3) million
|
|
Increase in R&D Expenses
|
$(0.4) million
|
|
Increase in Depreciation & Amortization
|
$(3.9) million
|
|
Impairment Loss on Long term Assets
|
$5.8 million
|
|
Derivative gains
|
$(1.1) million
|
|
Increase in Interest Expense
|
$(0.4) million
|
|
All other
|
$4.9 million
|
|
Total Increase in Net Loss
|
During the year ended December, 2009, we had sales of
approximately $2.6 million compared to $1.5 million
for the same period in 2008. The $1.1 million increase in
composed of a $600,000 increase in sales from our Gonzales
facility and a $500,000 increase in sales from our Woodbridge
facility. Gonzales sales for the year ended December 31,
2009 were $2.1 million and Woodbridge sales were $500,000.
During 2009 we had cost of goods sold of approximately
$6.9 million compared to $2 million cost of goods sold
for the same period in 2008. Of the $4.9 million increase
in cost of good, $4.7 million is related to our Woodbridge
facility and $166,000 is related to our Gonzales facility. The
$4.7 million increase at Woodbridge reflects a full year of
operation compared to a partial year in 2008. The major
components of cost of goods in Woodbridge are labor of
$1.4 million, utilities and sewer costs of
$1.1 million, rent of $800,000, packaging and raw materials
of $1.1 million and maintenance and supplies of $500,000.
We feel that many of these costs (except rent) were higher than
we expect in the future during our first full year of operations
due to the start up nature of the facility and we expect these
costs to be lower in the future. Similar to what occurred with
the Gonzales facility, as sales from the Woodbridge facility
increase, we expect that we will add variable costs for raw
materials but that the current level of fixed costs will not
increase proportionally. At the Gonzales facility sales
increased by $600,000 however, the cost of sales increased by
$300,000 which generated a 50% margin on the incremental
activity. When considering together our sales and cost of sales
at the Woodbridge and Gonzales facilities, we generated $38,000
of positive gross margin from Gonzales and negative
$4.3 million of gross margin from Woodbridge for the year
ended December 31, 2009.
We incurred General and Administrative expenses of approximately
$10.0 million and $9.3 million for the years ended
December 31, 2009 and 2008, respectively. The approximately
$700,000 increase in general and administrative expenses from
2008 to 2009 is composed of increases related to the New Jersey
facility of $400,000 in odor related penalties and $200,000 in
legal expenses associated with odor issues; increases of
$750,000 at the corporate level related to additional personnel,
benefits and occupancy expenses; increased professional fees of
approximately $1,100,000 (due mainly to costs associated with
our various financing activities) and increased marketing costs
of $250,000. This is offset by a decrease at the corporate level
of $2.0 million in non cash compensation expense related to
the issuance of stock options.
We incurred Research and Development costs of $637,000 and
$375,000 for the years ended December 31, 2009 and 2008,
respectively. A major part of the increase of $262,000 is
related to the impairment of a deposit on a second license of
$139,000 as we have determined that we will not use this license
for future plant development.
36
During 2009 we incurred a loss on impairment of long term assets
of $3.9 million due to the write down of equipment
(specifically the corrosions in our IBR digester tanks) at our
Woodbridge facility. For more information please see the section
Our Woodbridge Facility on page 3.
During 2009 we recognized derivative gains of $5.8 million
due to certain our issuances of financial instruments. This item
is a non cash gain and did not contribute cash to our operations.
Interest expense for the years ended December 31, 2009 and
2008 was $6.9 and $5.8 million, respectively. The
components of interest expense for the period ended
December 31, 2009 are: (i) recognition of $562,000 of
interest expense associated with the extension of the
convertible debentures issued in January 2008, which became due
in January 2009 and which were extended until July 2009
(200,000 shares of common stock were issued in connection
with such extension), (ii) recognition of approximately
$660,000 of interest expense associated with the issuance of
warrants in connection with the March 6, 2009 financing
arrangement with the holders of our bonds, and approximately
$800,000 of interest expense associated with the issuances of
warrants related to the short-term non-convertible notes,
(iii) recognition of $1,400,000 in interest expense on our
NJ EDA bonds, and approximately $279,000 on our other various
borrowings, and (iv) recognition of approximately
$3.2 million in amortization of discounts on our financing
arrangement during the year ended December 31, 2009.
Amortization of other intangible assets expense was
approximately $358,000 for the year ended December 31, 2009
and approximately $399,000 during the same period in 2008.
As of December 31, 2009, we had current assets of
approximately $12.6 million compared to $7.2 million
as of December 31, 2008. Our total assets were
approximately $35.1 million as of December 31, 2009
compared to approximately $32.6 million as of
December 31, 2008. The majority of the increase in current
assets from December 31, 2008 to December 31, 2009 is
due to the increase in cash as a result of our secondary stock
offering.
As of December 31, 2009, we had current liabilities of
approximately $7.9 million compared to $9.5 million at
December 31, 2008. This decrease is due largely to the
negotiation of term notes with our construction vendors which
moved some of that liability from current to non-current. In
addition, we had long-term liabilities of approximately
$18.5 million as of December 31, 2009 as compared to
$18.1 million at December 31, 2008. The increase is
due to the reclassification of amounts owed to construction
vendors to long-term liabilities.
For the twelve months ended December 31, 2009 we had
negative cash flow from operating activity of approximately
$11 million, comprising loss from operations of
$21 million adjusted for certain non-cash items such as
derivative gains, depreciation, non-cash interest expense
associated with the issuance of warrants, the write-down of
impaired assets, amortization of deferred financing fees and
amortization of discounts on private financing, and an increase
in accounts payable and accrued expenses. We also had negative
cash flow from investing activities of $2.5 million,
primarily related to construction at the New Jersey facility,
offset by the release of restricted cash set aside for that
purpose. The negative cash flow from both operating and
investing activities was offset by approximately
$20.7 million in positive cash flow from financing
activities comprising proceeds from our various debt and equity
transactions.
For the twelve months ended December 31, 2008 we had
negative cash flow from operating activity of
approximately.$7.3 million, comprising loss from operations
of $16 million, adjusted for certain non-cash items such as
recognition of expense associated with the beneficial conversion
features of our debt, amortization of discounts attributable to
warrant transactions, and an increase in accounts payable and
accrued expenses. We had negative cash flow from investing
activities of $4.7 million, primarily related to
construction of the New Jersey facility, offset by the release
of restricted cash set aside for that purpose. The negative cash
flow from both operating and investing activities was offset by
the approximately $15 million in positive cash flow from
our debt and equity financing transactions.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
37
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
CONVERTED
ORGANICS INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
38
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Converted Organics
Inc.
We have audited the accompanying consolidated balance sheets of
Converted Organics Inc. (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in owners equity
(deficit) and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Converted Organics Inc. as of December 31, 2009
and 2008, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Glastonbury, Connecticut
March 30, 2010
39
CONVERTED
ORGANICS INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,708,807
|
|
|
$
|
3,357,940
|
|
Restricted cash
|
|
|
583,393
|
|
|
|
2,547,557
|
|
Accounts receivable, net
|
|
|
140,657
|
|
|
|
313,650
|
|
Inventories
|
|
|
448,748
|
|
|
|
289,730
|
|
Prepaid rent
|
|
|
600,684
|
|
|
|
389,930
|
|
Other prepaid expenses
|
|
|
102,442
|
|
|
|
73,937
|
|
Deposits
|
|
|
|
|
|
|
141,423
|
|
Other receivables
|
|
|
|
|
|
|
94,250
|
|
Deferred financing and issuance costs, net
|
|
|
|
|
|
|
22,042
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,584,731
|
|
|
|
7,230,459
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
780,686
|
|
|
|
912,054
|
|
Restricted cash
|
|
|
29,769
|
|
|
|
60,563
|
|
Property and equipment, net
|
|
|
18,626,910
|
|
|
|
19,725,146
|
|
Construction-in-progress
|
|
|
311,015
|
|
|
|
974,900
|
|
Capitalized bond costs, net
|
|
|
814,341
|
|
|
|
862,010
|
|
Intangible assets, net
|
|
|
1,995,619
|
|
|
|
2,852,876
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
35,143,071
|
|
|
$
|
32,618,008
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS EQUITY (DEFICIT)
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Term notes payable current
|
|
$
|
2,274,413
|
|
|
$
|
89,170
|
|
Accounts payable
|
|
|
1,789,332
|
|
|
|
3,583,030
|
|
Accrued compensation, officers, directors and consultants
|
|
|
769,056
|
|
|
|
430,748
|
|
Accrued legal and other expenses
|
|
|
406,403
|
|
|
|
164,620
|
|
Accrued interest
|
|
|
618,526
|
|
|
|
601,166
|
|
Convertible notes payable, net of unamortized discount
|
|
|
355,164
|
|
|
|
4,602,660
|
|
Capital lease obligations current
|
|
|
12,833
|
|
|
|
|
|
Mortgage payable
|
|
|
|
|
|
|
3,006
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,225,727
|
|
|
|
9,474,400
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
27,742
|
|
|
|
|
|
Term notes payable, net of current portion
|
|
|
973,339
|
|
|
|
|
|
Mortgage payable, net of current portion
|
|
|
|
|
|
|
245,160
|
|
Derivative liabilities
|
|
|
1,626,742
|
|
|
|
|
|
Convertible note payable, net of current portion
|
|
|
17,767
|
|
|
|
351,516
|
|
Bonds payable
|
|
|
17,500,000
|
|
|
|
17,500,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,371,317
|
|
|
|
27,571,076
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
OWNERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value, authorized
10,000,000 shares; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, authorized
75,000,000 shares at December 31, 2009 and 40,000,000
at December 31, 2008
|
|
|
3,777
|
|
|
|
743
|
|
Additional paid-in capital
|
|
|
58,660,042
|
|
|
|
31,031,647
|
|
Members equity
|
|
|
|
|
|
|
619,657
|
|
Accumulated deficit
|
|
|
(49,892,065
|
)
|
|
|
(26,605,115
|
)
|
|
|
|
|
|
|
|
|
|
Total owners equity
|
|
|
8,771,754
|
|
|
|
5,046,932
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$
|
35,143,071
|
|
|
$
|
32,618,008
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
40
CONVERTED
ORGANICS INC.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
2,633,782
|
|
|
$
|
1,547,981
|
|
Cost of good sold
|
|
|
6,914,857
|
|
|
|
1,981,084
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(4,281,075
|
)
|
|
|
(433,103
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
10,049,830
|
|
|
|
9,298,744
|
|
Research and development
|
|
|
637,142
|
|
|
|
375,267
|
|
Depreciation expense
|
|
|
723,846
|
|
|
|
11,232
|
|
Amortization of capitalized costs
|
|
|
357,718
|
|
|
|
399,269
|
|
Amortization of license
|
|
|
16,500
|
|
|
|
263,387
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,066,111
|
)
|
|
|
(10,781,002
|
)
|
|
|
|
|
|
|
|
|
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
24,097
|
|
|
|
290,125
|
|
Loss on impairment of long-term assets
|
|
|
(3,928,129
|
)
|
|
|
|
|
Derivative gain
|
|
|
5,766,035
|
|
|
|
|
|
Other income
|
|
|
68,995
|
|
|
|
146,677
|
|
Interest expense
|
|
|
(6,970,675
|
)
|
|
|
(5,834,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,039,677
|
)
|
|
|
(5,398,096
|
)
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(21,105,788
|
)
|
|
|
(16,179,098
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,105,788
|
)
|
|
$
|
(16,179,098
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(1.08
|
)
|
|
$
|
(2.70
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
19,569,853
|
|
|
|
5,982,569
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
CONVERTED
ORGANICS INC.
Years
Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Shares Issued
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Owners
|
|
|
|
and
|
|
|
|
|
|
Paid-in
|
|
|
Members
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Capital
|
|
|
Equity
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Balance, January 1, 2008
|
|
|
4,229,898
|
|
|
$
|
423
|
|
|
$
|
12,460,357
|
|
|
$
|
|
|
|
$
|
(10,374,425
|
)
|
|
$
|
2,086,355
|
|
Consolidation of variable interest entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,965
|
|
|
|
|
|
|
|
23,965
|
|
Common stock issued upon exercise of warrants
|
|
|
1,780,506
|
|
|
|
178
|
|
|
|
11,435,476
|
|
|
|
|
|
|
|
|
|
|
|
11,435,654
|
|
Common stock issued upon exercise of options
|
|
|
143,000
|
|
|
|
14
|
|
|
|
536,236
|
|
|
|
|
|
|
|
|
|
|
|
536,250
|
|
Common stock issued for services rendered
|
|
|
45,480
|
|
|
|
5
|
|
|
|
212,614
|
|
|
|
|
|
|
|
|
|
|
|
212,619
|
|
Warrants issued in connection with financings, net of
cancellations
|
|
|
|
|
|
|
|
|
|
|
1,113,750
|
|
|
|
|
|
|
|
|
|
|
|
1,113,750
|
|
Beneficial conversion features on convertible notes
|
|
|
|
|
|
|
|
|
|
|
2,943,386
|
|
|
|
|
|
|
|
|
|
|
|
2,943,386
|
|
Stock dividends
|
|
|
1,232,552
|
|
|
|
123
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
|
|
|
|
|
|
|
|
2,329,951
|
|
|
|
|
|
|
|
|
|
|
|
2,329,951
|
|
Members contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544,100
|
|
|
|
|
|
|
|
544,100
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,592
|
|
|
|
(16,230,690
|
)
|
|
|
(16,179,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009, before cumulative effect of
change in accounting principle
|
|
|
7,431,436
|
|
|
|
743
|
|
|
|
31,031,647
|
|
|
|
619,657
|
|
|
|
(26,605,115
|
)
|
|
|
5,046,932
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(2,936,250
|
)
|
|
|
|
|
|
|
(2,146,858
|
)
|
|
|
(5,083,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009, after cumulative effect of change
in accounting principle
|
|
|
7,431,436
|
|
|
|
743
|
|
|
|
28,095,397
|
|
|
|
619,657
|
|
|
|
(28,751,973
|
)
|
|
|
(36,176
|
)
|
Members contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
915,651
|
|
|
|
|
|
|
|
915,651
|
|
Members distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201,630
|
)
|
|
|
|
|
|
|
(201,630
|
)
|
Deconsolidation of former variable interest entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,367,982
|
)
|
|
|
|
|
|
|
(1,367,982
|
)
|
Common stock issued to holders of convertible notes payable in
connection with extension
|
|
|
200,000
|
|
|
|
20
|
|
|
|
561,980
|
|
|
|
|
|
|
|
|
|
|
|
562,000
|
|
Common stock issued upon conversion of convertible notes payable
and accrued interest
|
|
|
7,779,644
|
|
|
|
778
|
|
|
|
6,419,473
|
|
|
|
|
|
|
|
|
|
|
|
6,420,251
|
|
Common stock issued as compensation
|
|
|
151,528
|
|
|
|
15
|
|
|
|
139,198
|
|
|
|
|
|
|
|
|
|
|
|
139,213
|
|
Warrants issued in connection with release of restricted cash
|
|
|
|
|
|
|
|
|
|
|
662,479
|
|
|
|
|
|
|
|
|
|
|
|
662,479
|
|
Issuance of stock options
|
|
|
|
|
|
|
|
|
|
|
222,064
|
|
|
|
|
|
|
|
|
|
|
|
222,064
|
|
Common stock issued upon exercise of warrants
|
|
|
1,500,000
|
|
|
|
150
|
|
|
|
1,964,850
|
|
|
|
|
|
|
|
|
|
|
|
1,965,000
|
|
Issuance of common stock
|
|
|
20,711,600
|
|
|
|
2,071
|
|
|
|
20,594,601
|
|
|
|
|
|
|
|
|
|
|
|
20,596,672
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,304
|
|
|
|
(21,140,092
|
)
|
|
|
(21,105,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
37,774,208
|
|
|
$
|
3,777
|
|
|
$
|
58,660,042
|
|
|
$
|
|
|
|
$
|
(49,892,065
|
)
|
|
$
|
8,771,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
CONVERTED
ORGANICS INC.
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,105,788
|
)
|
|
$
|
(16,179,098
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Amortization of intangible asset license
|
|
|
16,500
|
|
|
|
16,500
|
|
Amortization of capitalized bond costs
|
|
|
47,669
|
|
|
|
47,669
|
|
Amortization of deferred financing fees
|
|
|
22,042
|
|
|
|
331,600
|
|
Amortization of intangible assets
|
|
|
288,007
|
|
|
|
246,887
|
|
Depreciation of fixed assets
|
|
|
2,155,994
|
|
|
|
411,843
|
|
Beneficial conversion feature
|
|
|
230,492
|
|
|
|
2,712,009
|
|
Amortization of discounts on private financings
|
|
|
2,870,313
|
|
|
|
1,563,750
|
|
Non-cash interest expense private financings
|
|
|
1,245,186
|
|
|
|
|
|
Common stock issued for extension of convertible note payable
|
|
|
562,000
|
|
|
|
|
|
Common stock issued as compensation
|
|
|
139,213
|
|
|
|
212,619
|
|
Stock option compensation expense
|
|
|
222,064
|
|
|
|
2,329,951
|
|
Forgiveness of debt and accrued interest
|
|
|
|
|
|
|
(146,677
|
)
|
Loss on impairment of long-term assets
|
|
|
3,928,129
|
|
|
|
|
|
Loss on sale of fixed asset
|
|
|
|
|
|
|
176
|
|
Warrants issued in connection with release of restricted cash
|
|
|
662,479
|
|
|
|
|
|
Derivative gain
|
|
|
(5,766,035
|
)
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
100,784
|
|
|
|
(284,948
|
)
|
Inventory
|
|
|
(159,018
|
)
|
|
|
(278,616
|
)
|
Prepaid expenses and other current assets
|
|
|
(239,261
|
)
|
|
|
(242,983
|
)
|
Other assets
|
|
|
94,250
|
|
|
|
(38,800
|
)
|
Deposits
|
|
|
281,792
|
|
|
|
(507,500
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
|
3,111,634
|
|
|
|
2,425,206
|
|
Accrued compensation officers, directors and
consultants
|
|
|
338,308
|
|
|
|
32,967
|
|
Accrued interest
|
|
|
188,764
|
|
|
|
(8,048
|
)
|
Other
|
|
|
(53,955
|
)
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(10,818,437
|
)
|
|
|
(7,330,493
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Release of restricted cash
|
|
|
1,994,958
|
|
|
|
11,988,292
|
|
Cash paid for acquisitions
|
|
|
|
|
|
|
(1,500,000
|
)
|
Purchase of fixed assets
|
|
|
(3,830,264
|
)
|
|
|
(14,233,823
|
)
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
24,000
|
|
Capitalized interest
|
|
|
|
|
|
|
(72,438
|
)
|
Construction costs
|
|
|
(93,451
|
)
|
|
|
(902,462
|
)
|
Consolidation of variable interest entity
|
|
|
|
|
|
|
6,164
|
|
Deconsolidation of variable interest entity
|
|
|
(596,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,524,927
|
)
|
|
|
(4,690,267
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Members contributions
|
|
|
230,983
|
|
|
|
544,100
|
|
Members distributions
|
|
|
(201,630
|
)
|
|
|
|
|
Net proceeds from exercise of options
|
|
|
|
|
|
|
536,250
|
|
Net proceeds from exercise of warrants
|
|
|
1,965,000
|
|
|
|
11,435,654
|
|
Net proceeds from stock offering
|
|
|
20,596,672
|
|
|
|
|
|
Net proceeds from nonconvertible short-term note
|
|
|
1,182,500
|
|
|
|
|
|
Net proceeds from convertible short-term note
|
|
|
1,400,000
|
|
|
|
|
|
Repayment of nonconvertible short-term note
|
|
|
(1,330,313
|
)
|
|
|
|
|
Repayment of convertible short-term note
|
|
|
(1,540,000
|
)
|
|
|
|
|
Proceeds from private financing, net of original issue discount
|
|
|
|
|
|
|
3,715,000
|
|
Repayment of demand notes
|
|
|
|
|
|
|
(69,600
|
)
|
Repayment of capital lease obligations
|
|
|
(12,403
|
)
|
|
|
|
|
Repayment of term notes
|
|
|
(1,568,752
|
)
|
|
|
(250,000
|
)
|
Repayment of term note issued for acquisition
|
|
|
(26,883
|
)
|
|
|
(814,447
|
)
|
Repayment of mortgage payable
|
|
|
(943
|
)
|
|
|
(6,124
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
20,694,231
|
|
|
|
15,090,833
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
7,350,867
|
|
|
|
3,070,073
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
3,357,940
|
|
|
|
287,867
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
10,708,807
|
|
|
$
|
3,357,940
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period in:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,665,990
|
|
|
$
|
1,722,863
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Financing costs paid from proceeds of private financing
|
|
$
|
|
|
|
$
|
335,000
|
|
Equipment acquired through assumption of capital lease
|
|
|
52,979
|
|
|
|
|
|
Equipment acquired through assumption of term note
|
|
|
118,250
|
|
|
|
|
|
Common stock issued upon conversion of convertible notes payable
and accrued interest
|
|
|
6,420,251
|
|
|
|
|
|
Beneficial conversion discount on convertible note
|
|
|
|
|
|
|
2,943,386
|
|
Fair value of derivatives issued
|
|
|
3,827,686
|
|
|
|
|
|
Discount on warrants issued in connection with financings
|
|
|
2,870,313
|
|
|
|
1,113,750
|
|
Members contribution of convertible note
|
|
|
684,668
|
|
|
|
|
|
Conversion of accounts payable into term notes
|
|
|
4,663,039
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
CONVERTED
ORGANICS INC.
|
|
NOTE 1
|
NATURE OF
OPERATIONS
|
Converted Organics Inc. (the Company) uses food and
other waste as a raw material to manufacture, sell and
distribute all-natural fertilizer products with nutrition
characteristics and which have been shown to support disease
suppression. The Company generates revenues from two sources:
product sales and tip fees. Product sales revenue comes from the
sale of our fertilizer products. Tip fee revenue is derived from
waste haulers who pay the Company tip fees for
accepting food waste generated by food distributors such as
grocery stores, produce docks and fish markets, food processors,
and hospitality venues such as hotels, restaurants, convention
centers and airports.
Converted Organics of California, LLC (the Gonzales
facility), a California limited liability company and
wholly-owned subsidiary of the Company, was formed when the
Company acquired the assets of United Organics Products, LLC.
The Gonzales facility operates a plant in Gonzales, California,
in the Salinas Valley and produces approximately 25 tons of
organic fertilizer per day, which is sold primarily to the
California agricultural market. The Gonzales facility employs a
proprietary method called High Temperature Liquid Composting
(HTLC). The facility has been upgraded to enable it
to accept larger amounts of food waste from waste haulers and
may be upgraded, depending on demand, to have the capability to
produce a dry product in addition to the current liquid
fertilizer it produces.
The Companys second facility, Converted Organics of
Woodbridge, LLC (the Woodbridge facility), is a New
Jersey limited liability company and wholly owned subsidiary of
the Company, which was formed for the purpose of owning,
constructing and operating the Woodbridge, New Jersey facility.
The Woodbridge facility is designed to service the New
York-Northern New Jersey metropolitan area. The Company
constructed this facility and it became partially operational in
the second quarter of 2008.
Converted Organics of Rhode Island, LLC, a Rhode Island limited
liability company and subsidiary of Converted Organics, was
formed in July 2008 for the purpose of developing a facility at
the Rhode Island central landfill. Converted Organics of Rhode
Island, LLC has not had any activity since its formation (see
Note 17).
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES
|
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS
In July 2009, the Company adopted Financial Accounting Standards
Board (FASB) Accounting Standards Codification
(ASC)
105-10,
which establishes the FASB ASC as the source of all
authoritative principles and standards to be applied in the
preparation of financial statements in conformity with
Accounting Principles Generally Accepted in the United States of
America (GAAP). As FASB ASC is not intended to
change or alter existing GAAP, it did not impact the
Companys financial statements.
In January 2009, the Company adopted FASB ASC
815-10-65,
which requires enhanced disclosures about (a) how and why
an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for, and
(c) how derivative instruments and related hedged items
affect an entitys financial position, financial
performance, and cash flows. The adoption of FASB ASC
815-10-65
did not have a material impact on the financial statements.
CONSOLIDATION
The accompanying consolidated financial statements include the
transactions and balances of Converted Organics Inc. and its
subsidiaries, Converted Organics of California, LLC, Converted
Organics of Woodbridge, LLC and Converted Organics of Rhode
Island, LLC. The transactions and balances of Valley Land
Holdings, LLC, a variable interest entity of Converted Organics
of California, LLC, were also consolidated therein until
April 1, 2009. All intercompany transactions and balances
have been eliminated in consolidation.
The consolidated financial statements included Valley Land
Holdings, LLC (VLH), as VLH had been deemed to be a
variable interest entity of the Company as it was the primary
beneficiary of that variable interest
44
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES Continued
|
entity following the acquisition of the net assets of United
Organic Products, LLC. VLHs assets and liabilities consist
primarily of cash, land and a mortgage note payable on the land
on which the California facility is located. Its operations
consist of rental income on the land from the Company and
related operating expenses. In 2009, the sole member of VLH
contributed cash and property to VLH in a recapitalization. VLH
has henceforth been sufficiently capitalized and is no longer
considered to be a variable interest entity of the Company. The
Company has deconsolidated VLH as a variable interest entity as
of April 1, 2009.
DEVELOPMENT
STAGE COMPANY
The Company was a development stage company through
June 30, 2008, as defined by ASC section 915 as it had
no principal operations or significant revenue. During the
second quarter of 2008, the Companys California facility
was operating near capacity and recognized revenue from the sale
of its product. Also during the second quarter of 2008, the tip
floor of the New Jersey facility commenced operations and began
to accept food waste on a limited basis. During the second half
of 2008, operations increased at both facilities, and the
Company exited the development stage.
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 and disclosures
in the consolidated financial statements. Actual results could
differ from those estimates.
CASH
AND CASH EQUIVALENTS
The Company considers financial instruments with an original
maturity date of three months or less from the date of purchase
to be cash equivalents. The Company had cash equivalents of $
-0- and $534,800 at December 31, 2009 and December 31,
2008, respectively, consisting of certificates of deposit. These
certificates of deposit were held by VLH.
RESTRICTED
CASH
As of December 31, 2009 and 2008, the Company had remaining
approximately $613,000 and $2,608,000, respectively, of cash
which is restricted under its bond agreement (Note 10). A
portion of this cash was raised by the Company in its initial
public offering and bond financing on February 16, 2007,
and a portion has been funded by the Company pursuant to its
obligations under the bond agreement. The cash is set aside in
three separate accounts at December 31, 2009 and 2008,
consisting of $ -0- and $34,000, respectively, for the
construction of the Woodbridge operating facility; $ -0- and
$8,000, respectively, for the working capital requirements of
the Woodbridge subsidiary while the facility is under
construction; and $613,000 and $2,566,000, respectively, in
reserve for bond principal and interest payments along with a
reserve for lease payments. The Company has classified this
restricted cash as non-current to the extent that such funds are
to be used to acquire non-current assets or are to be used to
service non-current liabilities. Third party trustee approval is
required for disbursement of all restricted funds. During the
year ended December 31, 2009, $2,000,000 of the restricted
cash was made available to the Company for use other than its
restricted purpose.
ACCOUNTS
RECEIVABLE
Accounts receivable represents balances due from customers, net
of applicable reserves for doubtful accounts. In determining the
need for an allowance, objective evidence that a single
receivable is uncollectible, as well as historical collection
patterns for accounts receivable are considered at each balance
sheet date. At December 31, 2009 and 2008, an allowance for
doubtful accounts of $81,000 and $16,000 has been established,
respectively,
45
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES Continued
|
against certain receivables that management has identified as
uncollectible. A charge of $81,000 and $16,000 is reflected in
the consolidated statements of operations for the years ended
December 31, 2009 and 2008, respectively. The Company wrote
off receivables of $16,000 and $-0- in the years ended
December 31, 2009 and 2008, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
determined by the first in, first out method. Inventories
consist primarily of raw materials, packaging materials and
finished goods, which consist of soil amendment products.
Inventory balances are presented net of applicable reserves.
There were no inventory reserves at December 31, 2009 or
December 31, 2008.
PREPAID
RENT
The Company has recorded prepaid rent on its consolidated
balance sheets which represents the difference between actual
lease rental payments made as of December 31, 2009 and 2008
and the straight line rent expense recorded in the
Companys consolidated statements of operations for the
years then ended relating to the Companys facilities in
Woodbridge, New Jersey and Gonzales, California, and pre-payment
of the Companys monthly rent of its Boston headquarters.
DEFERRED
FINANCING COSTS
The Companys deferred financing costs include deferred
financing and issuance costs and capitalized bond costs which
are amortized over the term of the associated debt.
DEPOSITS
The Company has made deposits during the course of normal
business related to real estate leases, equipment purchases and
other business transactions.
CONSTRUCTION-IN-PROGRESS
Construction-in-progress
includes construction costs, equipment purchases and capitalized
interest costs for assets not yet been placed in service.
INTANGIBLE
ASSETS LICENSE AND OTHER INTANGIBLES
The Company accounts for its intangible assets in accordance
with ASC 250, which requires that intangible assets with finite
lives, such as the Companys license, be capitalized and
amortized over their respective estimated lives and reviewed for
impairment whenever events or other changes in circumstances
indicate that the carrying amount may not be recoverable.
LONG-LIVED
ASSETS
In accordance with ASC 360, long-lived assets are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Such reviews are based on a comparison of
the assets undiscounted cash flows to the recorded
carrying value of the asset. If the assets recorded
carrying value exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset, the asset is written down to its estimated fair value.
Impairment charges, if any, are recorded in the period in which
the impairment is determined. The Company has incurred a charge
of $3.9 million on its consolidated statement of operations
for the year ended December 31, 2009 related to the
impairment of long-lived assets as more fully described in
Note 7.
46
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES Continued
|
PROPERTY
AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
computed on the straight-line basis over the estimated useful
lives of 7 to 20 years.
DERIVATIVE
INSTRUMENTS
The Company accounts for derivative instruments in accordance
with ASC 815, which establishes accounting and reporting
standards for derivative instruments and hedging activities,
including certain derivative instruments embedded in other
financial instruments or contracts and requires recognition of
all derivatives on the balance sheet at fair value, regardless
of the hedging relationship designation. Accounting for changes
in the fair value of the derivative instruments depends on
whether the derivatives qualify as hedge relationships and the
types of relationships designated are based on the exposures
hedged. At December 31, 2009 and 2008, the Company did not
have any derivative instruments that were designated as hedges.
REVENUE
RECOGNITION
Revenue is recognized when all of the following criteria is met:
|
|
|
|
|
Persuasive evidence of a sales arrangement exists;
|
|
|
|
Delivery of the product has occurred;
|
|
|
|
The sales price is fixed or determinable; and
|
|
|
|
Collectability is reasonably assured.
|
In those cases where all four criteria are not met, the Company
defers recognition of revenue until the period these criteria
are satisfied. Revenue is generally recognized upon shipment.
SHIPPING
AND HANDLING COSTS
The Company records freight billed to customers for shipment of
product as revenue with an offsetting charge to cost of goods
sold for freight paid on shipments to customers.
SHARE
BASED COMPENSATION
The Company accounts for share based compensation paid to
employees in accordance with ASC 718. Under the provisions of
the guidance, share-based compensation issued to employees is
measured at the grant date, based on the fair value of the
award, and is recognized as an expense over the requisite
service period (generally the vesting period of the grant). The
Company accounts for share based compensation issued to
non-employees in accordance with ASC 505. Under the provisions
of the guidance, such compensation is measured at the grant
date, based on the fair value of the equity instruments issued
and is recognized as an expense over the requisite service
period.
RESEARCH
AND DEVELOPMENT COSTS
Research and development costs include the costs of engineering,
design, feasibility studies, outside services, personnel and
other costs incurred in development of the Companys
manufacturing facilities. All such costs are charged to expense
as incurred.
47
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES Continued
|
INCOME
TAXES
The Company accounts for income taxes following the asset and
liability method in accordance with ASC 740. Under such method,
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years that the asset is expected
to be recovered or the liability settled. See Note 13 for
additional information.
FAIR
VALUE MEASUREMENTS
The Company applies ASC 820, which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. ASC 820 applies to
reported balances that are required or permitted to be measured
at fair value under existing accounting pronouncements;
accordingly, the standard does not require any new fair value
measurements of reported balances.
ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820
establishes a fair value hierarchy that distinguishes between
market participant assumptions based on market data obtained
from sources independent of the reporting entity (observable
inputs that are classified within Levels 1 and 2 of the
hierarchy) and the reporting entitys own assumptions about
market participant assumptions (unobservable inputs classified
within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has
the ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets
and liabilities in active markets, as well as inputs that are
observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates and
yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or
liability, which is typically based on an entitys own
assumptions, as there is little, if any, related market
activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair
value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value
measurement in its entirely requires judgment, and considers
factors specific to the asset or liability.
EARNINGS
(LOSS) PER SHARE
Basic earnings (loss) per share (EPS) is computed by
dividing the net income (loss) attributable to the common
stockholders (the numerator) by the weighted average number of
shares of common stock outstanding (the denominator) during the
reporting periods. Diluted income (loss) per share is computed
by increasing the denominator by the weighted average number of
additional shares that could have been outstanding from
securities convertible into common stock, such as stock options
and warrants (using the treasury stock method), and
convertible preferred stock and debt (using the
if-converted method), unless their effect on net
income (loss) per share is antidilutive. Under the
if-converted method, convertible instruments are
assumed to have been converted as of the beginning of the period
or when issued, if later. The effect of computing the
Companys diluted income (loss) per share was antidilutive
and, as such, basic and diluted earnings (loss) per share are
the same for each of the years ended December 31, 2009 and
2008.
48
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
SIGNIFICANT
ACCOUNTING POLICIES Continued
|
PROFIT
SHARING PLAN
In November 2007, the Company adopted a 401(k) plan for its
employees. The plan allows for employees to have a pretax
deduction of up to 15% of pay set aside for retirement. The plan
also allows for a Company match and profit sharing contribution.
As of December 31, 2009 and 2008, the Company has not
provided a match of employee contributions nor did the Company
contribute a profit sharing amount to the plan.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current year presentation.
SEGMENT
REPORTING
The Company has no reportable segments as defined by ASC 280.
On January 24, 2008, the Company acquired the assets,
including the intellectual property, of Waste Recovery
Industries, LLC of Paso Robles, CA. This acquisition allows the
Company to be the exclusive owner of the proprietary technology
and process known as the High Temperature Liquid Composting
system, which processes various biodegradable waste products
into liquid and solid organic-based fertilizer and feed
products. The purchase price of $500,000 was paid with a 7%
short term note that matured on May 1, 2008 and was repaid
on that date. Interest on that note was payable monthly. In
addition, the purchase price provides for future contingent
payments of $5,500 per ton of capacity, when and if additional
tons of waste-processing capacity are added to the
Companys existing current or planned capacity, using the
acquired technology. As of December 31, 2009, no such
payments were required under the terms of the agreement.
In addition, Waste Recovery Industries, LLC (WRI)
had begun discussion with a third party (prior to the Company
acquiring it) to explore the possibility of building a facility
to convert fish waste into organic fertilizer using the HTLC
technology. The Company has completed those negotiations and has
entered into an agreement with Pacific Choice Seafoods whereby
the Company will be required to pay 50% of the Companys
profits (as defined) to the former owner, that are earned from
the facility. The contingent profit-sharing payments under this
agreement will be accounted for as expenses of the appropriate
period, in accordance with ASC Section 805. If the Company
becomes obligated to make certain technology payments under its
purchase agreement with WRI, the Company estimated that no such
payments were payable in the twelve months following the
acquisition. Payments, if any, after that will be expensed as
incurred. The maximum payment due under these arrangements is
$7,000,000, with no minimum. As of December 31, 2009, no
such payments were required under the terms of this arrangement.
On January 24, 2008, Converted Organics of California, LLC
acquired the net assets of United Organic Products, LLC of
Gonzales, CA (UOP). With this acquisition, the
Company acquired a liquid fertilizer product line, as well as a
production facility that services a West Coast agribusiness
customer base through established distribution channels. This
facility is operational and began to generate revenues for the
Company immediately upon acquisition. The purchase price of
$2,500,000 was paid in cash of $1,500,000 and a note payable of
$1,000,000. This note matures on February 1, 2011, has an
interest rate of 7%, payable monthly in arrears and is
convertible to common stock six months after the acquisition
date for a price equal to the
five-day
average closing price of the stock on Nasdaq for the five days
preceding conversion. During 2009, the Company issued to the
shareholder 281,500 shares of common stock in payment of
interest and principal amounting to approximately $316,000.
49
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 3
|
ACQUISITIONS
Continued
|
The acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the net assets have been
recorded at their estimated fair values, and operating results
have been included in the Companys consolidated financial
statements from the date of acquisition.
The allocation of the purchase price is as follows:
|
|
|
|
|
Inventories
|
|
$
|
11,114
|
|
Accounts receivable
|
|
|
28,702
|
|
Technological know-how
|
|
|
271,812
|
|
Trade name
|
|
|
228,188
|
|
Existing customer relationships
|
|
|
2,030,513
|
|
Building
|
|
|
111,584
|
|
Equipment and machinery
|
|
|
543,000
|
|
Assumption of liabilities
|
|
|
(224,913
|
)
|
|
|
|
|
|
Total
|
|
$
|
3,000,000
|
|
|
|
|
|
|
The assets acquired from UOP were valued separately from the
assets acquired from WRI. The sum of the amounts assigned to
assets acquired and liabilities assumed did exceed the cost of
the acquired assets. The excess was allocated as a pro rata
reduction of the amounts that otherwise would have been assigned
to all of the acquired noncurrent assets, including intangibles.
The unaudited supplemental pro forma information discloses the
results of operations for the current year and for the preceding
year as though the business combination had been completed as of
the beginning of the year reported on.
The pro forma condensed consolidated financial information is
based upon available information and certain assumptions that
the Company believes are reasonable. The unaudited supplemental
pro forma information does not purport to represent what the
Companys financial condition or results of operations
would actually have been had these transactions in fact occurred
as of the dates indicated above or to project the Companys
results of operations for the period indicated or for any other
period.
|
|
|
|
|
|
|
Year ended
|
|
|
December 31, 2008
|
|
Revenues (in thousands)
|
|
$
|
1,548
|
|
Net loss (in thousands)
|
|
|
(16,232
|
)
|
Net loss per share basic and diluted
|
|
|
(2.71
|
)
|
Current assets (in thousands)
|
|
|
7,230
|
|
Total assets (in thousands)
|
|
|
32,618
|
|
Current liabilities (in thousands)
|
|
|
(9,474
|
)
|
Total liabilities (in thousands)
|
|
|
(27,571
|
)
|
Total equity (deficit) (in thousands)
|
|
|
5,047
|
|
|
|
NOTE 4
|
FAIR
VALUE MEASUREMENTS
|
CONCENTRATIONS
OF CREDIT RISK
The Companys financial instruments that are exposed to a
concentration of credit risk are cash, including restricted
cash, and accounts receivable. Currently, the Company maintains
its cash accounts with balances in excess of the federally
insured limits. The Company mitigates this risk by selecting
high quality financial
50
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4
|
FAIR
VALUE MEASUREMENTS Continued
|
institutions to hold such cash deposits. At December 31,
2009 and 2008, the Companys cash balances on deposit
exceeded federal depository insurance limits by approximately $
-0- and $5,812,000.
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. If the financial condition of the
Companys customers were to deteriorate, resulting in an
impairment of their ability to make such payments, additional
allowances may be required. An increase in allowances for
customer non-payment would increase the Companys expenses
during the period in which such allowances are made. Based upon
the Companys knowledge at December 31, 2009 and 2008,
a reserve for doubtful accounts was recorded of approximately
$81,000 and $16,000, respectively.
FAIR
VALUE OF FINANCIAL MEASUREMENTS
The Companys assets and liabilities measured at fair value
on a recurring basis at December 31, 2009, aggregated by
the level in the fair value hierarchy within which these
measurements fall were as follows:
|
|
|
|
|
|
|
|
|
|
|
Observable
|
|
Balance
|
|
|
Inputs
|
|
December 31, 2009
|
|
Derivative liabilities
|
|
|
Level 3
|
|
|
$
|
(1,626,742
|
)
|
Long-term impaired assets
|
|
|
Level 3
|
|
|
|
-0-
|
|
The following table reflects the change in Level 3 fair
value of the Companys derivative liabilities for the year
ended December 31, 2009:
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
|
|
Cumulative effect of change in accounting principle
|
|
|
(5,083,108
|
)
|
Settlements
|
|
|
1,518,017
|
|
Issuances
|
|
|
(3,827,686
|
)
|
Net gains
|
|
|
5,766,035
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
$
|
(1,626,742
|
)
|
|
|
|
|
|
The Company has other non-derivative financial instruments, such
as cash, accounts receivable, accounts payable, accrued expenses
and long-term debt, which carrying amounts approximate fair
value.
The Companys inventories consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Finished goods
|
|
$
|
252,860
|
|
|
$
|
214,053
|
|
Raw materials
|
|
|
151,701
|
|
|
|
18,785
|
|
Packaging materials
|
|
|
44,187
|
|
|
|
56,892
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
448,748
|
|
|
$
|
289,730
|
|
|
|
|
|
|
|
|
|
|
NOTE 6
CONSTRUCTION-IN-PROGRESS
The Company constructed an operating facility in Woodbridge, New
Jersey. Construction commenced in February, 2007 and was
substantially completed as of December 31, 2008. A portion
of the funds for construction of this plant came from the
issuance of New Jersey Economic Development Bonds on
February 16, 2007 and a condition of this bond offering was
that the Company place in trust approximately $14 million
to be used for plant construction and associated equipment
purchases. At the end of the second quarter of 2008, portions of
the
51
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 6
CONSTRUCTION-IN-PROGRESS Continued
Woodbridge facility became operational and certain fixed assets
were placed in service. During the remainder of 2008,
approximately $19 million in assets were transferred from
construction-in-progress
to leasehold improvements and machinery and equipment accounts
and depreciation commenced on those assets placed in service.
Construction in progress related to the Woodbridge facility is $
-0- and $805,000 at December 31, 2009 and 2008,
respectively.
During the years ended December 31, 2009 and 2008,
capitalized interest of approximately $600,000 and
$1.1 million were allocated to assets placed in service and
transferred from construction in progress to property and
equipment.
The Company also has construction in progress related to the
upgrade of its Gonzalez facility. Construction in progress
related to the Gonzalez facility is approximately $311,000 and
$170,000 at December 31, 2009 and 2008, respectively.
|
|
NOTE 7
|
PROPERTY
AND EQUIPMENT
|
The Companys property and equipment at December 31
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Land and improvements
|
|
$
|
|
|
|
$
|
357,692
|
|
Building and improvements
|
|
|
5,889,220
|
|
|
|
5,754,163
|
|
Machinery and equipment
|
|
|
14,588,902
|
|
|
|
13,968,134
|
|
Vehicles
|
|
|
42,570
|
|
|
|
42,570
|
|
Office equipment and furniture
|
|
|
11,228
|
|
|
|
7,837
|
|
Software
|
|
|
29,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,561,234
|
|
|
|
20,130,396
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,934,324
|
)
|
|
|
(405,250
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
18,626,910
|
|
|
$
|
19,725,146
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment totaled
$2,155,994 and $411,843 for the years ended December 31,
2009 and 2008, respectively.
In November 2009, the Company discovered corrosion in the walls
of one of its 120,000 gallon digesters and determined that the
corrosion was due to the manufacturing process and the
unsatisfactory performance of a protective coating that was
applied at the time of installation. Through subsequent
ultrasound wall thickness testing it was determined that the
corrosion was significant in two digesters and that the Company
would not be able to use those digesters for their intended
purpose in the manufacturing process and that they would have to
be repaired or replaced. The Company has determined that repair
of the digesters is not feasible and, as such, they would have
to be replaced. Accordingly, the assets have been fully impaired
as the Company has determined that they will not contribute to
any future revenue stream. The consolidated statements of
operations includes a charge of $3.9 million in the year
ending December 31, 2009, comprising the net book value of
the impaired property and equipment of $3.4 million and the
related intellectual property (see Note 9).
|
|
NOTE 8
|
DEFERRED
AND CAPITALIZED COSTS
|
DEFERRED
FINANCING AND OFFERING COSTS
In connection with its repayment of bridge notes in 2007, the
Company paid to the bridge lender a letter of credit fee of
$27,375. The fee has been recorded as a deferred financing fee
to be amortized over the term of the letter of credit. The
letter of credit was nullified by the Companys borrowing
of funds from a private investor in
52
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
DEFERRED
AND CAPITALIZED
COSTS Continued
|
January, 2008. Amortization of these deferred financing fees
totaled $0 and $8,642 for the years ended December 31, 2009
and 2008, respectively.
In connection with its private financing in January of 2008, the
Company incurred fees of $345,000 which were capitalized and
which are being amortized over the one year term of the loan.
Amortization expense associated with these fees of $22,042 and
$322,958 was recorded during the years ended December 31,
2009 and 2008, respectively.
CAPITALIZED
BOND COSTS
In connection with its $17.5 million bond financing on
February 16, 2007, the Company has capitalized bond
issuance costs of $953,375 and is amortizing those costs over
the term of the bond. Amortization of capitalized bond issuance
costs totaled $47,669 per year in each of the years ended
December 31, 2009 and 2008. Accumulated amortization was
approximately $139,000 and $91,000 at December 31, 2009 and
2008, respectively.
|
|
NOTE 9
|
INTANGIBLE
ASSETS
|
Pursuant to a license agreement with an effective date of
July 15, 2003 and amended effective February 9, 2006,
by and between the Company and International Bio-Recovery
Corporation (IBRC), the Company entered into an
exclusive license to use IBRCs Enhanced Autogenous
Thermophylic Aerobic Digestion process (EATAD) technology for
the design, construction and operation of facilities for the
conversion of food waste into solid and liquid organic material.
The license is recorded at its acquisition cost of $660,000 less
accumulated amortization of $107,250 and $90,750 as of
December 31, 2009 and 2008, respectively. Amortization is
provided using the straight-line method over the life of the
license. Amortization expense for both of the years ended
December 31, 2009 and 2008 was $16,500. The Company
determined at December 31, 2009 that the value of this
license is impaired due to corrosion of the machinery that is
utilized in the technology (see Note 7), and its subsequent
decision use its own technology, HTLC, to manufacture product in
the Woodbridge facility, and discontinue use of the EATAD
technology. Accordingly, the value of the license has been fully
impaired at December 31, 2009. The consolidated statements
of operations includes an expense of $552,750 in the year ended
December 31, 2009 related to this charge.
The Company is obligated to pay IBRC an aggregate royalty equal
to nine percent of the gross revenues from the sale of product
produced by the Woodbridge facility that is manufactured using
the EATAD technology. The Company began to pay royalties during
the first quarter of 2009, as product sales commenced during
that quarter. The Company was also obligated to purchase
IBRCs patented macerators and shearators as specified by
or supplied by IBRC or Shearator Corporation for use at the
Woodbridge facility. Such equipment was purchased, but some was
never installed. The value of the machinery and equipment used
in the technology has also been impaired and written down by
management (see Note 7).
In addition, the Company paid a non-refundable deposit of
$139,978 to IBRC in 2007 on a second plant licensing agreement,
which was included in non-current deposits on the Companys
consolidated balance sheets at December 31, 2008. The
Company also agreed to pay IBRC approximately $338,000 in twelve
monthly installments for market research, growth trails and
other services. For the years ended December 31, 2009 and
2008, the Company had paid approximately $ -0- and $22,000,
respectively, of this amount which has been included in research
and development in the Companys consolidated statements of
operations. The Company does not intend to purchase the second
license and, accordingly, the deposit of $139,978 has been
expensed during the year ended December 31, 2009.
53
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 9
|
INTANGIBLE
ASSETS Continued
|
The Company identified certain intangible assets acquired in the
2008 acquisitions (Note 3). The following intangible assets
were identified and values and estimated useful lives were
assigned as follows:
|
|
|
|
|
|
|
|
|
|
|
Assigned
|
|
|
Estimated
|
|
|
|
value
|
|
|
useful life
|
|
|
Existing customer relationships
|
|
$
|
2,030,513
|
|
|
|
8 years
|
|
Technological know-how
|
|
|
271,812
|
|
|
|
8 years
|
|
Trade name
|
|
|
228,188
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
Intangibles acquired
|
|
$
|
2,530,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The consolidated statements of operations include amortization
expense of $288,007 and $246,887 related to these intangible
assets for the year ending December 31, 2009 and 2008,
respectively. Accumulated amortization is $534,894 at
December 31, 2009 and $246,887 at December 31, 2008.
Amortization expense for those intangible assets is estimated to
be $278,669 annually until the assets are fully amortized.
TERM
NOTES
The Company had a term note payable to its CEO, Edward J.
Gildea. The unsecured term note for $89,170 was dated
April 30, 2007 with an original maturity of April 30,
2009 and accrued interest at 12% per annum. The note had been
extended for one year until April 30, 2010. The Company
paid accrued interest of $21,400 upon extension of the
notes due date on June 30, 2009. This note was
subordinate to the New Jersey EDA bonds. On December 18,
2009, the Company repaid the principal balance of the note plus
accrued interest of $6,777.
The Company entered into a financing agreement with an equipment
financing company to acquire equipment for its Woodbridge
facility. The note is for $118,250, bears an imputed interest
rate of 9% and has a three year term, maturing January, 2012.
Interest expense of $7,629 has been recorded related to this
note during the year ended December 31, 2009.
On April 1, 2009, the Company agreed to convert certain
accounts payable into a 12 month note with its landlord at
the New Jersey facility, Recycling Technology Development
Corporation (Recycling Technology). The note bears
interest at 9%, payable quarterly in arrears commencing
September 30, 2009. The note requires payments of $263,573
on October 1, 2009 and January 1, 2010, to be applied
first to accrued interest and then to principal. A final
installment of $318,832 is due on March 31, 2010.
On June 17, 2009, the Company agreed to convert certain
accounts payable into a 24 month note with SNC-Lavalin
Project Services, Inc. (SNC-Lavalin) for $888,000.
The terms of the note require a $100,000 down payment, interest
only payments for six months and the remaining principal balance
to be repaid in 18 monthly installments of $43,778
commencing January 16, 2010. The note has a stated interest
rate of 6% for the first six months and 0% for months seven
through twenty four. SNC-Lavalins lien will be released
upon full and final payment of the note. The Company has
recorded a discount on the note representing imputed interest of
$39,200, which will be amortized during the non-interest bearing
period of the note repayment.
On June 19, 2009, the Company also agreed to convert
certain accounts payable into a 24 month note with
Hatzel & Buehler, Inc. (Hatzel &
Buehler) for $620,235. The terms of the note require a
$65,560 down payment, interest only payments for six months and
the remaining principal and interest balance to be repaid in
18 monthly installments of $32,300 commencing
February 1, 2010. The note has a stated interest rate of 6%
for the entire 24 month term. Hatzel &
Buehlers lien will be released upon full and final payment
of the note.
54
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
DEBT Continued
|
On September 24, 2009, the Company agreed to convert
certain accounts payable into a 24 month note with Airside,
Inc. (Airside) for $335,085. The terms of the note
require the Company to make an initial principal payment of
$38,500, interest only payments for six months and the remaining
principal and interest balance to be repaid in 18 monthly
installments of $16,477 commencing in April, 2010. The note has
a stated interest rate of 6% for the first six months and 0% for
months seven through twenty-four. The Company has recorded a
discount on the note representing imputed interest of $14,754,
which will be amortized during the non-interest bearing period
of the note repayment.
On November 19, 2009, the Company agreed to convert certain
accounts payable into a note with Armistead Mechanical, Inc. for
$2,029,000, with the first payment of $1,000,000 paid
November 19, 2009 and the balance of $1,029,000 payable in
eighteen level monthly payments of principal and interest
calculated at 6% per annum. The monthly payments began
January 1, 2010. This construction vendor had previously
filed a construction lien on the Woodbridge facility and had
commenced a lawsuit to enforce that lien. According to terms of
the agreement, the construction lien claim and related lawsuit
was suspended during the eighteen month payment period and will
be released completely upon final payment.
The following table is a summary of the Companys term
notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Current
|
|
|
Non-current
|
|
|
2008
|
|
|
Interest rate
|
|
|
Maturity date
|
|
|
Edward J. Gildea
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
89,170
|
|
|
|
12
|
%
|
|
|
|
|
Komatsu Finance Corporation
|
|
|
70,720
|
|
|
|
32,310
|
|
|
|
38,410
|
|
|
|
|
|
|
|
9
|
%
|
|
|
January, 2012
|
|
SNC Lavalin, Inc.
|
|
|
748,799
|
|
|
|
491,421
|
|
|
|
257,377
|
|
|
|
|
|
|
|
6
|
%
|
|
|
June, 2011
|
|
Recycling Technology Development, LLC
|
|
|
562,728
|
|
|
|
562,728
|
|
|
|
|
|
|
|
|
|
|
|
9
|
%
|
|
|
March, 2010
|
|
Hatzel & Buehler, Inc.
|
|
|
554,675
|
|
|
|
333,032
|
|
|
|
221,643
|
|
|
|
|
|
|
|
6
|
%
|
|
|
July, 2011
|
|
Airside, Inc.
|
|
|
281,831
|
|
|
|
137,677
|
|
|
|
144,154
|
|
|
|
|
|
|
|
6
|
%
|
|
|
September, 2011
|
|
Armistead Mechanical, Inc.
|
|
|
1,029,000
|
|
|
|
717,245
|
|
|
|
311,755
|
|
|
|
|
|
|
|
6
|
%
|
|
|
May, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,247,752
|
|
|
$
|
2,274,413
|
|
|
$
|
973,339
|
|
|
$
|
89,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company obtained the necessary bondholder consents to enter
into these agreements.
During 2008, the Company negotiated the forgiveness of the
balance of an unsecured term note dated September 6, 2005,
plus accrued interest. Total principal and interest forgiven was
$146,677, and this amount is recorded as other income on the
consolidated statements of operations for the year ended
December 31, 2008.
BOND
FINANCING
On February 16, 2007, concurrent with its initial public
offering, the Companys wholly-owned subsidiary, Converted
Organics of Woodbridge, LLC, completed the sale of $17,500,000
of New Jersey Economic Development Authority Bonds. Direct
financing costs related to this issuance totaled approximately
$953,000, which have been capitalized and are being amortized
over the term of the bonds. The bonds carry a stated interest
rate of 8% and mature on August 1, 2027. The bonds are
secured by a leasehold mortgage and a first lien on the
equipment of the Woodbridge facility. In addition, Woodbridge
had agreed to, among other things, establish a fifteen month
capitalized interest reserve and to comply with certain
financial statement ratios. The capitalized interest reserve has
been depleted and is now being funded monthly by the Company.
The Company has provided a guarantee to the bondholders on
behalf of Woodbridge for the entire bond offering.
55
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
DEBT Continued
|
On March 6, 2009, the Company entered into an agreement
with the holders of the New Jersey Economic Development
Authority Bonds to release $2.0 million for capital
expenditures on its New Jersey facility and to defer interest
payments on the bonds through July 30, 2009. These funds
had been held in a reserve for bond principal and interest
payments along with a reserve for lease payments. As
consideration for the release of the reserve funds, the Company
issued the bond holders 2,284,409 Class B warrants. The
Class B warrants are exercisable at $11.00 per warrant. The
expense associated with these warrants of $662,000 is reflected
as interest expense in the consolidated statements of operations
for the twelve months ended December 31, 2009. On
July 30, 2009 the deferred interest payments were paid in
full. In September of 2009, the holders of the bonds agreed to
continue to defer monthly deposits to the interest escrow
through January, 2010. The Company funded the escrow following
its secondary public offering in October, 2009. The escrow
balance of approximately $583,000 is reflected as current
restricted cash on its balance sheet as of December 31,
2009.
The New Jersey Economic Development Bonds have certain
covenants, which among other things, preclude the Company from
making any dividends, payments or other cash distributions until
such time as (i) the Company has achieved, over the course
of a full fiscal year, a maximum annual debt service coverage
ratio greater than 2.0, and (ii) at least $1,200,000 is on
deposit with the third party trustee in the operations and
maintenance reserve fund and is available to satisfy ongoing
maintenance, repair and replacement costs associated with the
project facilities. In addition, the Company is precluded from
borrowing additional funds under any debt agreements, without
the consent of the bondholders. During 2009 and 2008, the
Company again received consent from the bondholder prior to
borrowing additional funds in a series of private transactions.
Under the terms of the bond agreement, the lender has the right,
upon 30 days written notice, to demand full payment of all
outstanding principal and interest amounts owed under the
agreement if specific covenants are not met. As of
December 31, 2009 and 2008, the Company is in compliance
with these covenants of the bond agreement.
CONVERTIBLE
NOTE PAYABLE
On January 24, 2008, in conjunction with the purchase of
the net assets of UOP, the Company issued a note payable to the
former sole member in the amount of $1,000,000. The note bears
interest of 7% per annum and matures on February 1, 2011;
monthly principal and interest payments are $30,877. The note
became convertible by the holder six months after issuance. The
Company recognized a discount related to the intrinsic value of
the beneficial conversion feature of the note. That amount was
calculated to be $7,136, and has been recorded as a component of
additional paid-in capital. The balance of this note and the
related interest expense had been eliminated in the
consolidation of VLH, a variable interest entity, as the related
convertible note receivable was contributed to VLH by its
member. As of December 31, 2009, VLH is no longer
considered to be a variable interest entity of the Company, and
therefore the balance of the note and the related interest are
no longer eliminated in the consolidation.
During the year ended December 31, 2009, the holder of the
note commenced converting the principal and interest payments to
shares of common stock. Accordingly, during the year ended
December 31, 2009 the Company issued 281,500 shares of
common stock to the note holder, representing principal and
interest payments of approximately $316,000. The principal
balance of the note was approximately $373,000 and $685,000 as
of December 31, 2009 and 2008, respectively.
PRIVATE
FINANCING
On January 24, 2008, the Company entered into a private
financing with three investors (the Investors) for a
total amount of $4,500,000 (the Financing). The
Financing was offered at an original issue discount of 10%. The
Company used the proceeds to fund the acquisitions described in
Note 3, to fund further development activities and to
provide working capital. As consideration for the Financing, the
Investors received a note issued by the Company in the amount of
$4,500,000 with interest accruing at 10% per annum to be paid
monthly and the principal balance
56
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
DEBT Continued
|
to be paid in full one year from the closing date (the
Note). In addition, the Company issued to the
Investors 750,000 Class A Warrants and 750,000 Class B
Warrants, which may be exercised at $8.25 and $11.00 per
warrant, respectively (the Warrants). The Company
further agreed not to call any Warrants until a registration
statement registering all of the Warrants was declared
effective. A placement fee of $225,000 was paid from the
proceeds of this loan.
In connection with the Financing, the Company had agreed that
within 75 days of the closing date the Company would have a
shareholder vote to seek approval to issue a convertible
debenture with an interest rate of 10% per annum, which would be
convertible into common stock pursuant to terms of the debenture
agreement, or such other price as permitted by the debenture
(the Convertible Debenture). Upon shareholder
approval, the Note was replaced by this Convertible Debenture
and one half of each of the Class A Warrants and
Class B Warrants issued were returned to the Company. Under
the conversion option, the Investors shall have the option, at
any time on or before the maturity date (January 24, 2009),
to convert the outstanding principal of this Convertible
Debenture into fully-paid and non assessable shares of the
Companys common stock at the conversion price equal to the
lowest of (i) the fixed conversion price of $6.00 per
share, (ii) the lowest fixed conversion price (the lowest
price, conversion price or exercise price set by the Company in
any equity financing transaction, convertible security, or
derivative instrument issued after January 24, 2008), or
(iii) the default conversion price (if and so long as there
exists an event of default, then 70% of the average of the three
lowest closing prices of common stock during the twenty day
trading period immediately prior to the notice of conversion).
The Company held a special shareholders meeting on
April 3, 2008 to vote on this matter, at which time it was
approved.
In connection with the Financing, the Company entered into a
Security Agreement with the Investors whereby the Company
granted the Investors a security interest in Converted Organics
of California, LLC and any and all assets that are acquired by
the use of the funds from the Financing. In addition, the
Company granted the Investors a security interest in Converted
Organics of Woodbridge, LLC and all assets subordinate only to
the current lien held by the holder of the bonds issued in
connection with the Woodbridge facility of approximately
$17,500,000.
In connection with the Financing, the Company issued
1.5 million warrants to purchase common stock, which were
deemed to have a fair value of $5,497,500. The Company recorded
the relative fair value of the warrants to the underlying notes
of $2,227,500 as additional paid-in capital and established a
discount on the debt. The discount was being amortized over the
life of the note (12 months). On April 17, 2008, the
Investors returned to the Company 750,000 warrants that had been
held in escrow. This reduced the value assigned to the warrants
and, accordingly, the value assigned to the debt discount
attributable to the warrants by $1,113,750. In addition, the
remaining original issue discount of approximately $366,000 was
recognized as expense on April 7, 2008.
On April 7, 2008, the shareholders of the Company approved
the issuance of additional shares so that convertible notes
could be issued to the note holders to replace the original
notes dated January 24, 2008. The Company is required to
recognize a discount for the intrinsic value of the beneficial
conversion feature of the notes, which is to be recognized as
interest expense through the redemption date of the notes, which
is January 24, 2009. That amount was calculated to be
$3,675,000, and recognition was limited to $2,936,250, as the
debt discount was limited to the proceeds allocated to the
convertible instrument of $4,500,000. That discount is being
amortized over the life of the loan. During the twelve month
periods ending December 31, 2009 and 2008, the Company
recognized interest expense of $230,492 and $2,705,758 related
to this discount.
On January 24, 2009 the convertible notes became due.
Because the Company did not have sufficient cash to repay the
notes, the Company agreed to convert the notes to shares at the
default rate, although no event of default had occurred. As of
December 31, 2009, the note holders had converted the full
principal amount of $4,500,000 into 7,366,310 shares of
common stock. In consideration for entering into this agreement,
the Company granted 200,000 shares of common stock to the
note holders. An expense of $562,000 is included in the
statement of operations for the year ended December 31,
2009 for this stock grant, which represents the market value of
57
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
DEBT Continued
|
200,000 shares on the date they were granted. In addition,
the notes accrued interest at 10% of their declining balance as
they were paid off through the issuance of stock. An additional
131,834 shares of common stock were issued on
April 23, 2009 for accrued interest. Accrued interest of
$7,232 has not been converted to shares of common stock.
On May 7, 2009, the Company entered into an agreement with
an institutional investor (the Investor), wherein
the Company agreed to sell to the Investor, for the sum of
$1,182,500, six-month non-convertible original issue discount
notes with principal amounts totaling $1,330,313 (the
Notes). The agreement provides that if the Company
raises over $1.33 million while the Notes are outstanding,
the first $1,330,313 must be used to repay the Note. The Notes
were repaid on May 22, 2009, with the proceeds of the
issuance of the Companys common stock on May 19, 2009
(see Note 12). See Note 11 for a description of
warrants issued to the Investor in consideration for this
transaction.
On September 8, 2009, the Company entered into an agreement
with an institutional investor (the Investor),
wherein the Company agreed to sell to the Investor, for the sum
of $1,400,000, six-month convertible original issue discount
notes with principal amounts totaling $1,540,000 (the
Notes). The agreement provides that if the Company
raises over $1.54 million while the Notes are outstanding,
the first $1,540,000 must be used to repay the Notes. The Notes
were repaid on October 20, 2009, with the proceeds of the
Companys secondary public offering of common stock (see
Note 12). See Note 11 for a description of warrants
issued to the Investor in consideration for this transaction.
REGISTRATION
RIGHTS AGREEMENT
In connection with the January 24, 2008 Financing, the
Company entered into a registration rights agreement with the
Investors which called for the Company to register the
securities within certain time periods. The Company had
10 days from shareholder approval, with an additional
7 day extension, to register the shares issuable under the
Convertible Debenture and 90 days from the filing of a
registration statement (filed on February 13,
2008) for the Warrants and the underlying shares to be
declared effective by the SEC. The Company has filed the
registration statement relative to the Convertible Debenture as
of the filing date of this report and the registration statement
filed for the Warrants has been declared effective. However, the
registration statement filed for the convertible debt and the
date the warrant registration statement was declared effective
by the SEC did not occur within the timelines agreed to in the
registration rights agreement. The registration rights agreement
calls for $90,000 per month in liquidated damages, payable in
cash, if the Company does not file the registration statement
for the Convertible Debenture and liquidated damages equal to
the average closing price of 375,000 Class A warrants and
375,000 Class B warrants for each 30 day period,
commencing May 13, 2008, and multiplying that average by 2%
for each 30 day period that the registration statement is
not declared effective.
Therefore, on April 24, 2008, the Company began to incur
liquidated damages in connection with the Convertible Debenture
of $90,000 per month and as of May 13, 2008 the Company
began to incur liquidated damage obligations in connection with
the Warrants according to the formula described above. The
maximum amount of liquidated damages relative to the Warrant
Registration Statement and the Convertible Debenture is equal to
10% of the face amount of the Convertible Debenture or $450,000
(10% of $4,500,000). The Company paid a total of approximately
$158,000 in liquidated damages related to the Convertible
Debentures, which are recorded as interest expense on the
consolidated statements of operations for year ended
December 31, 2008. On June 7, 2008 the warrant
registration statement was declared effective. At this time, the
Company is not subject to further liquidated damages.
58
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
DEBT Continued
|
MORTGAGE
NOTE PAYABLE
VLH has a mortgage note payable on the land upon which the
California facility resides. The note, in the original amount of
$250,000, bears interest at 6.75%. Monthly payments of principal
and interest of $1,638 are due based on an amortization of
twenty years. The note matures in May, 2013. The mortgage
balance is no longer reflected in the Companys financial
statements following the deconsolidation of VLH as a variable
interest entity.
FIVE-YEAR
MATURITY OF DEBT
Principal due during the next five years on all the
Companys long-term and current debt is as follows:
|
|
|
|
|
2010
|
|
$
|
2,642,410
|
|
2011
|
|
|
998,328
|
|
2012
|
|
|
20,520
|
|
2013
|
|
|
0
|
|
2014
|
|
|
0
|
|
Thereafter
|
|
|
17,500,000
|
|
|
|
|
|
|
Total
|
|
$
|
21,161,258
|
|
|
|
|
|
|
|
|
NOTE 11
|
DERIVATIVE
INSTRUMENTS
|
Upon the adoption of guidance described in ASC 815 related to
derivatives and hedging activities on January 1, 2009, the
Company determined that the conversion features within the
convertible notes payable issued in the January 2008 Financing
to be an embedded derivative which was required to be bifurcated
and shown as a derivative liability subject to
mark-to-market
adjustment each reporting period. The fair value of the
conversion feature was determined using a Black-Scholes model
and resulted in a fair value of $5,083,108. The fair value at
January 1, 2009 was recognized as a cumulative effect of
accounting change in the Companys consolidated statement
of changes in owners equity (deficit).
During the year ended December 31, 2009, all conversion
features were converted to common stock at the default rate in
accordance with the agreement dated January 29, 2009 with
the note holders. The effect of the derivative instruments in
the year ended December 31, 2009 was recorded in the
Companys consolidated statements of operations and was a
derivative gain of $3,565,091. No derivative liability related
to this transaction is recorded as of December 31, 2009 as
these derivative instruments have been converted into common
stock.
On May 7, 2009, in connection with the Notes issued
pursuant to the Financing agreement described in Note 10,
the Investor received five-year warrants to purchase
750,000 shares and 350,000 shares of Company common
stock, with exercise prices of $1.00 per share and $1.50 per
share, respectively, (Class C and D warrants, respectively)
subject to certain anti-dilution provisions. An investment
banker was issued 135,000 Class C warrants and 65,000
Class D warrants. These warrants are subject to certain
anti-dilution right for issuance below the exercise prices and
are not registered and cannot be traded. The Company has
determined that the warrant provisions providing for protection
for issuances below the warrant exercise prices could result in
modification of the exercise price based on a variable that is
not an input to the fair value for a
fixed-for-fixed
option. Therefore the Company has determined that the warrants
issued in connection with this financing to be a derivative
instrument which is required to be shown as a derivative
liability subject to
mark-to-market
adjustment each reporting period. The fair value of the warrants
was determined using a Black-Scholes model with the following
assumptions: risk-free interest rate of 2.05%; no dividend
yield; volatility of 96.7%. The resulting derivative liability
on May 7, 2009 was approximately $1,841,100 of which
$1,558,000 was recorded as interest expense and $283,000 was
recorded as general and administrative expense on the
consolidated statement of operations for the twelve months ended
December 31, 2009. The liability was revalued as of
December 31, 2009 using a Black-Scholes model and the
59
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 11
|
DERIVATIVE
INSTRUMENTS Continued
|
following assumptions: risk-free interest rate of 2.35%; no
dividend yield, volatility of 98.6%, resulting in a revalued
liability of approximately $563,500 and a derivative gain of
approximately $1,277,600, on the consolidated statement of
operations for the year ended December 31, 2009.
On September 8, 2009, in connection with the Notes issued
pursuant to the financing agreement on that date described more
fully in Note 10, the Investor received a five-year warrant
to purchase 2,500,000 shares of the Companys common
stock, with exercise prices of $1.25 per share, subject to
certain anti-dilution rights for issuances below such exercise
price; provided that absent shareholder approval, the exercise
price may not be reduced to less than $1.08 per share
(Class G warrants). These warrants are not registered and
cannot be traded. The Company has determined that the warrant
provisions providing for issuances below the warrant exercise
price could result in modification of the exercise price based
on a variable that is not an input to the fair value for a
fixed-for-fixed
option. The Company has determined that the warrants issued in
connection with this financing are a derivative instrument which
is required to be shown as a derivative liability subject to
mark-to-market
adjustment each reporting period. The fair value of the
derivative liability was determined on September 8, 2009
using a Black-Scholes model and the following assumptions;
risk-free interest rate of 2.38%; no dividend yield; volatility
of 94.3%; expected term of 5 years. The resulting liability
of $1,986,600 was recorded as a discount on the Note to the
extent of the Note balance of $1.4 million, and is being
amortized over the six month note term, and the remaining
$587,000 was recorded as interest expense in the twelve month
period ending December 31, 2009. The derivative liability
was revalued as of December 31, 2009 using a Black-Scholes
model and the following assumptions: risk-free interest rate of
2.35%; no dividend yield; volatility of 98.6%, resulting in a
revalued liability of approximately $1,063,200. The derivative
gain of $923,400 is recorded on the consolidated statement of
operations for the twelve months ended December 31, 2009.
|
|
NOTE 12
|
OWNERS
EQUITY (DEFICIT)
|
AUTHORIZED
SHARES
At the April 3, 2008 special meeting of shareholders, the
shareholders approved a resolution to decrease the number of
common shares that the Company is authorized to issue from
75,000,000 to 40,000,000, and the number of preferred shares
that the Company is authorized to issue from 25,000,000 to
10,000,000. At the time, the Company believed that
40,000,000 shares of common stock would be sufficient to
meet its future needs. At the June 25, 2009 annual meeting
of shareholders, the shareholders approved a resolution to
increase the number of common shares that the Company is
authorized to issue from 40,000,000 to 75,000,000, given that
the Company had the opportunity to raise capital through the
issuance of additional shares.
STOCK
ISSUANCES
During the year ended December 31, 2008, the Company
declared stock dividends in the amount of 1,232,552 shares.
On October 1, 2008, the Company issued 45,480 shares
of its common stock to a consultant as remuneration for services
rendered. The related services were substantially complete when
the stock was issued. The Company recognized $212,619 of expense
related to the fair value of this issuance.
On January 24, 2009, the Company issued 200,000 shares
of its common stock to the holders of its convertible debentures
as consideration for the refinancing described in Note 10.
The Company recognized interest expense of $562,000 related to
this issuance.
On March 10, 2009, the Company granted 121,528 shares
of common stock to a consultant providing development services
related to the Companys proposed Rhode Island facility.
The grant was measured using the closing price of the
Companys stock on the date of grant. The statement of
operations includes a charge of $120,316 for the year ended
December 31, 2009 related to this grant, which was credited
to additional paid-in capital.
60
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
OWNERS
EQUITY (DEFICIT) Continued
|
On December 15, 2009, the Company granted
30,000 shares of common stock to a consultant who provides
professional services to the Company as remuneration for
services rendered. The grant was measured using the closing
price of the Companys stock on the date of grant. The
statement of operations includes a charge of $18,897 for the
year ended December 31, 2009 related to this grant, which
was credited to additional paid-in capital.
On May 19, 2009, the Company entered into an agreement with
an institutional investor (the Investor) whereby the
Investor agreed to purchase 1,500,000 shares of the
Companys common stock under its shelf registration
statement, for $1.40 per share, providing the Company with
$2.1 million before fees and expenses of $172,000, which
were charged to Additional Paid-in Capital. The May 7, 2009
non-convertible short-term note described in Note 10 was
immediately paid off with proceeds of this offering. In
addition, and as an inducement to enter into this transaction,
the Company issued the Investor 1,500,000 warrants, with a
strike price of $1.40 and a 90 day term. On May 26,
2009, the Investor exercised the warrants and received
1,500,000 shares of common stock, providing net proceeds to
the Company of $2.1 million before expenses of $135,000.
On July 15, 2009, the Company entered into a Securities
Purchase Agreement with an institutional investor. Pursuant to
the Securities Purchase Agreement, the Company agreed to issue
to the investor: (a) 1,961,000 shares of the
Companys common stock at $1.02 per share; and
(b) warrants to purchase an additional 585,000 shares
of the Companys common stock at an exercise price of $1.25
per share. The Warrants may be exercised commencing
January 15, 2010 until July 15, 2014.
On October 20, 2009, the Company closed its second public
offering of 17,250,000 units, including
2,250,000 units reflecting the exercise in full of the
underwriters over-allotment option, at a price per unit of
$1.06 to the public. Each unit consists of one share of common
stock and one newly created Class H warrant, with each
Class H warrant exercisable for one share of common stock
at an exercise price of $1.30 per share. The warrants will
expire on October 14, 2014. The units are listed on the
NASDAQ Capital Market under the symbol COINU and the
Class H warrants are expected to be listed on the NASDAQ
Capital Market under the symbol COINW, at such time
as the warrants are detached from the units. The approximately
$16.4 million of net proceeds to the Company, after
deducting the underwriting discounts and commissions and other
estimated offering expenses, will be used for further
development and execution of the Companys sales and
marketing plan, strategic growth initiatives, other general
corporate purposes, and to repay the six-month note the Company
issued in September 2009 in the principal amount of $1,540,000.
WARRANTS
On February 16, 2007, in connection with the Companys
initial public offering, the Company sold 1,800,000 equity units
consisting of one share of common stock, one Class A
warrant and one Class B warrant. On March 13, 2007,
the Class A and Class B warrants began to trade as
separate securities. The Class A warrants are exercisable
for one share of common stock, plus accumulated stock dividends,
for $8.25. The Class A warrants expire on February 16,
2012 and, if certain conditions are met, the Company may redeem
these warrants at a price of $0.25 per warrant prior to the
expiration date. The warrants were redeemed during 2008, as more
fully described below. The Class B warrants are exercisable
for one share of common stock, plus accumulated stock dividends,
for $11.00. The Class B warrants expire on
February 16, 2012 and there is no provision for the Company
to redeem these warrants prior to the expiration date. The fair
value of Class B warrants totaled $690,541 and $3,442,438
at December 31, 2009 and 2008, respectively, based on
quoted market prices on that date.
On January 24, 2008, in conjunction with the private
financing arrangement of the Company described in Note 10,
the Company issued 750,000 Class A and 750,000 Class B
Warrants to the Investors. Such warrants are exercisable for one
share of the Companys common stock, adjusted for
dividends, at $8.25 and $11.00, respectively. Once the
Companys registration statement related to the underlying
shares was declared effective, one-half of the warrants were
returned to the Company by the Investors, as described in
Note 11.
61
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
OWNERS
EQUITY (DEFICIT) Continued
|
On March 6, 2009, the Company entered into an agreement
with the holders of the New Jersey Economic Development
Authority Bonds to release $2.0 million for capital
expenditures on its New Jersey facility and to defer interest
payments on the bonds through July 30, 2009. These funds
had been held in a reserve for bond principal and interest
payments along with a reserve for lease payments. As
consideration for the release of the reserve funds, the Company
issued the bond holders 2,284,409 Class B warrants. The
Class B warrants are exercisable at $11.00 per warrant. The
expense associated with these warrants of $662,000 is reflected
as interest expense in the consolidated statements of operations
for the twelve months ended December 31, 2009.
On May 7, 2009, the Company issued 885,000 Class C
warrants and 415,000 Class D warrants in connection with
securing a private financing agreement more fully described in
Note 10. Each Class C and Class D warrant may be
exchanged for one share of common stock at an exercise price of
$1.00 and $1.02, respectively. The shares underlying these
warrants have not been registered and these warrants cannot be
traded.
On May 19, 2009, in connection with the issuance of
1,500,000 shares of common stock, the Company issued
1,500,000 warrants with an exercise price of $1.40. These
warrants were exercised on May 26, 2009.
On May 26, 2009, as an inducement for the Investor to
exercise 1,500,000 warrants at $1.40, the Company issued the
Investor an additional 1,500,000 Class E warrants with an
exercise price of $1.63 and an expiration date of May 27,
2014. Each warrant may be exchanged for one share of common
stock.
On July 15, 2009, in connection with the issuance of
1,961,000 shares to an institutional investor, the Company
issued Class F warrants to purchase 585,000 shares of
the Companys common stock at an exercise price of $1.25
per share. The Warrants may be exercised commencing
January 15, 2010 until July 15, 2014.
On September 8, 2009, the Company issued 2,500,000
Class G warrants in connection with the Notes issued
pursuant to the financing agreement described more fully in
Note 10. Each Class G warrant may be exchanged for one
share of common stock at an exercise price of $1.25 per share,
subject to certain anti-dilution rights for issuances below such
exercise price; provided that absent shareholder approval, the
exercise price may not be reduced to less than $1.08 per share.
The shares underlying these warrants have not been registered
and these warrants cannot be traded.
On October 20, 2009, the Company issued 17,250,000
Class H warrants in conjunction with its secondary public
offering, described above. Each Class H warrant may be
exchanged for one share of common stock at an exercise price of
$1.30, and have an expiration date of October 14, 2014.
Each warrant may be exchanged for one share of common stock.
WARRANT
EXERCISE
The Company has received net proceeds of approximately
$11,344,000 as a result of the exercise of approximately
1,381,000 Class A (which includes the warrant redemption
discussed below) warrants and 600 Class B warrants in the
year ended December 31, 2008. The Company issued
approximately 1,781,000 shares of common stock in
connection with the exercise of these warrants due to the
cumulative effect of the Companys stock dividends.
On May 26, 2009, the Investor exercised its 1,500,000
warrants at $1.40, providing the Company with $2.1 million
before fees and expenses of $135,000, which were charged to
Additional Paid-in Capital. The Company issued
1,500,000 shares of common stock upon exercise of these
warrants.
WARRANT
REDEMPTION
On September 16, 2008, the Company announced the redemption
of its outstanding Class A Warrants. The redemption date
was set for October 17, 2008, and was subsequently extended
a total of 31 days voluntarily by the
62
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
OWNERS
EQUITY (DEFICIT) Continued
|
Company to November 17, 2008. Any outstanding Class A
warrants that had not been exercised before that date expired
and are redeemable by the Company for $0.25 per warrant.
Until the redemption date, the Class A warrants were
convertible into common stock at an exercise price of $8.25.
Each warrant exercised at this price received 1.276 shares
of common stock. Prior to the notification of redemption,
approximately 756,000 Class A warrants had been exercised.
After the redemption, an additional 673,000 warrants were
exercised. In total, from both the exercise and redemption of
warrants, the Company received proceeds of approximately
$11,344,000. The Company was obligated to remit to its transfer
agent funds sufficient to compensate warrant holders for the
remaining warrants at $.25 each.
The intrinsic value of the Companys warrants is $0 as of
December 31, 2009.
The following table sets forth the outstanding warrants as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class D
|
|
|
Warrants
|
|
|
Class E
|
|
|
Class F
|
|
|
Class G
|
|
|
Class H
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Price
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Exercise
|
|
|
|
Price $8.25
|
|
|
Price $11.00
|
|
|
Price $1.00
|
|
|
Price $1.02
|
|
|
$1.40
|
|
|
Price $1.63
|
|
|
Price $1.25
|
|
|
Price $1.25
|
|
|
Price $1.30
|
|
|
Outstanding at January 1, 2008
|
|
|
2,273,629
|
|
|
|
2,273,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in conjunction with January 24, 2008 private
financing
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returned to the Company upon shareholder approval of exchange of
term note for convertible note
|
|
|
(375,000
|
)
|
|
|
(375,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,380,768
|
)
|
|
|
(600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,267,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2009
|
|
|
|
|
|
|
2,648,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in connection with agreement with bond holders on
March 6, 2009
|
|
|
|
|
|
|
2,284,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in connection with securing debt on May 7, 2009
|
|
|
|
|
|
|
|
|
|
|
885,000
|
|
|
|
415,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in connection with issuance of shares on May 19, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised May 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in connection with May 26 warrants exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in connection with issuance of shares on July 15,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585,000
|
|
|
|
|
|
|
|
|
|
Issued in connection with issuance of convertible debt on
September 8, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
Issued in connection with issuance of shares on October 20,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
|
|
|
|
4,932,438
|
|
|
|
885,000
|
|
|
|
415,000
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
585,000
|
|
|
|
2,500,000
|
|
|
|
17,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
OWNERS
EQUITY (DEFICIT) Continued
|
STOCK
OPTION PLAN
In June 2006, the Companys Board of Directors and
stockholders approved the 2006 Stock Option Plan (the
Option Plan). The Option Plan authorizes the grant
and issuance of options and other equity compensation to
employees, officers and consultants. A total of
666,667 shares of common stock are reserved for issuance
under the Option Plan. The Option Plan is administered by the
Compensation Committee of the Board of Directors (the
Committee). Subject to the provisions of the Option
Plan, the Committee determines who will receive the options, the
number of options granted, the manner of exercise and the
exercise price of the options. The term of incentive stock
options granted under the Option Plan may not exceed ten years,
or five years for options granted to an optionee owning more
than 10% of the Companys voting stock. The exercise price
of an incentive stock option granted under the Option Plan must
be equal to or greater than the fair market value of the shares
of the Companys common stock on the date the option is
granted. The exercise price of a non-qualified option granted
under the Option Plan must be equal to or greater than 85% of
the fair market value of the shares of the Companys common
stock on the date the option is granted. An incentive stock
option granted to an optionee owning more than 10% of the
Companys voting stock must have an exercise price equal to
or greater than 110% of the fair market value of the
Companys common stock on the date the option is granted.
Stock options issued under the option plan vest immediately upon
date of grant.
At a Special Meeting of Shareholders on April 3, 2008, the
shareholders approved an amendment to the 2006 Stock Option Plan
to include an evergreen provision pursuant to which
on January 1st of each year, commencing in 2009, the
number of shares authorized for issuance under the 2006 Stock
Option Plan shall automatically be increased to an amount equal
to 20% of the shares of the common stock outstanding on the last
day of the prior fiscal year. The Shareholders also approved an
amendment to the Plan to increase the number of options
available under the plan from 666,667 to 1,666,667. On
June 27, 2008, an additional 736,735 options were granted,
and vested on that date.
The options granted on June 27, 2008 have an exercise price
of $5.02 and expire ten years from the grant date. The exercise
price was based on the closing price of the stock on the date of
grant. The fair value of the options was estimated using a
Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 3.52%; no dividend yield; volatility
factor of 52.3%; and an expected term of 5 years. The
resulting expense of approximately $2.3 million is included
in general and administrative expenses in the consolidated
statements of operations for the year ended December 31,
2008.
On June 27, 2009, the Company granted 233,500 stock options
under its 2006 Stock Option Plan. The options have an exercise
price of $1.10 and expire ten years from the date of grant. The
exercise price was based on the closing price of the stock on
the date of grant. The expense associated with this option grant
was calculated using a Black-Scholes model and the following
assumptions: risk-free interest rate of 2.85%; no dividend
yield; volatility of 96.7%; and an expected term of
5 years. The resulting expense of $190,000 is included in
general and administrative expense on the consolidated statement
of operations for the year ended December 31, 2009.
On November 19, 2009, the Company granted 100,000 stock
options under its 2006 Stock Option Plan to a consultant of the
Company who provides odor control services. The options may be
exercised for a price of $.75 per share. One half of the options
vested upon grant, and one half will vest on November 30,
2010 if the consultant continues to be retained by the Company.
The Company is recording the issuance of these options in
accordance with ASC
Section 505-50.
The expense associated with the options that vest immediately
was calculated using a Black-Scholes model and the following
assumptions: risk-free interest rate of 2.35%; no dividend
yield; volatility of 96.6%; expected term of 5 years. The
resulting expense of $27,602 is included in general and
administrative expense on the consolidated statement of
operations for the year ended December 31, 2009. The
expense associated with the options that vest on
November 30, 2010, was calculated with a Black-Scholes
model and the same assumptions, except an expected term of
4.5 years. The resulting expense of $26,639 will be
recognized as expense
64
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
OWNERS
EQUITY (DEFICIT) Continued
|
ratably over the vesting period. Accordingly, an expense of
$4,440 is included in general and administrative expense on the
consolidated statement of operations for the year ended
December 31, 2009. The unrecognized liability associated
with the grant, which will be recognized as expense during the
2010 vesting period, is approximately $22,000.
As of December 31, 2009, the Company had 122,992 options
available to grant under the plan.
Stock option activity for the period January 1, 2008
through December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Stock
|
|
|
Price per
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Share
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Outstanding and exercisable at January 1, 2008
|
|
|
653,000
|
|
|
$
|
3.75
|
|
|
$
|
3.75
|
|
|
|
6.5
|
|
Granted
|
|
|
736,735
|
|
|
|
5.02
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(133,000
|
)
|
|
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2008
|
|
|
1,256,735
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
9.5
|
|
Granted
|
|
|
233,500
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
.75
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(359,940
|
)
|
|
|
5.02
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2009
|
|
|
1,230,295
|
|
|
|
|
|
|
$
|
3.54
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding and
exercisable at December 31, 2009 and 2008 is $0 and $0,
respectively. The aggregate intrinsic value represents the total
pretax intrinsic value, based on options with an exercise price
less than the Companys closing stock price of $0.67 and
$3.54 as of December 31, 2009 and 2008, respectively, which
would have been received by the option holders had those option
holders exercised their options as of that date.
As of December 31, 2009 the Company has estimated that its
unrecognized compensation cost related to non-vested share-based
compensation arrangements was approximately $22,000. At
December 31, 2008, there was no unrecognized compensation
cost related to non-vested share-based compensation arrangements
granted under the Companys stock option plan. During the
year ended December 31, 2008, the Company has received
approximately $499,000 as a result of the exercise of 133,000
options. No options were exercised in the year ended
December 31, 2009.
At December 31, 2009, the Company had accumulated net
operating losses of approximately $37,500,000 which may be
offset against future taxable income, if any, expiring at
various dates through 2028.
The Company has fully reserved the approximately $15,000,000 tax
benefit of these losses with a valuation allowance of the same
amount, because the likelihood of realization of the tax benefit
cannot be determined to be more likely than not.
There is a minimum current tax provision for the years ended
December 31, 2009 and 2008.
65
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 13
|
INCOME
TAXES Continued
|
The effective tax rate based on the federal and state statutory
rates is reconciled to the actual tax rate for the years ended
December 31, 2009 and 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Statutory state income tax rate
|
|
|
6
|
|
|
|
6
|
|
Valuation allowance on net deferred tax assets
|
|
|
(40
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax asset (liability) at
December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
13,470,000
|
|
|
$
|
6,148,000
|
|
Accrued compensation
|
|
|
120,000
|
|
|
|
120,000
|
|
Stock options
|
|
|
1,410,000
|
|
|
|
1,320,000
|
|
Valuation allowance
|
|
|
(15,000,000
|
)
|
|
|
(7,588,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Companys valuation allowance increased $7,412,000 and
$4,948,000 for the years ended December 31, 2009 and 2008,
respectively.
The Company has a tax benefit of approximately $1,410,000
related to the grant of common stock to certain key employees
and advisors. Pursuant to guidance provided by Sections 505
and 718 of the ASC, the benefit will be recognized and recorded
to APIC when the benefit is realized through the reduction of
taxes payable.
The Company complies with the provisions of ASC
Section 740. The guidance addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under
Section 740, the Company may recognize the tax benefit from
an uncertain tax position only if it is more likely than not
that the tax position will be sustained on an examination by the
taxing authorities, based on the technical merits of the
position. The Company has determined that the Company has no
uncertain tax positions requiring recognition under the guidance.
The Company is subject to U.S. federal income tax as well
as income tax of certain state jurisdictions. The Company has
not been audited by the U.S. Internal Revenue Service or
any states in connection with its income taxes. The periods from
January 1, 2005 to December 31, 2009 remain open to
examination by the U.S. Internal Revenue Service and state
authorities.
The Companys net operating loss carryforwards may be
limited subject to the provisions of Section 382 the
Internal Revenue Code.
|
|
NOTE 14
|
SEGMENT
REPORTING
|
ASC Section 280 provides guidance regarding the
requirements for a public enterprise to report financial and
descriptive information about its reportable operating segments.
Operating segments, as defined in the guidance, are components
of an enterprise about which separate financial information is
available that is evaluated regularly by the Company in deciding
how to allocate resources and in assessing performance. The
financial information is required to be reported on the basis
that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The Company has
no reportable segments at December 31, 2009 and 2008.
66
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 15
|
RELATED
PARTY TRANSACTIONS
|
ACCRUED
COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS
As of December 31, 2009 and 2008 the Company has an accrued
liability totaling $769,056 and $430,748, respectively,
representing accrued compensation to officers, directors and
consultants.
CONVERTED
ORGANICS OF RHODE ISLAND, LLC
Converted Organics of Rhode Island, LLC was formed for the
purpose of developing and operating a waste to fertilizer
facility in Johnston, Rhode Island. A development consultant who
has provided services to the Company holds a 5% non-controlling
interest in Converted Organics of Rhode Island, LLC. For the
years ending December 31, 2009 and 2008, the consultant was
paid $60,000 and $60,000, respectively, for services rendered,
and was granted 121,528 shares of the Companys common
stock.
PACKAGING
VENDOR
The Company has purchased packaging materials from a vendor
which is partially owned by an employee of the Company. The
Company made purchases of $106,000 and $141,000 from this vendor
in the years ending December 31, 2009 and 2008,
respectively.
NOTE 16
COMMITMENTS AND CONTINGENCIES
LEASES
The Company signed a lease during June 2006 for its Woodbridge,
New Jersey facility. The lease term is for ten years with an
option to renew for an additional ten years. The Company has
exercised the option to renew. Future minimum lease payments
under this lease are as follows:
|
|
|
|
|
For years ended December 31,
|
|
|
|
|
2010
|
|
$
|
934,820
|
|
2011
|
|
|
946,194
|
|
2012
|
|
|
959,097
|
|
2013
|
|
|
967,383
|
|
2014
|
|
|
975,834
|
|
2015 and thereafter
|
|
|
6,434,807
|
|
|
|
|
|
|
|
|
$
|
11,218,135
|
|
|
|
|
|
|
For the years ended December 31, 2009 and 2008, the Company
has recorded rent expense of $742,111 and $740,351,
respectively, in relation to this lease.
67
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 16
COMMITMENTS AND
CONTINGENCIES Continued
In September, 2008, the Company entered into a lease agreement
for 9 acres of land at the central landfill in Johnston,
RI, with the Rhode Island Resource Recovery Corporation. The
Company plans to build its next facility at this location. The
lease requires monthly payments of $9,167. Once the facility is
operational, the monthly rent will also include a charge of $8
per ton of fertilizer sold from the facility. The term of the
lease is twenty years. Future minimum payments under this lease
are as follows:
|
|
|
|
|
For years ended December 31,
|
|
|
|
|
2010
|
|
$
|
110,000
|
|
2011
|
|
|
110,000
|
|
2012
|
|
|
110,000
|
|
2013
|
|
|
110,000
|
|
2014
|
|
|
110,000
|
|
2015 and thereafter
|
|
|
1,503,334
|
|
|
|
|
|
|
|
|
$
|
2,053,334
|
|
|
|
|
|
|
The Company recognized $110,000 and $36,667 of expense related
to this lease in the years ending December 31, 2009 and
2008, respectively, which is included in Research &
Development on the consolidated statements of operations.
On November 24, 2009, the Company entered into a lease
agreement to begin December 1, 2009 with SWS Lewis Wharf
LLC for headquarter office space in Boston, Massachusetts. The
term is three years, and the Company has a right to extend the
term for two extension periods of one year each. Under the
Lease, the Company will pay a basic rent of $9,772 per month for
the three year term.
On January 24, 2008, the Company entered into a lease
agreement with VLH, its former variable interest entity, for
rental of the land upon which the Gonzalez facility resides. The
lease term is for ten years, with three options to renew for an
additional five years each. Future minimum rental payments under
the lease are as follows:
|
|
|
|
|
2010
|
|
$
|
114,299
|
|
2011
|
|
|
117,728
|
|
2012
|
|
|
121,260
|
|
2013
|
|
|
124,898
|
|
2014
|
|
|
128,645
|
|
2015 and thereafter
|
|
|
421,299
|
|
|
|
|
|
|
|
|
$
|
1,028,129
|
|
|
|
|
|
|
Rent expense incurred in connection with this lease was $123,810
and $113,492 for the years ended December 31, 2009 and
2008, respectively.
68
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 16
COMMITMENTS AND
CONTINGENCIES Continued
The following table sets for the Companys aggregate future
payments under its lease commitments as of December 31,
2009:
|
|
|
|
|
2010
|
|
$
|
1,276,379
|
|
2011
|
|
|
1,291,182
|
|
2012
|
|
|
1,297,845
|
|
2013
|
|
|
1,202,281
|
|
2014
|
|
|
1,214,479
|
|
2015 and thereafter
|
|
|
8,359,440
|
|
|
|
|
|
|
|
|
$
|
14,641,606
|
|
|
|
|
|
|
LEGAL
PROCEEDINGS
The Company is not currently aware of any pending or threatened
legal proceeding to which it is or would be a party, or any
proceedings being contemplated by governmental authorities
against it, or any of its executive officers or directors
relating to the services performed on the Companys behalf
except as follows.
On December 11, 2008, the Company received notice that a
complaint had been filed in a putative class action lawsuit on
behalf of 59 persons or entities that purchased units
pursuant to a financing terms agreement, or FTA, dated
April 11, 2006, captioned Gerald S. Leeseberg, et
al. v. Converted Organics Inc., filed in the
U.S. District Court for the District of Delaware. The
lawsuit alleges breach of contract, conversion, unjust
enrichment, and breach of the implied covenant of good faith in
connection with the alleged failure to register certain
securities issued in the FTA, and the redemption of the
Companys Class A warrants in November 2008. The
lawsuit seeks damages related to the failure to register certain
securities, including alleged late fee payments, of
approximately $5.25 million, and unspecified damages
related to the redemption of the Class A warrants. In
February 2009, the Company filed a Motion for Partial Dismissal
of Complaint. On October 7, 2009, the Court concluded that
Leeseberg has properly stated a claim for actual damages
resulting from the Companys alleged breach of contract,
but that Leeseberg has failed to state claims for conversion,
unjust enrichment and breach of the implied covenant of good
faith, and the Court dismissed such claims. On November 6,
2009, the Company filed its answer to the Complaint with the
Court. On March 4, 2010, the parties participated in a
Fed.R.Civ.P. 26(f) conference, and began discussing discovery
issues. The Company plans to vigorously defend this matter and
is unable to estimate any contingent losses that may or may not
be incurred as a result of this litigation and its eventual
disposition. Accordingly, no contingent loss has been recorded
related to this matter.
In December 2009, the Company filed a complaint in the Superior
Court of Massachusetts for the County of Suffolk, a matter
captioned Converted Organics Inc. v. Holland &
Knight LLP, No. The Company claims that in the event it is
required to pay any monies to Mr. Leeseberg and his
proposed class in the matter of Gerald S. Leeseberg, et
al. v. Converted Organics, Inc., that Holland &
Knight should make us whole, because its handling of the
registration of the securities at issue in the Leeseberg lawsuit
caused any loss that Mr. Leeseberg and other putative class
members claim to have suffered. Holland & Knight has
not yet responded to the complaint. It has threatened to bring
counterclaims against Converted Organics for legal fees
allegedly owed, which the Company would contest vigorously. At
this early stage in the case, the Company is unable to predict
the likelihood of an unfavorable outcome, or to estimate the
amount or range of potential loss.
On May 19, 2009, the Company received notice that a
complaint had been filed in the Middlesex County Superior Court
of New Jersey, captioned Lefcourt Associates, Ltd., et
al. v. Converted Organics of Woodbridge, et al. The lawsuit
alleges private and public nuisances, negligence, continuing
trespasses and consumer common-law fraud in connection with the
odors emanating from the Woodbridge facility and the
Companys alleged, intentional failure to disclose to
adjacent property owners the possibility of the facility causing
pollution and was later amended
69
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE 16
COMMITMENTS AND
CONTINGENCIES Continued
to allege adverse possession, acquiescence and easement. The
lawsuit seeks enjoinment of any and all operations which in any
way cause or contribute to the alleged pollution, compensatory
and punitive damages, counsel fees and costs of suit and any and
all other relief the Court deems equitable and just. In response
to these allegations, the Company has filed opposition papers
with the Court and has complied with the plaintiffs
requests for information. The Company plans to vigorously defend
this matter and is unable to estimate any contingent losses that
may or may not be incurred as a result of this litigation and
its eventual disposition. Accordingly, no contingent loss has
been recorded related to this matter.
On May 28, 2009, the Company received notice that a Lien
Claim Foreclosure Complaint had been filed in the Middlesex
County Superior Court of New Jersey, captioned Armistead
Mechanical, Inc. v. Converted Organics Inc., et al.
Armistead filed this Lien Claim Foreclosure Complaint in order
to perfect its previously filed lien claim. The Complaint also
alleges breach of contract, reasonable value, demand for
payment, unjust enrichment, and breach of the implied covenant
of good faith and fair dealing, and seeks compensatory,
consequential and incidental damages, attorneys fees,
costs, interest, and other fair and equitable relief. On
July 10, 2009, the Company received an Amended Lien Claim
Foreclosure Complaint from Armistead Mechanical. The amended
complaint did not make any substantial changes to the suit. On
August 4, 2009, the Company filed a response to the
complaint whereby the Company denied certain claims and at this
time it is unable to estimate any contingent losses. On
August 28, 2009, the court entered an order staying the
litigation pending the outcome of arbitration. In connection
with the Complaint, Armistead has filed a demand for arbitration
with the American Arbitration Association in order to preserve
its status quo and right to submit a contract dispute claim to
binding arbitration. On October 30, 2009, the
Companys response to the demand was due with the consent
of Armistead. No arbitrator has yet been appointed. On
November 19, 2009, the Company signed a Settlement
Agreement with Armistead for a total of $2,029,000, with the
first payment of $1,000,000 due upon closing (closing occurred
on November 19, 2009) and the balance of $1,029,000
payable in eighteen level monthly payments of principal and
interest calculated at 6% per annum. The monthly payments began
January 1, 2010. According to terms of the Settlement
Agreement, the construction lien claim and related lawsuit will
be suspended during the eighteen month payment period and will
be released completely upon final payment.
OTHER
The Middlesex County Health Department (MCHD) issued a number of
notices of violation (NOV) to the Company for
alleged violations of New Jersey State Air Pollution Control
Act, which prohibits certain off-site odors. The NOV alleged
that odors emanating from the facility had impacted surrounding
businesses and those odors were of sufficient intensity and
duration to constitute air pollution under the Act. The
penalties assessed total $379,375 of which the Company has paid
$ $159,469 (of which $157,719 were related to odor emissions, as
described above), and currently have an unpaid balance of
$219,906. The Company has recorded a liability of $268,500 as of
December 31, 2009, relating to the unpaid portion of the
penalties as of that date. In addition, based on a change in
operational procedures and working with two outside odor-control
consultants, the Company believes that it can avoid charges
related to such violations in the future.
|
|
NOTE 17
|
SUBSEQUENT
EVENTS
|
On January 4, 2010, the Companys Compensation
Committee approved an employee and director stock option grant
under the Amended and Restated 2006 Stock Option Plan. A total
of 2,458,500 options were granted with an exercise price of
$.68, which was the closing price as of the date of grant. The
cost associated with this option grant was calculated using a
Black-Scholes model and the following assumptions: risk-free
interest rate of 2.35%; no dividend yield; volatility of 98.6%;
expected term of 5 years. The resulting expense of
approximately $1,188,000 will be reflected in the Companys
consolidated statement of operations for the quarter ending
March 31, 2010.
70
CONVERTED
ORGANICS INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 17
|
SUBSEQUENT
EVENTS Continued
|
On January 26, 2010, the Company formed Converted Organics
of Mississippi, LLC, a Mississippi limited liability company and
a wholly owned subsidiary of the Company, for the purpose of
hiring a sales force and adding a poultry litter-based
fertilizer product to our existing product lines. The Company
has outsourced production of this new product line.
On February 25, 2010 the Company signed a letter of intent
with the non-controlling interest in Converted Organics of Rhode
Island to sell substantially all of the assets and a limited
select amount of liabilities of Converted Organics of RI, a
transaction that would include an assignment of the
Companys lease with RIRRC.
Also on February 25, 2010, the Company signed a memorandum
of understanding with MassOrganics I, under which
MassOrganics I would install and operate the system at a new
manufacturing facility to be constructed at the Sutton Commerce
Park in Sutton, Massachusetts. MassOrganics I has agreed to
enter into a license agreement under which MassOrganics I will
pay a licensing fee to the Company.
On March 23, 2010, The Company entered into a bridge loan
and license agreement with Heartland Technology Partners, LLC
(HTP). The bridge loan agreement requires the
Company to advance $500,000 to HTP in three monthly installments
commencing upon signing of the loan. The outstanding principal
balance of the bridge loan is due where there occurs on or
before June 30, 2012 either a change of control of HTP or
the completion by HTP of a financing in excess of
$10 million. In consideration for entering the bridge loan
agreement, the Company was granted an exclusive, irrevocable
license for the use of HTPs waste water processing
technology. In addition, the Company has hired a senior
executive in the waste water processing industry and has begun
to develop plans to establish this line of business.
71
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There have been no disagreements with our accountants on
accounting and financial disclosures.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The Companys management, with the participation and under
the supervision of its Principal Executive Officer and Principal
Financial Officer, reviewed and evaluated the effectiveness of
the Companys disclosure controls and procedures, as
defined by
Rule 13a-15(e)
of the Exchange Act, as of the end of the fiscal year covered by
this report. Based upon their evaluation, the Companys
principal executive and financial officer concluded that, as of
the end of such period, our disclosure controls and procedures
are effective and sufficient to ensure that we record, process,
summarize, and report information required to be disclosed in
the reports we file under the Securities Exchange Act of 1934
within the time periods specified by the Securities and Exchange
Commissions rules and regulations.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Our system of internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the
United States of America and includes policies and procedures
that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of our assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and
directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial
statements.
|
Our management conducted an evaluation of the effectiveness of
our internal control over financial reporting as of
December 31, 2009, based on the framework in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, our management concluded that our internal
control over financial reporting was effective as of
December 31, 2009.
This annual report does not include an attestation report of the
Companys registered public accounting firm regarding
internal control over financial reporting. The Companys
internal controls over financial reporting were not subject to
attestation by the Companys registered public accounting
firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only
managements report in this annual report.
Changes
in Internal Control over Financial Reporting
There have been no significant changes in our internal control
over financial reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) or in other factors that occurred during
the period of our evaluation or subsequent to the date we
carried out our evaluation which have significantly affected, or
are reasonably likely to significantly affect, our internal
control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
72
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by Item 10 regarding directors,
executive officers, promoters and control persons is
incorporated by reference to the information appearing under the
caption Directors and Executive Officers in the
Companys definitive Proxy Statement relating to its 2010
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission within 120 days after the close of
its fiscal year.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by Item 11 is incorporated by
reference to the information appearing under the caption
Executive Compensation in the Companys
definitive Proxy Statement relating to its 2010 Annual Meeting
of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal
year.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Securities
authorized for issuance under equity compensation
plans
The information required by Item 12 is incorporated by
reference to the information appearing under the caption
Security Ownership in the Companys definitive
Proxy Statement relating to its 2010 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of its fiscal
year.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by Item 13 is incorporated by
reference to the information appearing under the caption
Certain Relationships and Related Transactions in
the Companys definitive Proxy Statement relating to its
2010 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after
the close of the fiscal year.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by Item 14 is incorporated by
reference to the information appearing under the caption
Principal Accounting Fees and Services in the
Companys definitive Proxy Statement relating to its 2010
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission within 120 days after the close of
its fiscal year.
73
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Asset Purchase Agreement between the Registrant and United
Organic Products, LLC, dated January 21, 2008 (incorporated
by reference to Exhibit 2.02 to our current report on
Form 8-K
filed January 29, 2008)
|
|
2
|
.2
|
|
Asset Purchase Agreement between the Registrant and Waste
Recovery Industries, LLC, dated January 21, 2008
(incorporated by reference to Exhibit 2.03 to our current
report on
Form 8-K
filed January 29, 2008)
|
|
3
|
.1
|
|
Registrants Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to our Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
3
|
.2
|
|
Registrants Bylaws (incorporated by reference to
Exhibit 3.2 to our Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
3
|
.3
|
|
Registrants Certificate of Amendment of Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 to
our Registration Statement on
Form S-1
filed September 15, 2009)
|
|
4
|
.1
|
|
Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to our
Form SB-2/A
filed January 25, 2007)
|
|
4
|
.2
|
|
Form of Class B Warrant (incorporated by reference to
Exhibit B to Exhibit 4.5 on Post-Effective Amendment
No. 1 to our Registration Statement on
Form SB-2
filed February 20, 2007)
|
|
4
|
.3
|
|
Form of Unit Certificate issued in initial public offering
(incorporated by reference to Exhibit 4.4 on Post-Effective
Amendment No. 1 to our Registration Statement on
Form SB-2
filed February 20, 2007)
|
|
4
|
.4
|
|
Class B Warrant Agreement between the Registrant and
Computershare Shareholder Services, Inc. and Computershare
Trust Company N.A., dated February 16, 2007
(incorporated by reference to Exhibit 4.5 on Post-Effective
Amendment No. 1 to our Registration Statement on
Form SB-2
filed February 20, 2007)
|
|
4
|
.5
|
|
Form of Representatives Purchase Warrant issued in initial
public offering (incorporated by reference to Exhibit 4.6
to our Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
4
|
.6
|
|
Registration Rights Agreement between the Registrant and
Professional Offshore Opportunity Fund, Ltd., Professional
Traders Fund, LLC and High Capital Funding, LLC, dated
January 24, 2008 (incorporated by reference to
Exhibit 2.06 to our current report on
Form 8-K
filed January 29, 2008)
|
|
4
|
.7
|
|
Form of Class H Warrant (incorporated by reference to
Exhibit 4.1 to our Quarterly Report on
Form 10-Q
filed November 16, 2009)
|
|
4
|
.8
|
|
Form of Unit Certificate issued in October 2009 offering
(incorporated by reference to Exhibit 4.2 to our Quarterly
Report on
Form 10-Q
filed November 16, 2009)
|
|
4
|
.9
|
|
Form of Warrant issued in May 2009 offering (incorporated by
reference to Exhibit 4.1 to our
Form 8-K
filed on May 20, 2009)
|
|
4
|
.10
|
|
Form of Warrant issued in July 2009 offering (incorporated by
reference to Exhibit 4.1 to our
Form 8-K
filed on July 16, 2009)
|
|
4
|
.11
|
|
Class G Common Stock Purchase Warrant (incorporated by
reference to Exhibit 10.5 to our
Form 8-K
filed on September 14, 2009)
|
|
4
|
.12
|
|
Class H Warrant Agreement between the Registrant and
Computershare Trust Company N.A., dated October 20,
2009 (incorporated by reference to Exhibit 10.3 to our
Form 8-K
filed on October 21, 2009)
|
|
4
|
.13
|
|
Unit Conversion Agreement between the Registrant and
Computershare Trust Company N.A.., dated October 20,
2009 (incorporated by reference to Exhibit 10.2 to our
Form 8-K
filed on October 21, 2009)
|
|
10
|
.1
|
|
Form of Bridge Loan Documents dated March 2, 2006
(incorporated by reference to Exhibit 10.1 to our
Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
10
|
.1A
|
|
Form of Bridge Loan Documents dated April 11, 2006
(incorporated by reference to Exhibit 10.1A to our
Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
10
|
.2
|
|
Amended and Restated 2006 Stock Option Plan and Form of Stock
Option Agreement (incorporated by reference to Exhibit 10.2
to Annex A of our Definitive Proxy Statement filed
March 5, 2008)
|
|
10
|
.3
|
|
Service Agreement between the Registrant and ECAP, LLC, dated
March 1, 2006 (incorporated by reference to
Exhibit 10.3 to our Registration Statement on
Form SB-2
filed June 21, 2006)
|
74
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4
|
|
Lease Agreement between the Registrant and Recycling Technology
Development, LLC, dated June 2, 2006 (incorporated by
reference to Exhibit 10.4 to our Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
10
|
.4A
|
|
Amendment to the Lease Agreement between the Registrant and
Recycling Technology Development dated January 18, 2007
(incorporated by reference to Exhibit 10.4A to our
Form SB-2/A
filed January 25, 2007)
|
|
10
|
.4B*
|
|
Second Amendment to the Lease Agreement between the Registrant
and Recycling Technology Development dated June 30, 2008
|
|
10
|
.4C*
|
|
Third Amendment to the Lease Agreement between the Registrant
and Recycling Technology Development dated March 31, 2009
|
|
10
|
.5
|
|
Employment Agreement between the Registrant and Edward J.
Gildea, dated March 2, 2006 (incorporated by reference to
Exhibit 10.5 to our Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
10
|
.6
|
|
Employment Agreement between the Registrant and John A.
Walsdorf, dated March 2, 2006 (incorporated by reference to
Exhibit 10.7 to our Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
10
|
.7
|
|
Agreement between the Registrant and Weston Solutions, Inc.,
dated May 29, 2003 and modification dated October 6,
2004 (incorporated by reference to Exhibit 10.9 to our
Registration Statement on
Form SB-2
filed June 21, 2006)
|
|
10
|
.8
|
|
IBR Plant License Agreement between International Bio Recovery
Corporation and Mining Organics Management LLC, dated
July 15, 2003 (incorporated by reference to
Exhibit 10.10 to our
Form SB-2/A
filed July 5, 2006)
|
|
10
|
.9
|
|
Revision dated February 9, 2006 to IBR Plant License
Agreement dated July 15, 2003 (incorporated by reference to
Exhibit 10.11 to our
Form SB-2/A
filed July 5, 2006)
|
|
10
|
.10
|
|
Secured Convertible Promissory Note in favor of United Organic
Products, LLC, dated January 24, 2008 (incorporated by
reference to Exhibit 2.04 to our current report on
form 8-K
filed January 29, 2008)
|
|
10
|
.11
|
|
Secured Promissory Note in favor of Waste Recovery Industries,
LLC, dated January 24, 2008 (incorporated by reference to
Exhibit 2.05 to our current report on
form 8-K
filed January 29, 2008)
|
|
10
|
.12
|
|
New Jersey Economic Development Authority $17,500,000 Solid
Waste Facilities Revenue Bonds (Converted Organics of
Woodbridge, LLC 2007 Project), dated
February 16, 2007 (incorporated by reference to
Exhibit 10.13 on
Form 10-K
filed March 30, 2009)
|
|
10
|
.13
|
|
Subscription Agreement between Registrant and Iroquois Master
Fund Ltd. dated May 7, 2009 (incorporated by reference
to Exhibit 10.1 on
Form 8-K
filed on May 13, 2009)
|
|
10
|
.14
|
|
Security Agreement between Registrant and Iroquois Master
Fund Ltd dated May 7, 2009 (incorporated by reference
to Exhibit 10.2 on
Form 8-K
filed on May 13, 2009)
|
|
10
|
.15
|
|
Security Agreement dated May 7, 2009 by and among Converted
Organics of California, LLC, Converted Organics of Woodbridge,
LLC and Iroquois Master Fund Ltd (incorporated by reference
to Exhibit 10.3 on
Form 8-K
filed on May 13, 2009)
|
|
10
|
.16
|
|
Secured Promissory Note dated May 7, 2009 payable to
Iroquois Master Fund Ltd (incorporated by reference to
Exhibit 10.4 on
Form 8-K
filed on May 13, 2009)
|
|
10
|
.17
|
|
Class C Common Stock Purchase Warrant dated May 7,
2009 entitling Iroquois Master Fund Ltd the right to
purchase 750,000 shares of Converted Organics Inc.s
common stock (incorporated by reference to Exhibit 10.5 on
Form 8-K
filed on May 13, 2009)
|
|
10
|
.18
|
|
Class D Common Stock Purchase Warrant dated May 7,
2009 entitling Iroquois Master Fund Ltd. the right to
purchase 350,000 shares of Converted Organics Inc.s
common stock (incorporated by reference to Exhibit 10.6 on
Form 8-K
filed on May 13, 2009)
|
|
10
|
.19
|
|
Subsidiary Guaranty dated May 7, 2009 by Converted Organics
of California, LLC and Converted Organics of Woodbridge, LLC for
the benefit of Iroquois Master Fund Ltd (incorporated by
reference to Exhibit 10.7 on
Form 8-K
filed on May 13, 2009)
|
|
10
|
.20
|
|
Securities Purchase Agreement from May 2009 offering between
Registrant and Purchasers (incorporated by reference to
Exhibit 10.1 on
Form 8-K
filed on May 20, 2009)
|
75
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.21
|
|
Form of Amended Agreement dated May 26, 2009 (incorporated
by reference to Exhibit 10.1 on
Form 8-K
filed on May 27, 2009)
|
|
10
|
.22
|
|
Securities Purchase Agreement dated July 15, 2009 between
Registrant and Purchasers (incorporated by reference to
Exhibit 10.22 on
Form 8-K
filed on July 16, 2009)
|
|
10
|
.23
|
|
Promissory Note by Converted Organics of Woodbridge, LLC in
favor of Recycling Technology Development, LLC dated
March 31, 2009 (incorporated by reference to
Exhibit 10.16 on
Form 10-Q
filed August 14, 2009)
|
|
10
|
.24
|
|
Promissory Note by Converted Organics of Woodbridge, LLC in
favor of Hatzel & Buehler Inc. dated June 19,
2009 (incorporated by reference to Exhibit 10.15 on
Form 10-Q
filed August 14, 2009)
|
|
10
|
.25
|
|
Promissory Note by Converted Organics of Woodbridge, LLC in
favor of SNC Lavalin Project Services Inc. dated June 16,
2009 (incorporated by reference to Exhibit 10.14 on
Form 10-Q
filed August 14, 2009)
|
|
10
|
.26
|
|
Subsidiary Guarantee dated September 14, 2009 by Converted
Organics of California, LLC and Converted Organics of
Woodbridge, LLC for the benefit of Iroquois Master Fund Ltd
(incorporated by reference to Exhibit 10.6 on
Form 8-K
filed September 14, 2009)
|
|
10
|
.27
|
|
Secured Convertible Promissory Note in favor of Iroquois Master
Fund Ltd. dated September 14, 2009 (incorporated by
reference to Exhibit 10.4 on
Form 8-K
filed September 14, 2009)
|
|
10
|
.28
|
|
Security Agreement between Converted Organics of Woodbridge,
LLC, Converted Organics of California, LLC and Iroquois master
Fund Ltd dated September 14, 2009 (incorporated by
reference to Exhibit 10.3 on
Form 8-K
filed September 14, 2009)
|
|
10
|
.29
|
|
Security Agreement between Registrant and Iroquois Master
Fund Ltd dated September 14, 2009 (incorporated by
reference to Exhibit 10.2 on
Form 8-K
filed September 14, 2009)
|
|
10
|
.30
|
|
Subscription Agreement between Registrant and Iroquois Master
Fund Ltd dated September 14, 2009 (incorporated by
reference to Exhibit 10.1 on
Form 8-K
filed September 14, 2009)
|
|
10
|
.31
|
|
Class G Common Stock Purchase Warrant dated
September 14, 2009 (incorporated by reference to
Exhibit 10.5 on
Form 8-K
filed September 14, 2009)
|
|
10
|
.32
|
|
Promissory Note in favor of Airside, Inc. dated
September 24, 2009 (incorporated by reference to
Exhibit 10.1 on
Form 8-K
filed September 28, 2010)
|
|
10
|
.33
|
|
Form of Representatives Unit Purchase Option issued in October
2009 offering (incorporated by reference to Exhibit 10.1 on
Form 8-K
filed on October 21, 2010)
|
|
*10
|
.34
|
|
Promissory Note in favor of Heartland Technology Partners, LLC
dated March 23, 2010
|
|
*10
|
.35
|
|
Supply and License Agreement between Registrant and Heartland
Technology Partners, LLC dated March 23, 2010
|
|
*10
|
.36
|
|
Lease Agreement between Registrant and SWS Lewis Wharf, LLC
dated November 24, 2009
|
|
*10
|
.37
|
|
Promissory Note in favor of Armistead Mechanical, Inc. dated
November 19, 2009
|
|
*14
|
.1
|
|
Code of Ethics
|
|
*21
|
.1
|
|
List of Subsidiaries
|
|
*23
|
.1
|
|
Consent of CCR LLP
|
|
*31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a)
|
|
*31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a)
|
|
*32
|
.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
*32
|
.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
* |
|
Filed as an Exhibit herein. |
76
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Converted Organics Inc.
Name: Edward J. Gildea
|
|
|
|
Title:
|
President, Chief Executive Officer,
|
Chairman of the Board
Date: March 31, 2010
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name: Edward J. Gildea
|
|
|
|
Title:
|
President, Chief Executive Officer,
|
Chairman of the Board
Date: March 31, 2010
Name: David R. Allen
|
|
|
|
Title:
|
Chief Financial Officer,
|
Executive Vice President of Administration
Date: March 31, 2010
Name: Ellen P. ONeil
|
|
|
|
Title:
|
Chief Accounting Officer
|
Date: March 31, 2010
Name: Robert E. Cell
Date: March 31, 2010
77
By:
/s/ John
P. DeVillars
Name: John P. DeVillars
Date: March 31, 2010
|
|
|
|
By:
|
/s/ Edward
A. Stoltenberg
|
Name: Edward A. Stoltenberg
Date: March 31, 2010
78