e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 001-33304
Converted Organics Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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20-4075963 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
137A Lewis Wharf, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
(617) 624-0111
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES 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
þ NO 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.
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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) |
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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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of August 11, 2011, there were 141,619,062 shares of our common
stock outstanding.
Item 1. Financial Statements
CONVERTED ORGANICS INC.
CONSOLIDATED BALANCE SHEETS
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June 30, 2011 |
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(Unaudited) |
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December 31, 2010 |
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ASSETS |
CURRENT ASSETS |
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Cash |
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$ |
1,828,309 |
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$ |
3,039,941 |
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Accounts receivable, net |
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1,075,509 |
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579,946 |
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Inventories |
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207,874 |
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126,406 |
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Prepaid expenses and other assets |
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311,725 |
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251,589 |
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Deferred financing costs, net |
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196,366 |
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276,667 |
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Current assets of discontinued operations |
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14,500 |
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Total current assets |
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3,619,783 |
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4,289,049 |
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Deposits and other non-current assets |
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567,642 |
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575,596 |
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Property and equipment, net |
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2,994,822 |
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1,477,589 |
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Goodwill |
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1,668,369 |
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1,667,957 |
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Intangible assets, net |
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11,200,277 |
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11,629,265 |
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Total assets |
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$ |
20,050,893 |
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$ |
19,639,456 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Term note payable |
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$ |
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$ |
350,000 |
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Notes payable related party |
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72,351 |
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72,351 |
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Accounts payable |
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2,279,278 |
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2,393,388 |
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Accrued expenses |
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642,263 |
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656,412 |
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Convertible notes payable, net of unamortized discount |
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1,194,680 |
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306,404 |
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Obligation to issue shares |
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287,500 |
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1,560,715 |
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Derivative liabilities current |
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1,803,116 |
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5,199,572 |
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Liabilities of discontinued operations |
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674,800 |
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2,438,253 |
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Total current liabilities |
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6,953,988 |
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12,977,095 |
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Derivative liabilities |
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1,009,514 |
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3,476,047 |
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Total liabilities |
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7,963,502 |
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16,453,142 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY |
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Preferred stock, $1,000 stated value, authorized 10,000,000 shares |
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13,281,000 |
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17,500,000 |
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Common stock, $.0001 par value, authorized 500,000,000 shares
at June 30, 2011 and 250,000,000 shares at December 31, 2010 |
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12,746 |
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8,547 |
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Additional paid-in capital |
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99,470,282 |
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85,555,990 |
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Accumulated deficit |
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(101,090,877 |
) |
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(100,453,292 |
) |
Accumulated other comprehensive loss |
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(12,659 |
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(1,109 |
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11,660,492 |
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2,610,136 |
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Noncontrolling interests |
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426,899 |
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576,178 |
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Total stockholders equity |
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12,087,391 |
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3,186,314 |
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Total liabilities and stockholders equity |
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$ |
20,050,893 |
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$ |
19,639,456 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
CONVERTED ORGANICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
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Three month periods ended |
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Six month periods ended |
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June 30, 2011 |
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June 30, 2010 |
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June 30, 2011 |
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June 30, 2010 |
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Revenues |
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$ |
1,429,710 |
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$ |
1,245,183 |
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$ |
2,168,886 |
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$ |
1,957,059 |
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Cost of goods sold |
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953,959 |
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871,573 |
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1,458,426 |
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1,437,049 |
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Gross profit |
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475,751 |
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373,610 |
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710,460 |
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520,010 |
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Operating expenses |
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Selling, general and administrative expenses |
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3,801,637 |
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2,557,101 |
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6,118,811 |
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6,400,805 |
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Research and development |
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152 |
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79,800 |
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16,023 |
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141,650 |
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Amortization of intangible assets |
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221,375 |
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72,002 |
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442,642 |
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144,004 |
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4,023,164 |
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2,708,903 |
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6,577,476 |
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6,686,459 |
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Loss from continuing operations |
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(3,547,413 |
) |
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(2,335,293 |
) |
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(5,867,016 |
) |
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(6,166,449 |
) |
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Other income/(expenses) |
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Other income |
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21,930 |
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251 |
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28,953 |
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532 |
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Gain on
value of obligation to issue shares |
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1,108,929 |
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1,273,215 |
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Gain on settlement of debt |
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225,000 |
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Derivative gain |
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6,851,730 |
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1,133,883 |
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9,249,513 |
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498,728 |
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Interest expense |
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(3,565,784 |
) |
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(7,155 |
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(5,840,246 |
) |
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(11,528 |
) |
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4,416,805 |
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1,126,979 |
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4,936,435 |
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487,732 |
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Income (loss) from continuing operations before
provision for income taxes |
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869,392 |
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(1,208,314 |
) |
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(930,581 |
) |
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(5,678,717 |
) |
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Provision for income taxes |
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Net income (loss) from continuing operations |
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869,392 |
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(1,208,314 |
) |
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(930,581 |
) |
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(5,678,717 |
) |
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Income (loss) from discontinued operations |
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146,970 |
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(2,117,106 |
) |
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146,471 |
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(4,026,396 |
) |
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Net income (loss) |
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1,016,362 |
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(3,325,420 |
) |
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(784,110 |
) |
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(9,705,113 |
) |
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Net loss attributable to noncontrolling interests |
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(85,530 |
) |
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(146,525 |
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Net income (loss) attributable to Converted Organics Inc.
before other comprehensive loss |
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1,101,892 |
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(3,325,420 |
) |
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(637,585 |
) |
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(9,705,113 |
) |
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Other comprehensive loss: |
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Foreign currency translation adjustment |
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(3,808 |
) |
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(14,304 |
) |
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Comprehensive income (loss) |
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1,098,084 |
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(3,325,420 |
) |
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(651,889 |
) |
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(9,705,113 |
) |
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Comprehensive loss attributable to noncontrolling interests |
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(734 |
) |
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(2,754 |
) |
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Comprehensive income (loss) attributable to Converted Organics Inc. |
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$ |
1,098,818 |
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$ |
(3,325,420 |
) |
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$ |
(649,135 |
) |
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$ |
(9,705,113 |
) |
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Earnings (loss) per share, basic |
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Continuing operations |
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$ |
0.01 |
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|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
Discontinued operations |
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|
(0.05 |
) |
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|
(0.10 |
) |
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|
$ |
0.01 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.25 |
) |
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Earnings (loss) per share, diluted |
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Continuing operations |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
Discontinued operations |
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|
|
|
|
|
(0.05 |
) |
|
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|
|
|
|
(0.10 |
) |
|
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|
|
|
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|
|
|
|
|
|
|
|
$ |
(0.02 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.25 |
) |
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|
The accompanying notes are an integral part of these consolidated financial statements.
4
CONVERTED ORGANICS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2011
(UNAUDITED)
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Accumulated |
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Preferred Stock Series A |
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Common Stock |
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Other |
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Total |
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Shares Issued and |
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Shares Issued and |
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Additional |
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Accumulated |
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Comprehensive |
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Non-Controlling |
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Stockholders' |
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Outstanding |
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Amount |
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Outstanding |
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Amount |
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Paid-in Capital |
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Deficit |
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Loss |
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Total |
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Interests |
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Equity |
|
Balance, December 31, 2010 |
|
|
17,500 |
|
|
$ |
17,500,000 |
|
|
|
85,468,127 |
|
|
$ |
8,547 |
|
|
$ |
85,555,990 |
|
|
$ |
(100,453,292 |
) |
|
$ |
(1,109 |
) |
|
$ |
2,610,136 |
|
|
$ |
576,178 |
|
|
$ |
3,186,314 |
|
Common stock issued to settle convertible notes obligations |
|
|
|
|
|
|
|
|
|
|
25,445,599 |
|
|
|
2,545 |
|
|
|
6,049,427 |
|
|
|
|
|
|
|
|
|
|
|
6,051,972 |
|
|
|
|
|
|
|
6,051,972 |
|
Common stock issued as compensation |
|
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|
|
|
|
|
|
|
|
5,065,699 |
|
|
|
506 |
|
|
|
1,557,319 |
|
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|
|
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|
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1,557,825 |
|
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|
|
|
|
|
1,557,825 |
|
Issuance of employee stock options |
|
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|
|
|
|
669,444 |
|
|
|
|
|
|
|
|
|
|
|
669,444 |
|
|
|
|
|
|
|
669,444 |
|
Issuance of
common stock as payment of expenses |
|
|
|
|
|
|
|
|
|
|
508,333 |
|
|
|
51 |
|
|
|
76,199 |
|
|
|
|
|
|
|
|
|
|
|
76,250 |
|
|
|
|
|
|
|
76,250 |
|
Issuance of common stock as payment to settle
obligations of discontinued operations |
|
|
|
|
|
|
|
|
|
|
3,200,000 |
|
|
|
320 |
|
|
|
1,343,680 |
|
|
|
|
|
|
|
|
|
|
|
1,344,000 |
|
|
|
|
|
|
|
1,344,000 |
|
Issuance of common stock for conversion of preferred stock |
|
|
(4,219 |
) |
|
|
(4,219,000 |
) |
|
|
7,769,798 |
|
|
|
777 |
|
|
|
4,218,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,550 |
) |
|
|
(11,550 |
) |
|
|
(2,754 |
) |
|
|
(14,304 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(637,585 |
) |
|
|
|
|
|
|
(637,585 |
) |
|
|
(146,525 |
) |
|
|
(784,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011 |
|
|
13,281 |
|
|
$ |
13,281,000 |
|
|
|
127,457,556 |
|
|
$ |
12,746 |
|
|
$ |
99,470,282 |
|
|
$ |
(101,090,877 |
) |
|
$ |
(12,659 |
) |
|
$ |
11,660,492 |
|
|
$ |
426,899 |
|
|
$ |
12,087,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
CONVERTED ORGANICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six month periods ended |
|
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(784,110 |
) |
|
$ |
(9,705,113 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
Amortization expense of intangibles and other assets |
|
|
780,573 |
|
|
|
167,838 |
|
Depreciation and amortization of property and equipment |
|
|
130,461 |
|
|
|
879,123 |
|
(Recovery of) provision for losses on accounts receivable |
|
|
(75,875 |
) |
|
|
|
|
Amortization of discounts on notes payable |
|
|
5,558,287 |
|
|
|
|
|
Interest expense in connection with issuance of convertible debt |
|
|
268,486 |
|
|
|
|
|
Common stock issued as compensation |
|
|
1,557,825 |
|
|
|
160,050 |
|
Common stock
issued as payment of expenses |
|
|
76,250 |
|
|
|
|
|
Stock option compensation expense |
|
|
669,444 |
|
|
|
1,299,152 |
|
Obligations to issue shares revaluation |
|
|
(1,273,215 |
) |
|
|
|
|
Gain on settlement of debt |
|
|
(225,000 |
) |
|
|
|
|
Gain on settlements of accounts payable |
|
|
(164,348 |
) |
|
|
|
|
Loss on write-down of construction costs |
|
|
113,543 |
|
|
|
|
|
Derivative gain |
|
|
(9,249,513 |
) |
|
|
(498,728 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(405,188 |
) |
|
|
(930,538 |
) |
Inventories |
|
|
(81,468 |
) |
|
|
235,229 |
|
Prepaid expenses and other current assets |
|
|
(49,885 |
) |
|
|
(659,611 |
) |
Deposits and other non-current assets |
|
|
(1,045 |
) |
|
|
(34,705 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(967,118 |
) |
|
|
190,772 |
|
Accrued expenses |
|
|
(242,042 |
) |
|
|
78,650 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(4,363,938 |
) |
|
|
(8,817,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(937,958 |
) |
|
|
(364,356 |
) |
Patent costs |
|
|
(13,654 |
) |
|
|
|
|
Purchase of other assets |
|
|
|
|
|
|
(500,000 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(951,612 |
) |
|
|
(864,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Repayment of debt obligations |
|
|
(125,000 |
) |
|
|
(1,368,133 |
) |
Repayment of capital lease obligations |
|
|
|
|
|
|
(5,769 |
) |
Net proceeds from exercise of options |
|
|
|
|
|
|
34,000 |
|
Net proceeds from stock offering |
|
|
|
|
|
|
2,366,360 |
|
Net proceeds from short-term notes |
|
|
4,245,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
4,120,000 |
|
|
|
1,026,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of exchange rate changes on cash |
|
|
(16,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH |
|
|
(1,211,632 |
) |
|
|
(8,655,779 |
) |
|
|
|
|
|
|
|
|
|
Cash, beginning of period |
|
|
3,039,941 |
|
|
|
10,708,807 |
|
|
|
|
|
|
|
|
Cash, end of period |
|
$ |
1,828,309 |
|
|
$ |
2,053,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
12,603 |
|
|
$ |
788,396 |
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities: |
|
|
|
|
|
|
|
|
Equipment acquired through assumption of accounts payable |
|
$ |
817,547 |
|
|
$ |
|
|
Common stock
issued to settle convertible notes and derivative obligations |
|
|
6,051,972 |
|
|
|
194,343 |
|
Fair value of derivatives issued in conjuction with debt and equity financing |
|
|
4,667,269 |
|
|
|
968,096 |
|
Common stock issued as settlement of obligations of discontinued operations |
|
|
1,344,000 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America and the
rules and regulations of the Securities and Exchange Commission (the SEC) under Article 8-03 of
Regulation S-X for interim financial reporting. Certain information and footnote disclosures
normally included in the annual consolidated financial statements of Converted Organics Inc. (the
Company) have been condensed or omitted. In managements opinion, the unaudited interim
consolidated financial statements and accompanying notes reflect all adjustments, consisting of
normal and recurring adjustments, that are necessary for a fair presentation of its financial
position and operating results for the periods presented.
The results of operations for the interim periods are not necessarily indicative of the
results to be expected for the entire year. This Form 10-Q should be read in conjunction with the
audited consolidated financial statements and notes thereto included in Converted Organics, Inc.s
Form 10-K as of and for the year ended December 31, 2010.
NATURE OF OPERATIONS
Converted Organics Inc. and its subsidiaries (collectively the Company) utilize innovative
clean technologies to establish and operate environmentally friendly businesses. The Company is
dedicated to creating a cleaner, greener future, and operates using sustainable business practices
that support this vision. The Company operates in three business areas: Organic Fertilizer,
Industrial Wastewater Treatment and Vertical Farming.
Organic Fertilizer: The Company operates a processing facility that converts food waste and
other raw materials into all-natural fertilizers, biostimulants, and soil amendment products.
Industrial Wastewater Treatment: Utilizing an innovative wastewater treatment process,
Converted Organics Industrial Wastewater Resources business (IWR) provides a means of treating
aqueous waste streams. This technology, which can use waste heat and renewable energy as fuel,
produces only two byproducts: clean water vapor and landfill-appropriate solid residuals.
Vertical Farming: The Company engages in vertical farming through our TerraSphere business,
which builds efficient systems for growing pesticide-free organic produce in a controlled indoor
environment using its patented technology.
A summary of the Companys subsidiaries is as follows:
Converted Organics of California, LLC (the Gonzales facility), is a California limited
liability company and wholly-owned subsidiary. 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.
Converted Organics of Woodbridge, LLC, (the Woodbridge facility), is a New Jersey limited
liability company and wholly-owned subsidiary, which was formed for the purpose of owning,
constructing and operating the Companys facility in Woodbridge, New Jersey. During 2010, the
Company discontinued operations at the Woodbridge plant. The Company has reported the results of
operations of Converted Organics of Woodbridge, LLC as discontinued operations within the
consolidated financial statements (See Note 5).
Converted Organics of Rhode Island, LLC, is a Rhode Island limited liability company and
majority-owned subsidiary, which 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.
7
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND NATURE OF OPERATIONS (Continued)
NATURE OF OPERATIONS (Continued)
Converted Organics of Mississippi, LLC, a Mississippi limited liability company and a
wholly-owned subsidiary, was formed for the purpose of hiring a sales force and adding a poultry
litter-based fertilizer product to the Companys existing product lines. The Company does not
expect to have operating activity in this subsidiary during 2011.
TerraSphere Inc. (TerraSphere), a Delaware corporation and a wholly-owned subsidiary, was
formed for the purpose of acquiring the membership interests of TerraSphere Systems LLC
(TerraSphere Systems). On November 12, 2010, TerraSphere acquired a 95% membership interest in
TerraSphere Systems (See Note 4). TerraSphere Systems has two subsidiaries; wholly owned
PharmaSphere, LLC (PharmaSphere) and majority owned TerraSphere Systems Canada, Inc.
(TerraSphere Canada). PharmaSpheres business plan is to utilize TerraSphere Systems patented
technology for the production of high value biocompounds sourced from plants and used as active
pharmaceutical ingredients and for the production of transgenic plants (genetically engineered
plants) for the biotechnology market. PharmaSphere has a wholly-owned subsidiary PharmaSphere
Worcester, LLC, which was formed to build a facility in Worcester, Massachusetts utilizing
PharmaSpheres business plan. The building of the facility has not commenced. PharmaSphere has no
revenue to date. TerraSphere Canada, located in Vancouver, British Columbia, operates the research
and manufacturing facility for TerraSphere and is eighty-five percent owned by TerraSphere Systems.
On December 30, 2010, Converted Organics, Inc. purchased a majority ownership interest of the
vertical farming entity, GoLocalProduceRI, LLC located in Rhode Island, marking its entrance into
the vertical farming industry as owners and operators of what is expected to be the first
TerraSphere facility in the United States (See Note 4).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the balances of Converted Organics
Inc. and its wholly-owned subsidiaries, Converted Organics of California, LLC, Converted Organics
of Woodbridge, LLC, Converted Organics of Mississippi, LLC, TerraSphere Inc. and its majority-owned
subsidiaries Converted Organics of Rhode Island, LLC and GoLocalProduceRI, LLC. The minority-owned
interests in its consolidated subsidiaries are included in the Companys consolidated financial
statements as noncontrolling interests. All intercompany transactions and balances have been
eliminated in consolidation.
RECLASSIFICATIONS
As a result of the Woodbridge facility operations being discontinued during the third quarter
of 2010, certain items of the comparative interim period have been reclassified as discontinued
operations. These reclassifications have no affect on previously reported net loss.
NOTE 2 MANAGEMENTS PLAN OF OPERATIONS
As reflected in the consolidated financial statements, the Company incurred a net loss of
approximately $784,000 for the six months ended June 30, 2011, and as of June 30, 2011 has an
accumulated deficit of approximately $101.1 million and a working capital deficiency of
approximately $3.3 million. During 2010, the Company discontinued the operations at its Woodbridge
facility, acquired a license to treat Industrial Waste Water and acquired the TerraSphere business.
In addition, the Company currently has manufacturing capabilities at its Gonzales facility as a
means to generate revenues and cash. Although the Gonzales facility is currently cash flow
positive, the anticipated costs associated with corporate overhead and for the operations of
TerraSphere will cause the Company to have negative cash flow in 2011. In addition, the Company
feels that it will require cash, either through financing or equity transactions, in order to build
out the IWR and TerraSphere projects planned for 2011. The Company believes that if it achieves
planned sales from its Gonzales facility, establishes additional operational Industrial Wastewater
sites, and completes the construction of a TerraSphere facility, then the Company will become cash
flow positive in the future.
Presently, the Companys liquidity is limited to its cash on hand at June 30, 2011. In
addition, on February 28, 2011 the Company received shareholder approval to permit an investor to
exercise certain of its warrants, which could provide the Company with an additional $4.9 million.
However, since receiving shareholder approval the Companys stock price has closed at both above
and below the exercise price of these warrants, and it is not likely that any warrants would be
exercised unless the price of its stock was greater than the exercise price of the warrants. There
is no assurance that the investor will exercise the warrants in the near term, and as such, the
Company may not receive these necessary funds.
8
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 2 MANAGEMENTS PLAN OF OPERATIONS (Continued)
If the Company does not receive additional funds, whether as a result of the exercise of the
warrants issued in its December 2010 financing, or otherwise, the Company will not have sufficient
cash to be able to continue its operations. Even in the event that the Company does receive
additional funds, there is no guarantee that such funds will be sufficient to continue operations.
At this time the Company does not have any commitments for additional financing, and there is no
assurance that capital in any form will be available to the Company on terms and conditions that
are acceptable or at all. On July 1, 2011, the Company initiated certain overhead and salary
reductions and projects net cash out flows to be approximately $350,000 per month, and therefore
based on the current cash on hand the Company believes that it has sufficient cash to operate until
the end of 2011, however, that would not allow the Company to expend cash on IWR, TerraSphere or
Gonzales facility capital projects.
NOTE 3 NEW ACCOUNTING STANDARDS
In May 2011, the FASB issued ASU No. 2011-04 Fair Value Measurement (Topic 820) Amendments
to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs (ASU
No. 2011-04) which will supersede most of the accounting guidance currently found in Topic 820 of
FASBs ASC. The amendments will improve comparability of fair value measurements presented and
disclosed in financial statements prepared in accordance with GAAP and International Financial
Reporting Standards (IFRS). The amendments also clarify the application of existing fair value
measurement requirements. These amendments include (1) the application of the highest and best use
and valuation premise concepts, (2) measuring the fair value of an instrument classified in a
reporting entitys shareholders equity and (3) disclosing quantitative information about the
unobservable inputs used within the Level 3 hierarchy. The guidance is effective for the Companys
interim and annual periods beginning after December 15, 2011 and will be applied prospectively.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) -
Presentation of Comprehensive Income (ASU No. 2011-05) which eliminates the option to present
the components of other comprehensive income as part of the statement of stockholders equity. The
amendments require that all nonowner changes in stockholders equity must be presented in a single
continuous statement of comprehensive income or in two separate but consecutive statements.
Regardless of whether an entity chooses to present comprehensive income in a single continuous
statement or in two separate but consecutive statements the entity is required to present on the
face of the financial statements reclassification adjustments for items that are reclassified from
other comprehensive income to net income in the statement(s) where the components of net income and
the components of other comprehensive income are presented. The guidance is effective for the
Companys interim and annual periods beginning after December 15, 2011 and will be applied
prospectively.
NOTE 4 ACQUISITIONS
TERRASPHERE SYSTEMS LLC
On November 12, 2010, the Company acquired 95% of the membership interests of TerraSphere
Systems LLC. The acquisition will enable the Company to license TerraSpheres patented Growth
System, which is a system of modules and processes for growing plants in a controlled environment.
The system uses and controls precise combinations of light, water, nutrition, gravity, centrifugal
forces, and gasses to produce growing conditions that can be controlled and manipulated to result
in desired plant growth and maximum crop production.
GoLocalProduceRI, LLC
On December 30, 2010, the Company acquired 83.34% of GoLocalProduceRI, LLC, marking its
entrance into the vertical farming industry as owners and operators of what is expected to be the
first TerraSphere facility in the United States.
The
unaudited pro forma consolidated financial information including
continuing and discontinued operations for the three and six month periods
ended June 30, 2010 as though the above acquisitions had been completed at the beginning of the
interim period is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, 2010 |
|
June 30, 2010 |
Revenue |
|
$ |
4,634,790 |
|
|
$ |
7,118,799 |
|
Net loss |
|
$ |
(1,039,478 |
) |
|
$ |
(7,039,486 |
) |
Net loss per share, basic and diluted |
|
$ |
(0.02 |
) |
|
$ |
(0.13 |
) |
Weighted-average shares |
|
|
56,038,773 |
|
|
|
57,077,419 |
|
9
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 5 DISCONTINUED OPERATIONS
In 2010, the Company discontinued operations at its facility in Woodbridge, New Jersey. The
following table summarizes the components of the income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenue from discontinued operations |
|
$ |
|
|
|
$ |
580,425 |
|
|
$ |
|
|
|
$ |
728,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
146,970 |
|
|
$ |
(2,117,106 |
) |
|
$ |
146,471 |
|
|
$ |
(4,026,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized income from discontinued operations for the three and six month periods
ended June 30, 2011 as a result of favorable settlements with certain of its creditors. The
Company does not expect to have any continuing positive cash flows from operations associated with the
Woodbridge facility.
The following table provides the assets and liabilities of the Woodbridge facility, classified
as discontinued operations, in the consolidated balance sheets dated June 30, 2011 and December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Accounts receivable, net |
|
$ |
|
|
|
$ |
14,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
|
|
|
$ |
14,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
646,027 |
|
|
$ |
837,606 |
|
Accrued expenses |
|
|
|
|
|
|
1,571,874 |
|
Other liabilities |
|
|
28,773 |
|
|
|
28,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
674,800 |
|
|
$ |
2,438,253 |
|
|
|
|
|
|
|
|
On January 25, 2011, the Company paid cash of $150,000 and issued 3.2 million shares
of Company common stock with a fair value of $1,344,000 in payment for consulting services accrued
at December 31, 2010 related to the settlement of certain Woodbridge obligations. The Company is
actively working with its creditors to settle the remaining liabilities outstanding at June 30,
2011.
NOTE 6 FAIR VALUE MEASUREMENTS
The Company applies Accounting Standards Codification Topic 820 Fair Value Measurements and
Disclosures (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.
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).
10
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 6 FAIR VALUE MEASUREMENTS (Continued)
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
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 which requires judgment, and considers
factors specific to the asset or liability.
The Companys balances that are reported at fair value in the accompanying consolidated
balance sheets as of June 30, 2011 and December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level of |
|
Balance |
|
|
Hierarchy |
|
June 30, 2011 |
|
December 31, 2010 |
Obligations to issue shares |
|
Level 1 |
|
$ |
287,500 |
|
|
$ |
1,560,715 |
|
Derivative warrants and anti-dilution provision liabilities |
|
Level 3 |
|
|
2,812,630 |
|
|
|
8,675,619 |
|
The following table reflects the change in Level 3 fair value of the Companys derivative
liabilities for the three and six months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
Balance, beginning of period |
|
$ |
(6,953,753 |
) |
|
$ |
(8,675,619 |
) |
Settlements |
|
|
688,176 |
|
|
|
1,280,745 |
|
Issuances |
|
|
(3,398,783 |
) |
|
|
(4,667,269 |
) |
Net gains |
|
|
6,851,730 |
|
|
|
9,249,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
(2,812,630 |
) |
|
$ |
(2,812,630 |
) |
|
|
|
|
|
|
|
The Company has other non-derivative financial instruments, such as cash, accounts
receivable, accounts payable, accrued expenses, notes payable and convertible notes payable, for
which carrying amounts approximate fair value.
NOTE 7 INVENTORIES
The Companys inventories consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December |
|
|
|
2011 |
|
|
31, 2010 |
|
Finished goods |
|
$ |
151,632 |
|
|
$ |
104,690 |
|
Raw materials |
|
|
56,242 |
|
|
|
21,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
207,874 |
|
|
$ |
126,406 |
|
|
|
|
|
|
|
|
11
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 8 DEBT
TERM NOTES
In connection with the Companys acquisition of TerraSphere Systems, the Company assumed a
note payable from a third party in the amount of $350,000, with a fixed interest rate of 15% per
annum. On March 9, 2011, the Company entered into an agreement whereby in consideration of
receiving a lump sum cash payment of $125,000, the third party released and discharged the Company
from all obligations under the note.
NOTE PAYABLES RELATED PARTY
In connection with the Companys acquisition of TerraSphere Systems, the Company assumed
unsecured note payables to William Gildea, Secretary of the Company and Edward Gildea, President of
the Company, each of which have an interest rate of 10% per annum. The principal amount due totaled
$72,351 at June 30, 2011 and December 31, 2010.
CONVERTIBLE NOTES PAYABLE
On December 17, 2010, the Company entered into a Securities Purchase Agreement (Purchase
Agreement) with certain institutional investors (the Buyers) whereby, the Company agreed to sell
to the Buyers certain notes and warrants. Pursuant to the terms of the Purchase Agreement, the
Company agreed to sell to the Buyers convertible notes in the aggregate original principal amount
of $4,990,000 (the Notes), which are convertible into shares of common stock. These Notes are to
be purchased by Buyers in two tranches, the first of which involved the sale of Notes in the
aggregate original principal amount of $3,939,473 (the Initial Notes). The Initial Notes are non
interest bearing and were issued with an original issue discount of approximately 4.8%. The Company
recorded the initial fair values of the conversion feature and the warrants up to the proceeds of
the note ($3,750,000) as a discount on the Note which was amortized ratably over the six-month
term.
On March 7, 2011 the second tranche of the sale of Notes was completed in the aggregate
original principal amount of $1,050,527 (the Additional Notes) and was completed upon the
satisfaction of the conditions to closing set forth in the Purchase Agreement. The Additional Notes
were issued with an original issue discount of approximately 4.8%, and the proceeds from the
Additional Notes were $1,000,000, with proceeds net of costs totaling $920,000. The Additional
Notes are not interest bearing, unless the Company is in default on the Notes, in which case the
Additional Notes carry an interest rate of 18% per annum. At June 30, 2011, the carrying value of
the December 17, 2010 convertible debt totaled $-0- and the March 7, 2011 convertible debt totaled
$68.
The Notes are initially convertible into shares of Common Stock at a conversion price of $1.00
per share, provided that if the Company makes certain dilutive issuances (with limited exceptions),
the conversion price of the Notes will be lowered to the per share price for the dilutive
issuances. The Company also has the right, at its option, to permit the holder of the Notes to
convert at a lower price specified by the Company for a period specified by the Company. The
Company is required to repay the Notes in six equal installments commencing February 1, 2011 (with
respect to the Initial Notes) and six equal installments commencing April 8, 2011 (with respect to
the Additional Notes), either in cash or in shares of is common stock. If the Company chooses to
utilize shares of its common stock for the payment, the Company must make an irrevocable decision
to use shares 22 trading days prior to the installment payment date, and the value of its shares
will be equal to the lower of (i) the conversion price then in effect or (ii) 85% of the
average of the three lowest closing sale prices of its common stock during the 20 trading day
period prior to payment of the installment amount. If the Company chooses to make an installment
payment in shares of its common stock, it must make a pre-installment payment of shares to the Note
holder 20 trading days prior to the applicable installment date based on the value of its shares
during the 20 trading days preceding the delivery of the notice to elect to pay in its shares.
On the installment date, to the extent the Company owes the Note holder additional shares in excess
of the pre-installment shares to satisfy the installment payment, it will issue the Note holder
additional shares, and to the extent the Company has issued excess shares, such shares will be
applied to future payments. Through June 30, 2011, the Company has issued 25,445,599 shares of its
common stock as loan repayments on the notes.
If an event of default occurs under the Notes, the Company must redeem the Notes in cash at
the greater of 135% of the unconverted principal amount or 135% of the greatest equity value of the
shares of common stock underlying the Notes from the date of the default until the redemption is
completed. The conversion price of the Notes is subject to adjustment in the case of stock splits,
stock dividends, combinations of shares and similar recapitalization transactions. The
convertibility of the Notes may be limited if, upon exercise, the holder or any of its affiliates
would beneficially own more than 4.9% of our Common Stock.
12
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 8 DEBT (Continued)
CONVERTIBLE NOTES PAYABLE (Continued)
In connection with the sale of convertible notes and the issuance of the associated warrants
to purchase common stock on March 7, 2011, the Company established a debt discount equal to the
full amount of the notes, which reflects the original issue discount, the relative fair value of
the warrants to the debt and reflects that the debt is classified as a derivative liability as the
ability to repay the note in cash is deemed not to be within the Companys control and the number
of shares required to settle the obligation is not determinable. The total debt discount recognized
was $1,050,527 and the interest expense recognized in addition to that amount was $268,486. The
discount is being amortized over the term of the convertible notes. In addition, certain financing
costs associated with the notes have been recorded as deferred financing costs and are being
amortized over the term of the notes.
On April 1, 2011, the Company entered into a Securities Purchase Agreement (Agreement) with an
institutional investor (the Buyer) whereby, the Company agreed to sell to the Buyer certain notes
and warrants. Pursuant to the terms of the Agreement, the Company agreed to sell to the Buyer
convertible notes in the aggregate original principal amount of $3,850,000 (the April Notes),
which are convertible into shares of common stock. The April Notes are non interest bearing and
were issued with an original issue discount of approximately 9%. The Company recorded the initial
fair values of the conversion feature and the warrants up to the gross proceeds of the note
($3,500,000) as a discount on the April Note which will be amortized ratably over the six-month
term. Net proceeds of the note were $3,325,000. At June 30, 2011, the carrying value of the April
note was $1,194,612 and the associated unamortized discount was $2,407,472.
The April Notes are initially convertible into shares of Common Stock at a conversion price of
$.40 per share, provided that if the Company makes certain dilutive issuances (with limited
exceptions), the conversion price of the April Notes will be lowered to the per share price for the
dilutive issuances. The Company also has the right, at its option, to permit the holder of the
April Notes to convert at a lower price specified by the Company for a period specified by the
Company. The Company is required to repay the April Notes in five equal installments commencing
August 1, 2011. If the Company chooses to utilize shares of its common stock for the payment, the
Company must make an irrevocable decision to use shares 23 trading days prior to the installment
payment date, and the value of its shares will be equal to the lower of (i) the conversion price
then in effect and (ii) 85% of the average of the three lowest closing sale prices of its common
stock during the 20 trading day period prior to payment of the installment amount. If the Company
chooses to make an installment payment in shares of its common stock, it must make a
pre-installment payment of shares to the April Note holder 20 trading days prior to the applicable
installment date based on the value of its shares during the 20 trading days preceding the delivery
of the notice to elect to pay in its shares. On June 24, 2011, the Company filed a registration
statement in order to issue shares of its common stock to make the required loan repayments. The
registration statement has not yet been declared effective. On August 8, 2011, the Company amended
the payment due dates on its April 1, 2011 convertible note. The lender has agreed to extend the
first payment (originally due August 1, 2011) to the earlier of the date that the underlying
registration statement becomes effective or until six months after the issuance of the note. In
consideration of this amendment the Company has agreed to reprice certain of the warrants held by
the lender to an exercise price of $.05.
On the installment date, to the extent the Company owes the Note holder additional
shares in excess of the pre-installment shares to satisfy the installment payment, it will issue
the Note holder additional shares, and to the extent the Company has issued excess shares, such
shares will be applied to future payments. Through June 30, 2011, the Company has not issued any
shares of its common stock in satisfaction of loan repayments on the April notes.
If an event of default occurs under the April Notes, the Company must redeem the Notes in cash
at the greater of 135% of the unconverted principal amount or 135% of the greatest equity value of
the shares of common stock underlying the Notes from the date of the default until the redemption
is completed. The conversion price of the April Notes is subject to adjustment in the case of stock
splits, stock dividends, combinations of shares and similar recapitalization transactions. The
convertibility of the Notes may be limited if, upon exercise, the holder or any of its affiliates
would beneficially own more than 4.9% of our Common Stock.
In connection with the sale of convertible notes and the issuance of the associated warrants
to purchase common stock on April 1, 2011, the Company established a debt discount equal to the
full amount of the notes, which reflects the original issue discount, the relative fair value of
the warrants to the debt and reflects that the debt is classified as a derivative liability as the
ability to repay the note in cash is deemed not to be within the Companys control and the number
of shares required to settle the obligation is not determinable. The total debt discount recognized
was $3,398,783. The
discount is being amortized over the term of the convertible notes. In addition, certain financing
costs associated with the notes have been recorded as deferred financing costs and are being
amortized over the term of the notes.
13
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 9 DERIVATIVE INSTRUMENTS
On December 17, 2010, pursuant to the terms of the Purchase Agreement, the Company issued to
the Buyers warrants to acquire shares of common stock, in the form of three warrants: (i) Series A
Warrants, (ii) Series B Warrants, and (iii) Series C Warrants (collectively, the December
Warrants). The Warrants were issued in two tranches on the dates the Initial Notes and Additional
Notes were issued, on a pro rata basis based on the principal amount being issued in the applicable
closing based on the aggregate principal amount that could be issued at both closings.
The Series B Warrants became exercisable on February 28, 2011, the date upon which shareholder
approval was obtained in connection with the financing, and expire on November 28, 2011. The Series
B Warrants provide that the holders are initially entitled to purchase an aggregate of 4,990,000
shares (warrants to purchase 3,939,473 shares of Common Stock were issued at the Initial Closing
and a warrant to purchase 1,050,527 shares of Common Stock were issued at the Additional Closing
which occurred on March 7, 2011) at an initial exercise price of $1.00 per share. If the Company
makes certain dilutive issuances (with limited exceptions), the exercise price of the Series B
Warrants will be lowered to the per share price for the dilutive issuances. In addition, the
exercise price of the Series B Warrants will adjust to the average of the Installment Conversion
Prices used to repay the Initial Notes. The floor price for the exercise price of the Series B
Warrants is $0.345. The number of shares underlying the Series B Warrants will adjust whenever the
exercise price adjusts, such that at all times the aggregate exercise price of the Series B
Warrants will be $4,990,000 ($3,939,473 for the Series B Warrants issued in the Initial Closing and
$1,050,527 for the Series B Warrants issued at the Additional Closing). As of June 30, 2011, the
exercise price of the Series B Warrants is $0.345 per share and
there are 14,463,768 shares
underlying the Series B Warrants.
The Series A and Series C Warrants became exercisable on February 28, 2011, the date upon
which shareholder approval was obtained in connection with the financing, and have a five year
term. The Series A Warrants provide that the holders are initially entitled to purchase an
aggregate of 2,495,000 shares (warrants to purchase 1,969,737 shares of common stock were issued at
the Initial Closing and warrants to purchase 525,263 shares of common stock were issued at the
Additional Closing which occurred on March 7, 2011) at an initial exercise price of $1.00 per
share. The Series C Warrants provide that the holders are initially entitled to purchase an
aggregate of 2,495,000 shares (warrants to purchase 1,969,737 shares of common stock were issued at
the Initial Closing and warrants to purchase 525,263 shares of common stock were issued at the
Additional Closing) at an exercise price of $1.00 per share; provided that the Series C Warrants
may only be exercised by each holder in the same proportion as such holder has already exercised
its Series B Warrants.
If the Company makes certain dilutive issuances (with limited exceptions), the exercise price
of the Series A and Series C Warrants will be lowered to the per share price for the dilutive
issuances. In addition, the exercise price of the Series A and Series C Warrants will adjust to the
average of the Installment Conversion Prices used to repay the Initial Notes. As of June 30, 2011,
the exercise price of the Series A Warrants and Series C Warrants is $0.122 per share.
On April 17, 2010, pursuant to the terms of the Purchase Agreement, the Company issued to the Buyer
warrants to acquire shares of common stock, in the form of three warrants: (i) Series A Warrants,
(ii) Series B Warrants, and (iii) Series C Warrants (collectively, the April Warrants).
The Series B Warrants became exercisable on June 13, 2011, the date upon which shareholder
approval was obtained in connection with the financing, and expire on March 13, 2012. The Series B
Warrants provide that the holders are initially entitled to purchase an aggregate of 9,143,750
shares at an initial exercise price of $.4125 per share. If the Company makes certain dilutive
issuances (with limited exceptions), the exercise price of the Series B Warrants will be lowered to
the per share price for the dilutive issuances. In addition, the exercise price of the Series B
Warrants will adjust to the average of the Installment Conversion Prices used to repay the Notes.
The floor price for the exercise price of the Series B Warrants is $0.34. The number of shares
underlying the Series B Warrants will adjust whenever the exercise price adjusts, such that at all
times the aggregate exercise price of the Series B Warrants will
be $3,771,797. As of the June 30,
2011, the exercise price of the Series B Warrants is $0.34 per share and there are 11,093,521 shares
underlying the Series B Warrants.
To the extent the Company enters into a fundamental transaction (as
defined in the Series B Warrants and which include, without
limitation, the Company entering into a merger or consolidation with
another entity, selling all or substantially all of its assets, or a
person acquiring 50% of the Companys common stock), the Company
has agreed to purchase the Series B Warrants from the holders at
their Black-Scholes value.
If the Companys common stock trades at a price at least 200%
above the Series B Warrants exercise price for a period of 10 trading
days at any time after the company obtains shareholder approval (as
discussed above), the company may force the exercise of the Series B
Warrants if the Company meets certain conditions.
The Series A and Series C Warrants are exercisable six months and one day after issuance and have a five year term commencing on June
13, 2011. The Series A Warrants provide that the holders are
initially entitled to purchase an aggregate of 4,812,500 shares. The
Series C Warrants provide that the holders are initially entitled to
purchase an aggregate of 4,343,285 shares. If on the expiration date
of the Series B Warrants, a holder of such warrant has not exercised
such warrant for at least 50% of the shares underlying such warrant,
the Company has the right to redeem from such holder its Series C
Warrant for $1,000 under certain circumstances. On August 9, 2011, as
part of the restructuring of the Note described above, the Company
agreed to lower the exercise price of the Series A and Series C
Warrants to $0.05 per share.
If the Company makes certain dilutive issuances (with limited exceptions), the exercise price
of the Series A and Series C Warrants will be lowered to the per share price for the dilutive
issuances. In addition, the exercise price of the Series A and Series C Warrants will adjust to the
average of the Installment Conversion Prices used to repay the Initial Notes. As of the June 30,
2011, the exercise price of the Series A Warrants and Series C Warrants is $.40 per share.
To the extent the Company enters
into a fundamental transaction (as defined in the Series A and Series C Warrants and which include, without limitation, the Company
entering into a merger or consolidation with another entity, selling all or substantially all of its assets, or a person
acquiring 50% of the Companys common stock), the Company has agreed to purchase the Series A and Series C Warrants from
the holder at their Black-Scholes value.
The exercise price of all
the Warrants is subject to adjustment in the case of stock splits, stock dividends, combination of shares and similar
recapitalization transactions. The exercisability of the Warrants may be limited if , upon exercise, the holder or any
of its affiliates would beneficially own more than 4.9% of the Companys common stock. The Note may not be converted
if the total number of shares that would be issued would exceed 19.99% of the Companys common stock on the date the
Purchase Agreement was executed prior to the Company receiving shareholder approval (as discussed above).
14
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 9 DERIVATIVE INSTRUMENTS (Continued)
As of June 30, 2011, the Company has recognized the following warrants as derivative
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class/ |
|
|
|
|
|
December 31, |
|
|
|
|
|
Exercised |
|
Outstanding at |
|
Exercisable at |
|
Fair Value at |
Issue Date |
|
Series |
|
Price |
|
2010 |
|
Issued |
|
or Canceled |
|
June 30, 2011 |
|
June 30, 2011 |
|
June 30, 2011 |
May 7, 2009 |
|
Class C |
|
$ |
1.00 |
|
|
|
885,000 |
|
|
|
|
|
|
|
|
|
|
|
885,000 |
|
|
|
885,000 |
|
|
$ |
13,331 |
|
May 7, 2009 |
|
Class D |
|
$ |
1.02 |
|
|
|
415,000 |
|
|
|
|
|
|
|
|
|
|
|
415,000 |
|
|
|
415,000 |
|
|
$ |
6,204 |
|
September 8, 2009 |
|
Class G |
|
$ |
1.25 |
|
|
|
2,500,000 |
|
|
|
|
|
|
|
|
|
|
|
2,500,000 |
|
|
|
2,500,000 |
|
|
$ |
50,901 |
|
April 22, 2010 |
|
Class I |
|
$ |
1.06 |
|
|
|
1,163,362 |
|
|
|
|
|
|
|
|
|
|
|
1,163,362 |
|
|
|
|
|
|
$ |
27,974 |
|
December 17, 2010 * |
|
Series A |
|
$ |
.12 |
|
|
|
1,969,737 |
|
|
|
525,263 |
|
|
|
|
|
|
|
2,495,000 |
|
|
|
2,495,000 |
|
|
$ |
108,608 |
|
December 17, 2010 * |
|
Series B |
|
$ |
.34 |
|
|
|
3,939,474 |
|
|
|
10,524,294 |
|
|
|
|
|
|
|
14,463,768 |
|
|
|
14,463,768 |
|
|
$ |
2,934 |
|
December 17, 2010 * |
|
Series C |
|
$ |
.12 |
|
|
|
1,969,737 |
|
|
|
525,263 |
|
|
|
|
|
|
|
2,495,000 |
|
|
|
2,495,000 |
|
|
$ |
108,608 |
|
April 1, 2011 |
|
Series A |
|
$ |
.40 |
|
|
|
|
|
|
|
4,812,500 |
|
|
|
|
|
|
|
4,812,500 |
|
|
|
4,812,500 |
|
|
$ |
255,337 |
|
April 1, 2011 |
|
Series B |
|
$ |
.40 |
|
|
|
|
|
|
|
11,093,521 |
|
|
|
|
|
|
|
11,093,521 |
|
|
|
11,093,521 |
|
|
$ |
9,275 |
|
April 1, 2011 |
|
Series C |
|
$ |
.40 |
|
|
|
|
|
|
|
4,343,285 |
|
|
|
|
|
|
|
4,343,285 |
|
|
|
4,343,285 |
|
|
$ |
230,442 |
|
|
|
|
* |
|
Includes warrants issued on March 7, 2011 |
The Company also recognized certain conversion features issued in conjunction with debt as
derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
Exercised |
|
Outstanding at |
|
Exercisable at |
|
Fair Value at |
Issue Date |
|
Price |
|
2010 |
|
Issued |
|
or Canceled |
|
June 30, 2011 |
|
June 30, 2011 |
|
June 30, 2011 |
December 17, 2010 |
|
$ |
1.00 |
|
|
|
14,283,980 |
|
|
|
|
|
|
|
14,283,980 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
March 7, 2011 |
|
$ |
1.00 |
|
|
|
|
|
|
|
3,451,589 |
|
|
|
|
|
|
|
3,451,589 |
|
|
|
3,451,589 |
|
|
$ |
87,668 |
|
April 1, 2011 |
|
$ |
.40 |
|
|
|
|
|
|
|
60,661,765 |
|
|
|
|
|
|
|
60,661,765 |
|
|
|
60,661765 |
|
|
$ |
1,703,348 |
|
The warrants and conversion features above were revalued at June 30, 2011 using a binomial
lattice pricing model using certain assumptions related to the probability of exercise and the
following:
|
|
|
|
|
Risk free interest rate |
|
|
0.10% - 2.55 |
% |
Dividend yield |
|
|
-0- |
|
Volatility |
|
|
113.20% -136.20 |
% |
Expected term |
|
3 months to 5 years |
In addition to the above derivative transactions, on November 12, 2010, the Company completed
the acquisition of TerraSphere Systems LLC, where it determined that as a result of an
anti-dilution provision included in the purchase agreement, certain additional shares may have to
be issued. The Company estimated that approximately 3,200,000 shares could be issued and classified
the anti-dilution provision as a derivative liability. As of June 30, 2011, the Company revalued
the derivative liability to $208,000 based on the closing share price of the stock on that date.
The derivative liability reflected on the consolidated balance sheet at June 30, 2011 totaled
$2,812,630 and the derivative gain for the three and six month periods ended June 30, 2011 was
$6,851,730 and $9,249,513, respectively.
NOTE 10 STOCKHOLDERS EQUITY
STOCK ISSUANCES
On January 25, 2011 the Company issued 3,200,000 shares of its common stock to a consultant
satisfying a $1,344,000 accrual for services rendered in connection with the settlement of certain
Woodbridge obligations.
On February 23, 2011, the Company issued 2,165,000 restricted shares at $0.37 (the closing
price as of the date of issuance) to certain employees under the Amended and Restated 2006 Stock
Option Plan. The statement of operations and comprehensive loss for the six month period ended June
30, 2011 includes a charge of $801,050 for this compensation.
15
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 10 STOCKHOLDERS EQUITY (Continued)
STOCK ISSUANCES (Continued)
During April 2011, the Company issued 2,900,699 shares of its common stock as compensation
under its stock option plan. These shares were issued to employees and directors and are restricted
for a period of two years from issuance. The Company recorded compensation expense of $756,775 in
its statement of operations and comprehensive loss for the six month period ended June 30, 2011,
based upon the closing price of the shares on the commitment date.
On June 20, 2011, the Company issued 7,769,798 shares of its common stock in exchange for the
return of 4,219 shares of its preferred stock.
On June 10, 2011, the Company issued 508,333 shares of its common stock to vendors for
services. The shares are restricted for a period of six months. The Company recorded an
administrative expense of $76,250 based upon the closing price of the shares on the commitment
date.
During the six month period ended June 30, 2011 the Company issued 25,445,559 shares of its
common stock as loan repayments which reduced the balance on the convertible notes by $6,451,972.
WARRANTS
In addition to the warrants classified as derivatives, the Company has also recognized certain
warrants as equity instruments.
The following table sets forth the outstanding warrants classified as equity instruments as of
June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
Exercisable at |
Warrants |
|
Price |
|
December 31, 2010 |
|
Issued |
|
Exercised |
|
Canceled |
|
June 30, 2011 |
|
June 30, 2011 |
Class B |
|
$ |
11.00 |
|
|
|
2,648,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,648,029 |
|
|
|
2,648,029 |
|
Class E |
|
$ |
1.63 |
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000 |
|
|
|
1,500,000 |
|
Class F |
|
$ |
1.25 |
|
|
|
585,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585,000 |
|
|
|
585,000 |
|
Class H |
|
$ |
1.30 |
|
|
|
17,250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,250,000 |
|
|
|
17,250,000 |
|
Class J |
|
$ |
0.54 |
|
|
|
1,623,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,623,333 |
|
|
|
1,623,333 |
|
Class K |
|
$ |
0.54 |
|
|
|
1,157,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,157,407 |
|
|
|
1,157,407 |
|
In the event all outstanding warrants are exercised, including those classified as derivatives
and those classified as equity, the Company has adequate shares authorized to meet these
obligations.
STOCK OPTIONS
During the six month period ended June 30, 2011, the Company issued 3,175,699 stock options to
employees and directors under its stock option plan. The Company calculated a compensation expense
associated with the issuance of these options of $699,444 using the Black-Scholes pricing model.
The Company assumed a five year term, risk free interest rate of 1.9%, average volatility of 113.6%
and exercise prices of $0.15 to $0.27.
Stock option activity for the six month period ended June 30, 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average
Exercise |
|
Weighted Average |
|
|
Stock |
|
Price per |
|
Remaining |
|
|
Options |
|
Share |
|
Life (Years) |
Outstanding and exercisable at December 31, 2010 |
|
|
3,643,795 |
|
|
$ |
1.64 |
|
|
|
8.8 |
|
Granted |
|
|
2,829,029 |
|
|
|
.27 |
|
|
|
|
|
Granted |
|
|
218,679 |
|
|
|
.22 |
|
|
|
|
|
Granted |
|
|
129,000 |
|
|
|
.15 |
|
|
|
|
|
Forfeited |
|
|
(24,000 |
) |
|
|
.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at June 30, 2011 |
|
|
6,795,494 |
|
|
$ |
1.00 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 11 EARNINGS (LOSS) PER SHARE
Basic net income per common share is computed by dividing net income by the weighted average
number of common shares outstanding. Diluted net income per common share is computed by dividing
net income by the weighted average number of common shares and dilutive potential common share
equivalents then outstanding. Potential common share equivalents consist of (i) shares issuable
upon the exercise of warrants and options (using the treasury stock method), (ii) unvested
restricted stock awards (using the treasury stock method) and (iii) shares issuable upon
conversion of convertible notes using the if-converted method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
Ended |
|
Ended |
|
|
June 30, 2011 |
|
June 30, 2010 |
|
June 30, 2011 |
|
June 30, 2010 |
|
|
|
Earnings (loss) for basic earnings from continuing operations per common share : |
Net income (loss) |
|
$ |
869,392 |
|
|
$ |
(1,208,314 |
) |
|
$ |
(930,581 |
) |
|
$ |
(5,678,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for diluted earnings from continuing operations per common share: |
Net income (loss) |
|
$ |
869,392 |
|
|
$ |
(1,208,314 |
) |
|
$ |
(930,581 |
) |
|
$ |
(5,678,717 |
) |
Adjustments to net income
(loss) assuming convertible
notes payable are converted to
common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of gain on change in
derivative associated with
convertible notes payable |
|
|
(1,109,188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Write off of unamortized costs
of issuing convertible note
payable |
|
|
(2,615,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of interest expense in
connection with convertible
notes |
|
|
265,772 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjustments estimated effect
on provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common
stockholders for diluted net
loss per share |
|
$ |
(2,589,973 |
) |
|
$ |
(1,208,314 |
) |
|
$ |
(930,581 |
) |
|
$ |
(5,678,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) for basic and diluted earnings from discontinued operations per common share : |
Net income (loss) |
|
$ |
146,970 |
|
|
$ |
(2,117,106 |
) |
|
$ |
146,471 |
|
|
$ |
(4,026,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
111,077,486 |
|
|
|
39,930,049 |
|
|
|
101,991,517 |
|
|
|
38,902,816 |
|
Effect of dilutive potential
common share equivalents |
|
|
57,714,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, diluted |
|
|
168,791,549 |
|
|
|
39,930,049 |
|
|
|
101,991,517 |
|
|
|
38,902,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common share : |
Basic |
|
$ |
0.01 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
Diluted |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.15 |
) |
Earnings (loss) from discontinued operations per common share : |
Basic |
|
$ |
|
|
|
$ |
(0.05 |
) |
|
$ |
|
|
|
$ |
(0.10 |
) |
Diluted |
|
$ |
|
|
|
$ |
(0.05 |
) |
|
$ |
|
|
|
$ |
(0.10 |
) |
17
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 11 EARNINGS (LOSS) PER SHARE (Continued)
The following common shares issuable upon exercise of potential common share equivalents were
excluded from the calculation of diluted net income per common share because their effect was
antidilutive for the period presented:
|
|
|
|
|
|
|
Three months ended |
|
|
June 30, 2011 |
Options and warrants |
|
|
73,565,337 |
|
NOTE 12 SEGMENT REPORTING
The Company has three lines of business, which are (1) organic fertilizer, (2) vertical
farming and (3) industrial wastewater treatment and based on the nature of products and services
offered, the Company has determined each line of business is a reportable segment at June 30, 2011.
The Company evaluates performance based on several factors, of which the primary financial
measure is business segment operating income. There were no intersegment sales for the three and
six months ended June 30, 2011. The discreet financial information is presented below as of and for
the three and six month periods ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
Industrial |
|
Corporate and |
|
|
|
|
Organic Fertilizer |
|
Vertical Farming |
|
Wastewater |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
1,274,092 |
|
|
$ |
50,000 |
|
|
$ |
105,618 |
|
|
$ |
|
|
|
$ |
1,429,710 |
|
Operating income (loss) (1) |
|
|
11,447 |
|
|
|
(773,314 |
) |
|
|
(48,241 |
) |
|
|
(2,737,305 |
) |
|
|
(3,547,413 |
) |
Depreciation and
amortization(2) |
|
|
106,195 |
|
|
|
161,635 |
|
|
|
33,333 |
|
|
|
188,822 |
|
|
|
489,985 |
|
Interest expense(3) |
|
|
|
|
|
|
5,432 |
|
|
|
|
|
|
|
3,560,352 |
|
|
|
3,565,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
11,447 |
|
|
|
(763,515 |
) |
|
|
(48,241 |
) |
|
|
1,816,671 |
|
|
|
1,016,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
Industrial |
|
Corporate and |
|
|
|
|
Organic Fertilizer |
|
Vertical Farming |
|
Wastewater |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
1,918,092 |
|
|
$ |
50,000 |
|
|
$ |
200,794 |
|
|
$ |
|
|
|
$ |
2,168,886 |
|
Operating loss (1) |
|
|
(70,554 |
) |
|
|
(1,372,755 |
) |
|
|
(51,064 |
) |
|
|
(4,372,643 |
) |
|
|
(5,867,016 |
) |
Depreciation and
amortization(2) |
|
|
211,284 |
|
|
|
322,932 |
|
|
|
38,887 |
|
|
|
337,931 |
|
|
|
911,034 |
|
Interest expense(3) |
|
|
|
|
|
|
12,074 |
|
|
|
|
|
|
|
5,828,172 |
|
|
|
5,840,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(70,554 |
) |
|
|
(1,144,595 |
) |
|
|
(51,064 |
) |
|
|
482,103 |
|
|
|
(784,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (4) |
|
|
3,869,704 |
|
|
|
12,082,048 |
|
|
|
2,062,156 |
|
|
|
2,036,985 |
|
|
|
20,050,893 |
|
Goodwill |
|
|
|
|
|
|
1,668,369 |
|
|
|
|
|
|
|
|
|
|
|
1,668,369 |
|
Property and
equipment additions |
|
|
153,250 |
|
|
|
2,255 |
|
|
|
1,600,000 |
|
|
|
|
|
|
|
1,755,505 |
|
18
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 12 SEGMENT REPORTING (Continued)
|
(1) |
|
Operating income (loss) of the principal businesses exclude corporate compensation, marketing expense,
professional fees and other unallocated expenses. |
|
|
(2) |
|
Depreciation and amortization expense associated with property and equipment, intangibles and deferred
financing fees. Corporate amortization expense relates to deferred financing fees. |
|
|
(3) |
|
Corporate interest expense is primarily related to amortization of discounts on convertible notes payable. |
|
|
(4) |
|
Total business assets are the owned or allocated assets used by each business. Corporate assets consist
of cash, prepaid expenses, certain other assets and deferred financing costs. |
|
As of June 30, 2010, the Company was a single reportable segment. |
NOTE 13 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 conference, and began
discussing discovery issues. Plaintiff filed a Motion for Class Certification on June 22, 2010,
which was denied on November 22, 2010. On March 3, 2011, the court denied the Companys motion for
partial summary judgment. On March 25, 2011, some individual investors filed a new complaint
against the Company asserting similar claims to those in the Leeseberg litigation. The Court
consolidated this case with the existing lawsuit and, on May 12, 2011, Plaintiffs filed an Amended
Complaint. On June 6, 2011, the Company filed its answer to consolidated complaint and counter
claims against Plaintiffs. The Company plans to vigorously defend these matters and is unable to
estimate any losses that may be incurred as a result of this litigation and new complaint and upon
their eventual disposition. Accordingly, no loss has been recorded related to these matters.
Related to the above matter, in December 2009, the Company filed a complaint in the
Superior Court of Massachusetts for the County of Suffolk, captioned Converted Organics Inc. v.
Holland & Knight LLP. 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 the Company 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. Holland and Knight has threatened to bring counterclaims against Converted Organics
for legal fees allegedly owed, which we would contest vigorously. On May 12, 2010, the Superior
Court stayed the proceedings, pending resolution of the Leeseberg litigation. At this early stage
in the case, the Company is unable to predict the likelihood of an unfavorable outcome, or estimate
any loss/gain.
19
CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 13 LEGAL PROCEEDINGS (Continued)
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. v. Converted
Organics of Woodbridge, et al. The lawsuit alleged private and public nuisances, negligence,
continuing trespasses and consumer common-law fraud in connection with the odors emanating from the
Woodbridge facility and its alleged, intentional failure to disclose to adjacent property owners
the possibility of the facility causing pollution and was later amended to allege adverse
possession, acquiescence and easement. The lawsuit sought 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. On
April 12, 2010, the Middlesex County Superior Court of New Jersey issued an administrative order
settlement dismissing without prejudice the matter of Lefcourt Associates, Ltd. v. Converted
Organics of Woodbridge, et al. On June 8, 2010, Lefcourt Associates, Ltd re-filed their lawsuit but
before a different court, the Chancery Division in Bergen County. The Company filed a motion to
transfer the action back to the original court in Middlesex County, which was granted and sought to
have the lawsuit dismissed, which was granted in part on August 27, 2010. The Court limited the
plaintiffs claims to the events in part that occurred after the dismissal of the prior action. The
case was recently transferred to the Law Division and a trial date as to damages was scheduled for
June 6, 2011, but has since been postponed until September 12, 2011, and an evidentiary Learning
will be held on or prior to this date. Additionally, Plaintiffs appealed the order dismissing
their first lawsuit with prejudice, and the appellate court reversed the dismissal with prejudice.
Due to the appellate decision, plaintiffs filed a motion to reconsider the decision made in the
action, which was granted in part on July 28, 2011. We plan to vigorously defend this matter and
are unable to estimate any losses that may be incurred as a result of this litigation and upon its
eventual disposition. Accordingly, no loss has been recorded related to this matter.
NOTE 14 SUBSEQUENT EVENTS
From July 1, 2011 to August 12, 2011, the Company issued 10,727,414 shares of its common
stock in order to reduce the balance due on the convertible note agreement entered into on December
17, 2010.
On July 7, 2011, the Companys securities began to be quoted on the OTC Bulletin
Board upon its delisting from the Nasdaq Stock Market.
On July 14, 2011, two of the Companys directors resigned. The Company extended the
exercise period of stock options previously granted to these directors. The Company estimates that
the compensation expense associated with the repricing of these stock options as of July 14, 2011
will not have a significant financial impact on the Companys financial statements.
On
August 10, 2011, the Company amended the payment due dates on its April 1, 2011
convertible note. The lender has agreed to extend the first payment (originally due August 1, 2011)
to the earlier of the date that the underlying registration statement becomes effective or until
six months after the issuance of the note. In consideration of this amendment the Company has
agreed to reprice certain of the warrants held by the lender to an exercise price of $.05.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated interim financial
statements and related notes to the consolidated interim 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 forward-looking
statements are based largely on our current expectations and are subject to a number of
uncertainties and risks including the Risk Factors identified in our Annual Report on Form 10-K for
the year ended December 31, 2010. Actual results could differ materially from these forward-looking
statements. Converted Organics Inc. is sometimes referred to herein as we, us, our and the
Company.
Introduction
Converted Organics Inc. (the Company or COIN) has three lines of business, (1) organic
fertilizer, (2) vertical farming and (3) industrial wastewater treatment. Based on the nature of
products and services offered, the Company has determined that all three lines of business are
reportable segments at June 30, 2011.
The Company evaluates performance based on several factors, of which the primary financial
measure is business segment operating income. There were no intersegment sales for the three and
six months ended June 30, 2011. The discreet financial information is presented below as of and for
the three and six month periods ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
Industrial |
|
Corporate and |
|
|
|
|
Organic Fertilizer |
|
Vertical Farming |
|
Wastewater |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
1,274,092 |
|
|
$ |
50,000 |
|
|
$ |
105,618 |
|
|
$ |
|
|
|
$ |
1,429,710 |
|
Operating income (loss) (1) |
|
|
11,447 |
|
|
|
(773,314 |
) |
|
|
(48,241 |
) |
|
|
(2,737,305 |
) |
|
|
(3,547,413 |
) |
Depreciation and
amortization(2) |
|
|
106,195 |
|
|
|
161,635 |
|
|
|
33,333 |
|
|
|
188,822 |
|
|
|
489,985 |
|
Interest expense(3) |
|
|
|
|
|
|
5,432 |
|
|
|
|
|
|
|
3,560,352 |
|
|
|
3,565,784 |
|
Net income (loss) |
|
|
11,447 |
|
|
|
(763,515 |
) |
|
|
(48,241 |
) |
|
|
1,816,671 |
|
|
|
1,016,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
Industrial |
|
Corporate and |
|
|
|
|
Organic Fertilizer |
|
Vertical Farming |
|
Wastewater |
|
Eliminations |
|
Consolidated |
Revenues |
|
$ |
1,918,092 |
|
|
$ |
50,000 |
|
|
$ |
200,794 |
|
|
$ |
|
|
|
$ |
2,168,886 |
|
Operating loss (1) |
|
|
(70,554 |
) |
|
|
(1,372,755 |
) |
|
|
(51,064 |
) |
|
|
(4,372,643 |
) |
|
|
(5,867,016 |
) |
Depreciation and
amortization(2) |
|
|
211,284 |
|
|
|
322,932 |
|
|
|
38,887 |
|
|
|
337,931 |
|
|
|
911,034 |
|
Interest expense(3) |
|
|
|
|
|
|
12,074 |
|
|
|
|
|
|
|
5,828,172 |
|
|
|
5,840,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(70,554 |
) |
|
|
(1,144,595 |
) |
|
|
(51,064 |
) |
|
|
482,103 |
|
|
|
(784,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets (4) |
|
|
3,869,704 |
|
|
|
12,082,048 |
|
|
|
2,062,156 |
|
|
|
2,036,985 |
|
|
|
20,050,893 |
|
Goodwill |
|
|
|
|
|
|
1,668,369 |
|
|
|
|
|
|
|
|
|
|
|
1,668,369 |
|
Property and
equipment additions |
|
|
153,250 |
|
|
|
2,255 |
|
|
|
1,600,000 |
|
|
|
|
|
|
|
1,755,505 |
|
|
|
|
(1) |
|
Operating income (loss) of the principal businesses exclude corporate compensation, marketing expense,
professional fees and other unallocated expenses. |
|
(2) |
|
Depreciation and amortization expense associated with property and equipment, intangibles and deferred
financing fees. Corporate amortization expense relates to deferred financing fees. |
|
(3) |
|
Corporate interest expense is primarily related to amortization of discounts on convertible notes payable. |
|
(4) |
|
Total business assets are the owned or allocated assets used by each business. Corporate assets consist
of cash, prepaid expenses, certain other assets and deferred financing costs. |
21
|
|
|
|
|
As of June 30, 2010, the Company was a single reportable segment. |
Revenues are attributable to geographic areas based on the locations of the customers,
which are primarily within the continental United States. The fertilizer segment derived approximately $684,000 or 54% of its revenues from three customers (American Farms 18%;
New England pottery 16%; and Crop Production Services 20%), the vertical farming segment derived 100% of its revenue from one customer, Eco-Leaf Farms, and the industrial wastewater
segment derived 100% of its revenue from one customer,
South Canyon Waste Systems, Inc. for the three month period ended June 30, 2011. For the six month period ended June 30, 2011, the fertilizer segment derived approximately $1,131,000 or 60% of its revenues from four
customers (Verdi Tech 11%; American Farm 17%; New England pottery 15%; and Crop Production Services 17%), the vertical farming segment derived
100% of its revenue from one customer, Eco-Leaf Farms and the industrial wastewater segment derived 100% of its revenue from one customer, South Canyon Waste Systems, Inc.
Our operating structure is composed of our parent company, Converted Organics Inc. and the
subsidiaries listed below. The current subsidiaries of COIN are as follows:
|
|
|
Converted Organics of California, LLC, a wholly-owned
subsidiary of COIN, which includes the operation of our
Gonzales, California facility. |
|
|
|
|
Converted Organics of Woodbridge, LLC, a wholly-owned
subsidiary of COIN, which includes the discontinued
operation of our Woodbridge, New Jersey facility. |
|
|
|
|
Converted Organics of Mississippi, LLC, a wholly-owned
subsidiary of COIN, established for the purpose of adding a
poultry litter-based fertilizer product to the Companys
existing product lines. This entity is currently inactive. |
|
|
|
|
Converted Organics of Rhode Island, LLC, a 92.5% owned
subsidiary of COIN, which currently has no operating
activity and which was originally established to include
the operation of a previously planned fertilizer facility
in Rhode Island. On February 25, 2010, we signed a letter
of intent with the non-controlling member in Converted
Organics of RI to sell substantially all of the assets and
assign a limited select amount of liabilities of Converted
Organics of Rhode Island. This entity is currently
inactive. |
|
|
|
|
TerraSphere Inc. (TerraSphere Inc), a Delaware C
corporation and wholly owned subsidiary of COIN, was
established to hold COINs investment in TerraSphere
Systems LLC (Systems LLC) in which COIN acquired a 95%
interest on November 12, 2010. Systems LLC owns 85% of
TerraSphere Canada, LLC and 100% of PharmaSphere LLC, which
in turn owns 100% of PharmaSphere Worcester, LLC. COINs
acquisition of its interest in Systems LLC was approved by
our shareholders at a special meeting held on September 16,
2010. |
|
|
|
|
GoLocalProduceRI, LLC, a 83.34% owned subsidiary of COIN,
which we acquired on December 30, 2010 for the purpose of
building and operating a TerraSphere facility. |
Organic Fertilizer Business
We operate a processing facility (Gonzales, CA) that uses food and agricultural waste as raw
materials to manufacture all-natural fertilizer and soil amendment products combining nutritional
and disease suppression characteristics for sale to the agribusiness market. During the first
quarter of 2011 we also contracted with a third party manufacturer and packager to produce an 8-1-4
dry fertilizer product. This product was manufactured for the purpose of continuing to supply our
established retail and turf management customers that were previously serviced by our Woodbridge,
NJ facility, which closed in 2010.
Converted Organics of California, LLC Gonzales Facility
The Gonzales facility is our production facility that services a strong West Coast
agribusiness customer base through established distribution channels. This facility uses our
proprietary technology and process known as High Temperature Liquid Composting, or HTLC
®, which processes various biodegradable waste products into liquid and food waste-based
fertilizer and a limited amount of solids that could be further processed into a useable form for
use in agriculture, retail, and professional turf markets.
The Gonzales facility began to generate positive cash flow in June 2009 and has continued to
do so through June 2011. For the six month period ended June 30, 2011, the Gonzales facility
generated revenues of approximately $1,636,000 and had a positive gross margin of approximately
$608,000, or 37% (based on no allocation of corporate overhead). Gross margin for the three month
period ended June 30, 2011 was approximately $425,000 or 40%. We plan to continue to improve this
operating margin by maximizing the production capacity at the
facility, as discussed below, by generating tip fees from receiving additional quantities of solid
food waste for processing and by reducing the amount of raw material and freight costs currently
associated with the production process. 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. In addition,
22
we have plans to triple production capacity of the Gonzales
plant and further modify it to enable production of both liquid and solid fertilizers. 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 due to a lack
of market demand for a dry product within the area the Gonzales facility serves. We believe that
additional liquid production capacity could be achieved by adding storage tanks, and that dry
product capacity could be added by installing a drying and bagging line. We estimate costs to
increase liquid capacity by adding storage tanks would be approximately $200,000 to $300,000 and
dry line costs would approximate $500,000 to $600,000. At this time we have not committed to any
such costs and have not developed a precise timeline for the completion of these projects, if they
should begin. In addition, as we will have to obtain the proper building permits for continued
expansion, further development of the Gonzales facility will be delayed until additional market
research has been completed and those permits are obtained. 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.
In addition to sales of fertilizer product from our Gonzales facility, we sold approximately
$282,000 of dry fertilizer product for the six month period ended June 30, 2011. We produced this
dry 8-1-4 product using a third party manufacturer in order to supply product to our major retail
customer and landscaping customers. Through June 30, 2011 the sales of our dry product resulted in
a negative operating margin of $79,000. The selling season for this product has ended and we do not
anticipate sales in the second half of 2011 of this product.
Industrial Wastewater Treatment Business
In March 2010, we began to operate an Industrial Wastewater Resources (IWR) business of the
Company to leverage our exclusive license of the LM-HT ® Concentrator technology for the
treatment of industrial wastewater (IW). Due to its unique, energy efficient design, the LM-HT
® Concentrator provides a highly cost-effective alternative to traditional IW treatment
technology. Once the LM-HT ® Concentrators are installed, we plan to apply for carbon
credits and government grants based on the technologys ability to reduce carbon emissions and
energy consumption through its use of waste heat and renewable energy as thermal fuel.
On March 23, 2010, we entered into a loan and license agreement with Heartland Technology
Partners, LLC (HTP). The loan agreement required us to advance $500,000 to HTP in three monthly
installments that commenced upon signing of the loan. The outstanding principal balance of the loan
is due only if either a change of control of HTP or the completion by HTP of a financing in excess of
$10 million occurs on or before June 30, 2012. We have
classified this amount as an other non-current asset on our
balance sheet. In consideration for entering into the loan
agreement, we were granted an exclusive, irrevocable license to utilize HTPs patented LM-HT
® Concentrator technology in the U.S. industrial wastewater market. The IW market
involves the treatment of waters that have been contaminated by anthropogenic industrial or
commercial activities, prior to their reuse or release into the environment. The LM-HT ®
Concentrator reduces carbon emissions compared to traditional technologies by using waste heat and
renewable energy as thermal fuel. We have hired a senior executive in the wastewater processing
industry and have begun to develop plans to operate our Industrial Wastewater Resources division.
On July 30, 2010, we signed a letter of intent with Spirit Services, Inc. to jointly develop an
energy and IW treatment facility using our exclusively licensed technology to evaporate IW at a
facility in South Boston, Virginia.
IWR currently operates an industrial wastewater concentrator on Glenwood Springs
Landfill Enterprises South Canyon Landfill in Glenwood Springs, CO as a result of an agreement
signed on January 11, 2011. This facility is designed to treat 15,000 gallons of aqueous waste per
day and is fueled by the combustion of biomass diverted from disposal in the landfill. Among the
IWs to be treated by the plant are septic, wash waters, process waters, man-camp wastewaters, and
wastewaters from oil and gas exploration activities. Under this agreement we are paid a per gallon
fee for the amount of industrial wastewater that we treat and we pay the labor costs to operate the unit and a
marketing fee to generate the industrial wastewater delivered to the facility. In addition, we own the evaporator unit and
are responsible for repairing and maintaining it. As of January 2011 we began to generate revenue
under this agreement from South Canyon Landfills traditional method of wastewater treatment as we
waited for conditional air permits. Such permits were received in March 2011, since which time we
paid $783,000 of the $1.6 million purchase price of the new evaporator and the unit commenced
operations. For the six months ended June 30, 2011 we recorded revenues of approximately $201,000
and have had gross margin of approximately $92,000 or 46% from treatment of industrial wastewater
at this facility.
Our plan to increase business and revenues for IWR is to seek out municipal and industrial
locations to locate our owned evaporator units and to charge a per gallon fee to treat industrial
wastewater. We plan to follow the current agreement model where we would pay for labor, repairs and
marketing (if required) at the location. We will have to seek specific project financing for each
evaporator unit. Presently, we are in discussion with four potential owners of locations where an
evaporator unit could be located. We expect that in 2011, if we are able to secure project
financing, we will be able to begin operations on a second evaporator unit, in addition to the one
being operated at the South Canyon Landfill.
Vertical Farming Business
On May 20, 2010, we formed TerraSphere Inc., a Delaware C corporation and a wholly owned
subsidiary of the Company, for the purpose of acquiring the membership interests of TerraSphere
Systems LLC (Systems LLC). On July 6, 2010, a membership interest purchase agreement was entered
into by the Company, TerraSphere Inc., Systems LLC, and the members of Systems LLC, pursuant to
which we agreed to acquire the membership interests of Systems LLC. The maximum total shares that
could be issued for Systems LLC is estimated to be 34,166,667 shares of our common stock, which
includes earn-out share payments of up to 14,603,175 shares of our common stock. Pursuant to the
purchase agreement, the acquisition was approved by our shareholders on September 16, 2010, and the
Company acquired 95% of the membership interest of Systems LLC on November 12, 2010. We agreed to
issue up to 32,777,778 shares of our common stock to the members of Systems LLC in exchange for 95%
of the units of Systems LLC, subject to certain anti-dilution adjustments. Of these shares,
18,174,603
shares were issued on November 12, 2010, the closing of the acquisition, and the remainder of the
shares will be issued if TerraSphere achieves four milestones. As of the filing date of this
report, only one of the four milestones, TerraSpheres collection of $2.0 million of its accounts
receivable by February 28, 2011, was subject to measurement. This milestone was not met, and as a
result we will not issue the 1,825,397
23
shares of our common stock associated with that milestone.
Two of three remaining milestones (market capitalization and gross margin), are to be measured as
of December 31, 2011, and the final milestone (gross margin) is to be measured at December 31,
2012. On December 30, 2010 we also acquired an 83.34% ownership in GoLocalProduceRI, LLC (an
independent TerraSphere licensee) for the purpose of building and owning a TerraSphere facility.
Systems LLC is in the business of designing, building, and operating highly efficient and
scalable systems, featuring a patented, proprietary technology that utilizes vertically-stacked
modules to house rows of plants, which are then placed perpendicular to an interior light source to
grow pesticide and chemical-free organic fruits and vegetables. Due to a controlled, indoor
environment, the system generates fresh produce year-round in any location or climate world-wide.
The following pro forma condensed statement of operations information is presented to
illustrate the effects upon the quarter ended June 30, 2010 had the acquisitions of TerraSphere and
GoLocalProduceRI been completed on January 1, 2010, including continuing and discontinued operations.
The pro forma presentation 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 the Companys 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.
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, 2010 |
|
June 30, 2010 |
Revenue |
|
$ |
4,634,790 |
|
|
$ |
7,118,799 |
|
Net Loss |
|
$ |
(1,039,478 |
) |
|
$ |
(7,039,486 |
) |
Net loss per share, basic and diluted |
|
$ |
(0.02 |
) |
|
$ |
(0.13 |
) |
Weighted-average shares |
|
|
56,038,773 |
|
|
|
57,077,419 |
|
Recent Financing Activities
December 17, 2010 and March 7, 2011 Notes and Warrants
On December 17, 2010, we entered into a Securities Purchase Agreement (the Agreement) with
certain institutional investors whereby we sold to the investors convertible notes in the aggregate
original principal amount of $4,990,000 (the Notes), which were convertible into shares of our
common stock. The Notes were issued with an original issue discount of approximately 4.8%, and the
purchase price of the Notes was $4,750,000. The Notes are not interest bearing, unless we are in
default on the Notes, in which case the Notes carry an interest rate of 18% per annum. On December
17, 2010 we sold to the Buyer $3,940,000 of the Notes and on March 7, 2011 we sold the investors
the remaining $1,050,000 of the Notes. We repaid the Notes in six equal installments commencing
February 1, 2011, with respect to $3.94 million of the Notes, and with respect to $1.05 million of
the Notes, we commenced repayment in six equal installments on April 8, 2011. The repayment of the
Notes was made either in cash or in shares of our common stock. If we choose to utilize shares of
our common stock for the payment, the value of our shares will be equal to the lower of (i) the
conversion price then in effect or (ii) 85% of the average of the three lowest closing sale prices
of our common stock during the 20 trading day period prior to payment of the installment amount. We
also have the right, at our option, to permit the holder of the Notes to convert at a lower price
specified by us for a period specified by us.
In addition, we also issued to the investors warrants to acquire shares of common stock, in
the form of three warrants: (i) Series A Warrants, (ii) Series B Warrants, and (iii) Series C
Warrants (collectively, the December Warrants).
The Series B Warrants became exercisable on February 28, 2011, the date upon which shareholder
approval was obtained in connection with the financing, and expire on November 28, 2011. On August
9, 2011, as part of the restructuring of our outstanding debt to the holder of the Series B
Warrants, we agreed to lower the exercise price of the Series B Warrants to $0.05 per share. As of
the date hereof, the exercise price of the Series B Warrants is $0.05 per share and there are
14,463,768 shares underlying the Series B Warrants.
The Series A and Series C Warrants became exercisable on February 28, 2011, the date upon
which shareholder approval was obtained in connection with the financing, and have a five year
term. Should we make certain dilutive issuances (with limited exceptions), the exercise price of
the Series A and Series C Warrants will be lowered to the per share price for the dilutive
issuances. In addition, the exercise price of the Series A and Series C Warrants will adjust to the
average of the conversion prices used to repay the Notes as discussed above. On August 10, 2011, as
part of the restructuring of our outstanding debt to the holder of the Series A and Series C
Warrants, we agreed to lower the exercise price of the Series A and Series C Warrants to $0.05 per
share.
April 1, 2011 Notes and Warrants
On April 1, 2011, we entered into a Securities Purchase Agreement with an institutional
investor whereby we sold to the investor a convertible note in the aggregate original principal
amount of $3,850,000 (the Note), which is convertible into shares of our common stock.
The Note was issued with an original issue discount of approximately 9.1%, and the proceeds from
the Note was $3,500,000. The Note is not interest bearing, unless we are in default on the Note, in
which case the Note carries an interest rate of 18% per annum.
The Note is initially convertible into shares of common stock at a conversion price of $0.40
per share, provided that if we make certain dilutive issuances (with limited exceptions), the
conversion price of the Note will be lowered to the per share price for the dilutive issuances.
24
Pursuant to the original terms of the Note, we were required to repay the Note in five equal
monthly installments, commencing July 31, 2011, either in cash or in shares of our common stock. We
were not permitted to utilize shares of common stock for repayment prior to meeting certain
conditions, including the registration statement registering the resale of the shares of common
stock underlying the Note being declared effective by the Securities and Exchange Commission
(SEC). As of the date hereof, such registration statement has not been declared effective, and
as such, we would have been required to make the monthly Note repayment in cash. On August 9, 2011
we and the Note holder agreed to delay the repayment dates such that we are now required to repay
the Note in five equal installments on: (1) the twenty-third trading day immediately following the
earlier to occur of: (A) the trading day on which the foregoing registration statement is declared
effective by the SEC or (B) October 20, 2011 (the First Installment Date); (2) the twentieth
trading day immediately following the First Installment Date (the Second Installment Date); (3)
the twentieth trading day immediately following the Second Installment Date (the Third Installment
Date); and (4) the maturity date, which is the twentieth trading day immediately following the
Third Installment Date. If we choose to utilize shares of our common stock for payment, we must
make an irrevocable decision to use those shares 22 trading days prior to the installment payment
date, and the value of our shares will be equal to the lower of (i) the conversion price or (ii)
85% of the average of the three lowest closing sale prices of our common stock during the 20
trading day period prior to payment of the installment amount (the Installment Conversion Price).
If we choose to make an installment payment in shares of common stock, we must make a
pre-installment payment of shares (the Pre-Installment Shares) to the Note holder 20 trading days
prior to the applicable installment date based on the value of our shares during the 20 trading
days preceding the delivery of notice to the holder that we will be paying the installment in
common stock. On the installment date, to the extent we owe the Note holder additional shares in
excess of the Pre-Installment Shares to satisfy the installment payment, we will issue the Note
holder additional shares, and to the extent we have issued excess shares, such shares will be
applied to future payments. If an event of default occurs under the Note, we must redeem the Note
in cash at the greater of 135% of the unconverted principal amount or 135% of the greatest equity
value of the shares of common stock underlying the Note from the date of the default until the
redemption is completed.
The conversion price of the Note is subject to adjustment in the case of stock splits, stock
dividends, combinations of shares and similar recapitalization transactions. The convertibility of
the Note may be limited if, upon exercise, the holder or any of its affiliates would beneficially
own more than 4.9% of our common stock.
Pursuant to the terms of the Purchase Agreement, we also agreed to issue to the Note holder
warrants to acquire shares of common stock, in the form of three warrants: (i) Series A Warrants,
(ii) Series B Warrants and (iii) Series C Warrants (collectively, the April Warrants).
The Series B Warrants are exercisable six months and one day after issuance and expire nine
months after the date we obtain shareholder approval to issue in excess of 20% of our common stock
for the April financing and to permit us to adjust the exercise price of the Series A and Series C
Warrants. The Series B Warrants provide that the holders are initially entitled to purchase an
aggregate of 9,143,750 shares at an initial exercise price of $0.4125 per share. On August 9, 2011,
as part of the restructuring of the Note described above, we agreed to lower the exercise price of
the Series B Warrants to $0.05 per share. If we make certain dilutive issuances (with limited
exceptions), the exercise price of the Series B Warrants will be lowered to the per share price for
the dilutive issuances. In addition, the exercise price of the Series B Warrants will adjust to the
average of the Installment Conversion Prices used to repay the Note (see above for a discussion of
the Note installment payments).
To the extent we enter into a fundamental transaction (as defined in the Series B Warrants and
which include, without limitation, our entering into a merger or consolidation with another entity,
our selling all or substantially all of our assets, or a person acquiring 50% of our common stock),
we have agreed to purchase the Series B Warrants from the holders at their Black-Scholes value.
If our common stock trades at a price at least 200% above the Series B Warrants exercise price
for a period of 10 trading days at any time after we obtain shareholder approval (as discussed
above), we may force the exercise of the Series B Warrants if we meet certain conditions.
The Series A and Series C Warrants are exercisable six months and one day after issuance and
have a five year term commencing on the initial exercise date. The Series A Warrants provide that
the holders are initially entitled to purchase an aggregate of 4,812,500 shares. The Series C
Warrants provide that the holders are initially entitled to purchase an aggregate of 4,343,285
shares. If on the expiration date of the Series B Warrants, a holder of such warrant has not
exercised such warrant for at least 50% of the shares underlying such warrant, we have the right to
redeem from such holder its Series C Warrant for $1,000 under certain circumstances. On August 9,
2011, as part of the restructuring of the Note described above, we agreed to lower the exercise
price of the Series A and Series C Warrants to $0.05 per share.
If we make certain dilutive issuances (with limited exceptions), the exercise price of the
Series A and Series C Warrants will be lowered to the per share price for the dilutive issuances.
In addition, the exercise price of the Series A and Series C Warrants will adjust to the average of
the Installment Conversion Prices used to repay the Note (see above for a discussion of the Note
installment payments). The number of shares underlying the Series A and Series C Warrants will not
be adjusted due to an adjustment of the exercise price pursuant to the preceding two sentences.
To the extent we enter into a fundamental transaction (as defined in the Series A and Series C
Warrants and which include, without limitation, our entering into a merger or consolidation with
another entity, our selling all or substantially all of our assets, or a person acquiring 50% of
our common stock), we have agreed to purchase the Series A and Series C Warrants from the holder at
their Black-Scholes value.
The exercise price of all the Warrants is subject to adjustment in the case of stock splits,
stock dividends, combinations of shares and similar recapitalization transactions. The
exercisability of the Warrants may be limited if, upon exercise, the holder or any of its
affiliates would
beneficially own more than 4.9% of our common stock. The Note may not be converted if the total
number of shares that would be issued would exceed 19.99% of our common stock on the date the
Purchase Agreement was executed prior to our receiving shareholder approval (as discussed above).
25
Future Development
Our long-term strategic plan calls for growth of our organic fertilizer business as well as
expansion of our portfolio of sustainable, environmentally-friendly businesses. To grow our
existing fertilizer business, we plan to develop and license additional organic fertilizer
manufacturing facilities and utilize the remaining capacity of our Gonzales facility, which
currently operates at approximately 60% capacity. In connection with our plan to expand the
capacity of our Gonzales facility, we plan to increase production to approximately three times the
facilitys current production and, based on market demand, we may expand the capability of the
plant to have the ability to produce both liquid and solid products. In connection with the plan
for additional facilities, we have completed preliminary work aimed at establishing facilities in
Massachusetts, where 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 MassOrganics I transaction described below.
As of the filing date of this report we do not expect formal plans to be completed or
construction to begin anytime in the near future on these three
facilities.
We also plan to grow both our TerraSphere and Industrial Wastewater Resources Divisions.
Through the TerraSphere acquisition, our plan is to expand our business into the market of building
highly efficient systems for growing pesticide and chemical-free, organic fruits and vegetables in
controlled indoor environments. TerraSpheres clean technology helps to promote the sustainable
consumption of natural resources by accelerating plant production and maximizing crop yields, while
improving environmental footprints through the reduction of carbon emissions and fuel use
associated with traditional crop production and distribution. Also, we plan to continue to grow our
Industrial Wastewater Resources Division by working to form industry and/or project-based
partnerships that utilize our exclusively licensed, irrevocable technology to treat industrial
wastewaters.
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. 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 HTLC
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. To date, we have had neither sales of these units nor licenses.
Trends and Uncertainties Affecting our Operations
We are 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 we
expect. 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. In addition, a significant part of our growth strategy is based upon generating
revenues from both our Industrial Wastewater business and from the acquisition of TerraSphere
Systems, both of which are in early stages of development. This strategy requires licensees to
raise the funding necessary to construct facilities, which has proven difficult. 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 June 30, 2011, we had total current assets of approximately $3.6 million consisting
primarily of cash, accounts receivable, inventory and prepaid assets and had current liabilities of
approximately $6.9 million, consisting primarily of convertible notes payable, accounts payable,
derivative liabilities and liabilities from discontinued operations leaving us with negative
working capital of approximately $3.3 million. Non-current assets totaled approximately $16.4
million and consisted primarily of property and equipment and intangible assets. Non-current
liabilities consist of derivative liabilities totaling approximately $1.0 million at June 30, 2011.
We have an accumulated deficit at June 30, 2011 of approximately $101.1 million. Stockholders
equity at June 30, 2011 was approximately $12.1 million. For the three months ended June 30, 2011,
we generated revenues from continuing operations of approximately $1.4 million as compared to
revenue from continuing operations of $1.2 million for the same period in 2010. For the six months
ended June 30, 2011, we generated revenues from continuing operations of approximately $2.2 million
as compared to revenue from continuing operations of $2.0 million for the same period in 2010.
Although the California fertilizer business is currently cash flow positive and the closing of
the Woodbridge facility in the third quarter of 2010 will save us approximately $6.0 million per
year in net cash expenditures, we believe that we will continue to have negative cash flow from
operations in 2011 due to the costs associated with corporate operations and funding the operations
of TerraSphere. In addition, we believe that we will require additional cash to finance capital
growth activities in order to build out the IWR and TerraSphere projects planned for 2011. We
believe that if we achieve planned sales from our California facility, establish additional
operational Industrial Wastewater sites,
and complete the construction of a TerraSphere facility, then we can become cash flow positive in
the future. In order to achieve these goals, however, we will need significant additional financing
for which we have no commitments.
Presently, our liquidity is limited to our cash on hand at June 30, 2011. In addition, in
connection with our recent financings, we have warrants outstanding that if exercised could provide
us with additional cash. However, since receiving shareholder approval our stock price has closed
at both above and below the exercise price of these warrants, and it is not likely that any
warrants would be exercised unless the price of
26
our stock was greater than the exercise price of
the warrants. There is no assurance that the holders of the warrants will exercise the warrants in
the near term, and as such, we may not receive these funds.
If we do not receive additional funds, whether as a result of the exercise of outstanding
warrants issued in our recent financings, or otherwise, we will not have sufficient cash to be able
to continue our operations. We have projected our net cash out flows to be approximately $350,000
per month, and therefore, based on the cash on hand as of the filing date of this report, we have
sufficient cash to operate until the end of 2011 assuming we expend no cash on future IWR,
TerraSphere, or fertilizer capital projects. However, as our business strategy involves growing our
IWR and TerraSphere divisions, we expect that we will require additional cash prior to the end of
2011. At this time, we do not have any commitments for additional financing, and there is no
assurance that capital in any form will be available to us on terms and conditions that are
acceptable or at all. If we do not raise funds before we exhaust our current cash position we will
be unable to continue operations.
Results of Continuing Operations for the Three Month Period Ended June 30, 2011
Revenue
Our revenue from continuing operations for the three month period ended June 30, 2011, was
$1,430,000 compared to $1,245,000 for the same period ended June 30, 2010. We had income from
continuing operations of $869,000 for the three month period ended June 30, 2011 compared to a loss
from continuing operations of $1,208,000 for the same period in 2010. The various components are
described below.
Revenue from fertilizer sales was $1,274,000 for the three month period ended June 30, 2011
($1,072,000 for liquid fertilizer from Gonzales and $202,000 from the outsourced dry fertilizer)
compared to $1,245,000 for the same period ended June 30, 2010. This increase of $869,000 in
fertilizer sales revenue is due to an increase in the sale of dry product produced by an outside
vendor of $202,000 offset by a decrease in sales at the Gonzales facility of $173,000. We feel that
the decrease in sales from Gonzales was caused by bad weather, and as a result of this decrease our
expectations for increased sales in 2011 over 2010 may not be achieved. The sales from our dry
product being produced by an outside vendor generated a negative margin of approximately $61,000.
However, this program was initiated to satisfy two large customers who historically only purchase
product in the first half of the year, and we therefore do not expect further negative margin in
the second half of 2011.
Converted Organics of Mississippi, formed in January 26, 2010, generated revenues of $117,000
during the second quarter of 2010. In the second quarter of 2011 this entity had no revenue as the
company that we purchased the product from has filed for bankruptcy protection and the product is
no longer available.
The Industrial Wastewater Resources segment of our business recognized revenues in the amount
of $106,000 in the three month period ended June 30, 2011. This segment had no revenues in 2010, as
it was in the start up phase of operations.
Our TerraSphere segment reported revenues of $50,000 for the three month period ended June 30,
2011. TerraSphere continues to seek opportunities whereby it will generate license revenues from
new licensees, generate equipment revenues from current licensees, and is also seeking financing to
complete a production facility in Rhode Island, whereby we would generate revenues from the sale of
produce. We expect to generate further revenues from TerraSphere in 2011.
Cost of Goods Sold
For the three month period ended June 30, 2011, we had cost of goods of approximately $954,000
compared to $872,000 for the same period in 2010. The increase in cost of goods sold is detailed
below.
Cost of goods sold related to fertilizer at the Gonzales facility was approximately $647,000
for the three months ended June 30, 2011, leaving an operating margin of $425,000 or 40%, compared
to cost of goods of $801,000 for the same period in 2010 and an operating margin of 29%.
This favorable variance is due to decreased materials and production costs in the second quarter of
2011.
Cost of goods for our dry fertilizer product (produced by an outside supplier) was
approximately $263,000 for the three months ended June 30, 2011, resulting in a negative operating
margin of 30%. There was no comparable activity in 2010. We do not expect further losses in this
product line as we have completed filling 2011 orders for these customers and do not expect further
sales in the second half of 2011.
Cost
of goods for our IWR segment was $76,000 for the three months ended June 30, 2011
resulting in an operating margin of 28%. There was no comparable activity in 2010 as the business
was in the start of operations.
General and Administrative Expenses
General and administrative expenses for the three month period ended June 30, 2011 were
approximately $3.8 million compared to approximately $2.6 million for the same period in 2010. The
increase of approximately $1.2 million is primarily comprised of $1.5 million non-cash increase in
compensation expense, as annual compensation awards of stock options and restricted shares were
granted to employees, and an increase in overhead related to the operation of our TerraSphere
division of approximately $550,000 offset by decreases in marketing expenses of $450,000 and
decreased professional fees associated with acquisition activity of approximately $350,000.
Interest Expense
Interest expense for the three months ended June 30, 2011 was approximately $3.6 million
compared to approximately $7,000 for the same period in 2010. The increase of approximately $3.6
million is associated with the amortization of debt discounts related to our convertible notes and
is a non-cash item.
27
Other Income
Other
Income,
comprised primarily of gain on value of obligation to issue shares, for the three months ended June 30, 2011 was approximately $1.1 million compared
to approximately $251 for the same period in 2010. This increase of approximately $1.1 million
of other income is directly associated with the current market valuation of the liability
associated with milestone payments due under the TerraSphere acquisition, caused by the decline in
our stock price during the quarter, and is a non-cash item.
Derivative gain (loss)
For the three months ended June 30, 2011, we had a derivative gain of approximately $6.8
million compared to a derivative gain of approximately $1.1 million for the same period in 2010.
This is a non-cash gain and is related to the valuation of certain derivative features included in
certain of our warrants and convertible debt obligations, and included in an anti-dilution
provision related to shares issued in the TerraSphere acquisition. The major factor creating the
gain on these derivative features is the decrease in our stock price during the quarter. In
addition, certain derivative instruments were issued and settled during the quarter, which impacted
the derivative gain.
Results of Continuing Operations for the Six Month Period Ended June 30, 2011
Revenue
Our revenues from continuing operations for the six month period ended June 30, 2011, was
$2,169,000 compared to $1,957,000 for the same period ended June 30, 2010. We had a loss from
continuing operations of $930,000 for the six month period ended June 30, 2011 compared to a loss
from continuing operations of $5,678,000 for the same period in 2010. The various components are
described below.
Revenue from fertilizer was $1,918,000 for the six month period ended June 30, 2011
($1,636,000 for liquid fertilizer from Gonzales and $282,000 from the outsourced dry fertilizer)
compared to $1,957,000 for the same period ended June 30, 2010. This decrease of $39,000 in
revenues is due to an increase in the sale of dry product produced by an outside vendor of $282,000
offset by a decrease in sales at the Gonzales facility of $321,000. We feel that the decrease in
sales from Gonzales was caused by bad weather, and as a result of this decrease our expectations
for increased sales in 2011 over 2010 may not be achieved. The sales from our dry product being
produced by an outside vendor generated a negative margin of approximately $78,000, however, this
program was initiated to satisfy two large customers who historically only purchase product in the
first half of the year and therefore we dont expect further negative margin in the second half of
2011.
Converted Organics of Mississippi, formed in January 26, 2010, generated revenues of $117,000
during the first half of 2010. In the first half of 2011 this entity had no revenue as the company
that we purchased the product from has filed for bankruptcy protection and the product is no longer
available.
The Industrial Wastewater Resources segment of our business recognized revenues in the amount
of $201,000 in the six month period ended June 30, 2011. This segment had no revenues in 2010, as
it was in the start up phase of operations.
Our TerraSphere segment reported revenues of $50,000 for the six month period ended June 30,
2011. TerraSphere continues to seek opportunities whereby it will generate license revenues from
new licensees, generate equipment revenues from current licensees, and is also seeking financing to
complete a production facility in Rhode Island, whereby we would generate revenues from the sale of
produce. We do expect to generate further revenues from TerraSphere in 2011.
Cost of Goods Sold
For the six month period ended June 30, 2011, we had cost of goods of approximately $1,458,000
compared to $1,437,000 for the same period in 2010. The increase in cost of goods sold is detailed
below.
Cost of goods sold related to fertilizer at the Gonzales facility was approximately $1,028,000
for the six months ended June 30, 2011, leaving an operating margin of $608,000 or 37%, compared to
cost of goods of $1,299,000 for the same period in 2010 and an operating margin of 25%.
This favorable variance is due to decreased materials and production costs in the first half of
2011.
Cost of goods for our dry fertilizer product (produced by an outside supplier) was
approximately $360,000 for the six months ended June 30, 2011, leaving an operating margin of
negative 28%. There was no comparable activity in 2010 as the business was in the start of
operations. We do not expect further losses in this product line as we have completed filling 2011
orders for these customers and do not expect further sales in the second half of 2011.
Cost
of goods for our IWR segment was $109,000 for the six months ended June 30, 2011 resulting
in an operating margin of 46%.
General and Administrative Expenses
General and administrative expenses for the six month period ended June 30, 2011 were
approximately $6.1 million compared to approximately $6.4 million for the same period in 2010. The
decrease of approximately $300,000 is primarily comprised of an increase in the
expenses related to operating our TerraSphere segment of $1.1 million offset by decreases in
marketing costs of $650,000, consulting expenses of $100,000, professional fees of $500,000
associated with 2010 acquisition activities and various other savings of $150,000.
Interest Expense
Interest expense for the six months ended June 30, 2011 was approximately $5.8 million
compared to approximately $12,000 for the same period in 2010. This increase of approximately $5.8
million is associated with the amortization of debt discounts related to our convertible notes and
is a non-cash item.
28
Other Income
Other
Income, comprised primarily of gain on value of obligations to issue
shares for the six months ended June 30, 2011 was approximately $1.3 million compared to
approximately $532 for the same period in 2010. This increase of approximately $1.3 million of
other income is directly associated with the current market valuation of the liability associated
with milestone payments due under the TerraSphere acquisition, caused by the decline in our stock
price during the period, and is a non-cash item.
Derivative gain (loss)
For the six months ended June 30, 2011, we had a derivative gain of approximately $9.2 million
compared to a derivative gain of approximately $499,000 for the same period in 2010. This is a
non-cash gain and is related to the valuation of certain derivative features included in certain of
our warrants and convertible debt obligations, and included in an anti-dilution provision related
to shares issued in the TerraSphere acquisition. The major factor creating the gain on these
derivative features is the decrease in our stock price during the period. In addition, certain
derivative instruments were issued and settled during the quarter, which impacted the derivative
gain.
Results of Discontinued Operations
On July 30, 2010, the Company temporarily halted production at its Woodbridge facility in
order to undertake steps to lower its cost structure at the Woodbridge facility. Specifically, the
Company attempted to negotiate more favorable terms under its operating lease and to lower certain
utility costs. The Company was unable to lower such costs and therefore, management determined that
the Company could not sustain the negative cash flow from the Woodbridge facility and discontinued
operations at the Woodbridge plant in the third quarter of 2010.
The following table summarizes the components of the loss from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenue from discontinued operations |
|
$ |
|
|
|
$ |
580,425 |
|
|
$ |
|
|
|
$ |
728,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
146,970 |
|
|
$ |
(2,117,106 |
) |
|
$ |
146,471 |
|
|
$ |
(4,026,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized income from discontinued operations for the three and six month periods
ended June 30, 2011 as a result of favorable settlements with certain of its creditors. The
Company does not expect to have any continuing positive cash flows from operations associated with the
Woodbridge facility.
The following table provides the assets and liabilities of the Woodbridge facility, classified
as discontinued operations, in the consolidated balance sheets dated June 30, 2011 and December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Accounts receivable, net |
|
$ |
|
|
|
$ |
14,500 |
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
|
|
|
$ |
14,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
646,027 |
|
|
$ |
837,606 |
|
Accrued expenses |
|
|
|
|
|
|
1,571,874 |
|
Other liabilities |
|
|
28,773 |
|
|
|
28,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
674,800 |
|
|
$ |
2,438,253 |
|
|
|
|
|
|
|
|
On January 25, 2011, the Company paid cash of $150,000 and issued 3.2 million shares
of Company common stock with a fair value of $1,344,000 in payment for consulting services accrued
at December 31, 2010 related to the settlement of certain Woodbridge obligations. The Company is
actively working with its creditors to settle the liabilities outstanding at June 30, 2011.
Critical Accounting policies
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
Our organic fertilizer operation generates revenues from two sources: product sales and tip
fees. Product sales revenue comes from the sale of fertilizer products. Tip fee revenue is derived
from waste haulers who pay us 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. The IWR operation generates revenue by
setting up treatment systems on customers sites and processing their wastewater on a
29
price-per-gallon basis. Our vertical farming operation is expected to derive its revenue from
licensing fees and royalties, as well as the sale of equipment and expects future revenue from
operating facilities using our patented technology.
Revenue is recognized when all of the following criteria are 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 in which all of these criteria are satisfied. Revenue is generally recognized upon
shipment of product for our fertilizer business, and for TerraSphere we expect to
recognize technology license revenue immediately upon completed performance if the term of
exclusive technology licenses is equal to the life of the associated intellectual property,
otherwise license revenue would be recognized over the term of the license.
We recognize deferred revenue when payment has been received for product sales but the revenue
recognition criteria have not been met. In addition, we defer revenue when payment has been
received for future services to be provided.
Share-Based Compensation
We account for equity instruments exchanged for services in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 Compensation
Stock Compensation (ASC 718) regarding share-based compensation. Under the provisions of ASC 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.
Long-Lived Assets
We account for our long-lived assets (excluding goodwill) in accordance with ASC 360 Property,
Plant and Equipment (ASC 360), which requires that
long-lived assets be reviewed for impairment annually and 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 an undiscounted 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.
Goodwill
We evaluate the carrying value of goodwill during the fourth quarter of each year and when
events occur or circumstances change that would more likely than not reduce the fair value of the
reporting unit below its carrying amount. Such circumstances could include, but are not limited to
(1) a significant adverse change in legal factors or in business climate, (2) unanticipated
competition, or (3) an adverse action or assessment by a regulator. When evaluating whether
goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is
assigned to the reporting units carrying amount, including goodwill. The fair value of the
reporting unit is estimated using a combination of the income, or discounted cash flows, approach
and the market approach, which utilizes comparable companies data. If the carrying amount of a
reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The
impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill
to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair
value of the reporting unit is allocated to all of the other assets and liabilities of that unit
based on their fair values. The excess of the fair value of a reporting unit over the amount
assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment
loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. No
events or change in circumstances occurred that would impair the carrying value of goodwill for the
three month period ended June 30, 2011.
Intangible Assets
We account for intangible assets in accordance with ASC 350 Intangibles Goodwill and Other
(ASC 350), which requires that intangible assets with finite lives, such as our license and
patents, 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. Intangible assets deemed to have indefinite lives are not amortized
and are subject to impairment testing annually or whenever events or other changes in circumstances
indicate that the carrying amount may not be recoverable. This testing compares carrying values to
fair values and when appropriate, the carrying value of these assets is reduced to fair value.
During the three month period ended June 30, 2011, there was no impairment on intangible assets
deemed to have indefinite lives.
Derivative Instruments
We account for derivative instruments in accordance with ASC 815 Derivatives and Hedging (ASC
815), which establishes accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other financial
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instruments or
contracts and requires recognition of all derivatives on the balance sheet at fair value.
Accounting for changes in the fair value of derivative instruments depends on whether the
derivatives qualify as hedge relationships and the types of relationships designated are based on
the exposures hedged. At June 30, 2011 and December 31, 2010, we did not have any derivative
instruments that were designated as hedges.
Discontinued Operations
We discontinued the operations of our Woodbridge facility during the third quarter of 2010.
Assets and liabilities related to the Woodbridge facility have been classified as discontinued
operations on the consolidated balance sheets at June 30, 2011 and December 31, 2010, and its
operations have been classified as loss from discontinued operations on the consolidated statements
of operations and comprehensive loss for the periods ended June 30, 2011 and 2010.
Fair Value Measurements
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 Fair Value Measurements and
Disclosure (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):
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Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have
the ability to access. |
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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. |
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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 deferred tax assets to be a significant accounting
estimate. In applying ASC 740 Income Taxes, management estimates future taxable income from
operations and tax planning 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.
Off-Balance Sheet Transactions
We do not engage in material off-balance sheet transactions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Under the supervision, and with the participation of our management, including the Principal
Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of the end
of the period covered by this report. Based on that evaluation, the Principal Executive Officer and
Principal Financial Officer have concluded that these disclosure controls and procedures were
effective such that the material information required to be filed in our SEC reports is recorded,
processed, summarized and reported within the required time periods specified in the SEC rules and
forms.
There were no changes in our internal control over financial reporting during the three months
ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. Potential investors should be aware that the design
of any system of controls and procedures is based in part upon certain assumptions about the
likelihood of future events. There can be no assurance that any system of controls and procedures
will succeed in achieving its stated goals under all potential future conditions, regardless of how
remote.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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
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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 conference, and began discussing discovery issues. Plaintiff filed a Motion for
Class Certification on June 22, 2010, which was denied on November 22, 2010. On March 3, 2011, the
court denied our motion for partial summary judgment. On March 25, 2011, some individual investors
filed a new complaint against us asserting similar claims to those in the Leeseberg litigation.
The Court consolidated this case with the existing lawsuit and, on May 12, 2011, Plaintiffs filed
an Amended Complaint. On June 6, 2011, we filed our answers to the consolidated complaint and
counter claims against plaintiffs. We plan to vigorously defend these matters and are unable to
estimate any losses that may be incurred as a result of this litigation and new complaint and upon
their eventual disposition. Accordingly, no loss has been recorded related to these matters.
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. Holland
and Knight has threatened to bring counterclaims against Converted Organics for legal fees
allegedly owed, which we would contest vigorously. On May 12, 2010, the Superior Court stayed the
proceedings, pending resolution of the Leeseberg litigation. At this early stage in the case, the
Company is unable to predict the likelihood of an unfavorable outcome, or estimate any related
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. v. Converted
Organics of Woodbridge, et al. The lawsuit alleged private and public nuisances, negligence,
continuing trespasses and consumer common-law fraud in connection with the odors emanating from the
Woodbridge facility and its alleged, intentional failure to disclose to adjacent property owners
the possibility of the facility causing pollution and was later amended to allege adverse
possession, acquiescence and easement. The lawsuit sought 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. On
April 12, 2010, the Middlesex County Superior Court of New Jersey issued an administrative order
settlement dismissing without prejudice the matter of Lefcourt Associates, Ltd. v. Converted
Organics of Woodbridge, et al. On June 8, 2010, Lefcourt Associates, Ltd re-filed their lawsuit but
before a different court, the Chancery Division in Bergen County. The Company filed a motion to
transfer the action back to the original court in Middlesex County, which was granted and sought to
have the lawsuit dismissed, which was granted in part on August 27, 2010. The Court limited the
plaintiffs claims to the events in part that occurred after the dismissal of the prior action. The
case was recently transferred to the Law Division and a trial date as to damages was scheduled for
June 6, 2011, but has since been postponed until September 12, 2011, and an evidentiary hearing
will be held on or prior to this date. Additionally, plaintiffs appealed the order dismissing their
first lawsuit with prejudice, and the appellate court reversed the dismissal. Due to the appellate
decision, plaintiffs filed a motion to reconsider the decision made in the action, which was
granted in part on July 28, 2011. We plan to vigorously defend this matter and are unable to
estimate any losses that may be incurred as a result of this litigation and upon its eventual
disposition. Accordingly, no loss has been recorded related to this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During April 2011,
we issued common stock and warrants in connection with a convertible note financing agreement. A Form 8K
relating to this matter was filed on April 1, 2011 and is incorporated by reference herein. During June 2011,
we issued 508,333 restricted shares of our common stock to three Investor relations firms for consulting
services performed for the Company. The common stock was issued pursuant to an exemption from registration
pursuant to Section 4(2) of the Securities Act of 1933. During June, 2011, we issued 7,769,798 shares of
resiricied common stock in connection with the conversion of 4,219 shares of convertible Preferred Stock Series A.
The common stock was issued pursuant to an exemption from registration pursuant to Section 4(2) of the Securities
Act of 1933.
Item 3. Defaults upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information.
None.
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Item 6. Exhibits
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Exhibit No. |
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Description of Exhibit |
31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of Chief Executive Officer pursuant to Section 906 |
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32.2
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Certification of Chief Financial Officer pursuant to Section 906 |
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101.INS
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XBRL Instance Document |
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101.SCH
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XBRL Taxonomy Extension Schema Document |
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Converted Organics Inc.
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Date: August 15, 2011 |
/s/ Edward J. Gildea
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Edward J. Gildea |
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President and Chief Executive Officer, Principal
Executive Officer |
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Date: August 15, 2011 |
/s/ David R. Allen
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David R. Allen |
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Chief Financial Officer and Executive Vice President
of Administration and Principal Accounting Officer |
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