I have been reading the last SEC report (Linked in your post). Here is my view of the major items in this amendment. This is not advice, and just my personal opinion as to the major items I see while reading it. I have been long here since about March.
Looks like they are correcting earlier filings to make the Class H warrants correctly registered, these appear to be the class H warrants already sold and attached to the COINU issued combo back in October. The H warrants get split shortly from the COINU combo issue as I understand it, which was 1 share common plus 1 share warrant (H). If and when exercised the H warrant turns into a common share and COIN gets the conversion cash, raising their cash and stock holders equity. The conversion price is $1.30, so COIN gets a $1.30/new share at conversion time.
My earlier post about calculating estimated equity before and after the October stock sale seems to have been off. This latest filing shows they had negative equity per share of (.15) before the new shares were issued, while I had calculated +.04/share, not -.15/share, and as we know, COIN had an ongoing concern statement from the independent accounting firm, which they have now asked be removed (pending?)I thnk I read here in this amendment (but it is pending the final report early next year?). They show a net tangible book value increase of +.78/share based on the October share/warrant sale, but only if the $1.30/share class H warrants are converted to stock someday, with 17.5 million shares to be issued on conversion. .78-.15= .63 which is the new potential book value per share as of Sept 30, 2009, if the warrants are converted at $1.30/share. I think my earlier estimate in a prior post here was about .43/share? with out warrants included or converted.
Keep in mind if the $1.30 warrants are converted, 17.5 million shares get issued (dilution) and coin gets $1.30 per share in cash (increases total equity, book value). So cash goes up, and issued shares goes up, but only if H warrants are converted. Stock price would need to get over $1.30 share I think for people to convert the warrants.
Bad news in the latest filing:
" In early November 2009, during routine maintenance, we noticed corrosion in the walls of one of our 120,000 gallon digesters. Through subsequent ultrasound wall thickness testing we have determined that the corrosion is significant in two digesters and that we will not be able to use those digesters for their intended purpose in our manufacturing process until they are repaired or replaced. We have further determined that the corrosion in these two digesters is a result of our manufacturing process. At the time of installation, we had anticipated the possibility of corrosion and therefore had the digesters protected with a coating. We are currently investigating why the coating did not perform as expected and as it had performed during the pre-installation testing. "
"We are considering the most cost effective solutions to this matter, including the installation of stainless steel liners into the two 120,000 gallon digesters or the installation of additional CLF digesters, two of which are already installed and working at the facility. Until we make the decision as to which option we will elect we will only be able to operate at approximately 14 to 16% of capacity at the Woodbridge facility. Presently, our production at the plant has been limited by odor issues to 14 to 16% of capacity and therefore the corrosion problem is not affecting our ability to produce product at this time. However, we anticipate that we will correct the odor issues and increase sales in the future commencing in 2010, and if we cannot repair the problem before the sales increases happen, we may be unable to generate positive cash flow from the Woodbridge facility according to the planned schedule. We have obtained preliminary estimates for various solutions to the corrosion issues and they range in price from $400,000 to $2 million with an estimated time to complete ranging from three to six months. During this period of diminished production capacity we are looking at all possible ways to lower operating costs at the facility in order to lower cash requirements. "
And none of this looks too rosy at this time, except the Armistead settlement:
"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 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. We plan to vigorously defend this matter and are unable to estimate any contingent losses that may or may not be incurred as a result of this litigation and its eventual disposition. Accordingly, no contingent loss has been recorded related to this matter.
On May 19, 2009, we received notice that a complaint had been filed in the Middlesex County Superior Court of New Jersey, captioned Lefcourt Associates, Ltd., et al. v. Converted Organics of Woodbridge, et al. The lawsuit alleges private and public nuisances, negligence, continuing trespasses and consumer common-law fraud in connection with the odors emanating from our Woodbridge facility and our alleged, intentional failure to disclose to adjacent property owners the possibility of our facility causing pollution and was later amended to allege adverse possession, acquiescence and easement. The lawsuit seeks enjoinment of any and all operations which in any way cause or contribute to the alleged pollution, compensatory and punitive damages, counsel fees and costs of suit and any and all other relief the Court deems equitable and just. In response to these allegations, we have filed opposition papers with the Court and have complied with the plaintiff’s requests for information. We have also paid to the Middlesex County Health Department penalties in the amount of $86,000 relating to odor emissions. We plan to vigorously defend this matter and are unable to estimate any contingent losses that may or may not be incurred as a result of this litigation and its eventual disposition. Accordingly, no contingent loss has been recorded related to this matter.
On May 28, 2009, we received notice that a Lien Claim Foreclosure Complaint had been filed in the Middlesex County Superior Court of New Jersey, captioned Armistead Mechanical, Inc. v. Converted Organics Inc., et al. Armistead filed this Lien Claim Foreclosure Complaint in order to perfect its previously filed lien claim. The Complaint also alleges breach of contract, reasonable value, demand for payment, unjust enrichment, and breach of the implied covenant of good faith and fair dealing, and seeks compensatory, consequential and incidental damages, attorneys fees, costs, interest, and other fair and equitable relief. On July 10, 2009, we received an Amended Lien Claim Foreclosure Complaint from Armistead Mechanical. The amended complaint did not make any substantial changes to the suit. On August 4, 2009, we filed a response to the complaint whereby we denied certain claims and at this time we are unable to estimate any contingent losses. On August 28, 2009, the court entered an order staying the litigation pending the outcome of arbitration. In connection with the Complaint,
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Armistead has filed a demand for arbitration with the American Arbitration Association in order to preserve its status quo and right to submit a contract dispute claim to binding arbitration. On October 30, 2009, our response to the demand was due with the consent of Armistead. No arbitrator has yet been appointed. On November 19, 2009, we signed a Settlement Agreement with Armistead for a total of $2,029,000, with the first payment of $1,000,000 due upon closing (closing occurred on November 19, 2009) and the balance of $1,029,000 payable in eighteen level monthly payments of principal and interest calculated at 6% per annum. The monthly payments will begin January 1, 2010. According to terms of the Settlement Agreement, the construction lien claim and related lawsuit will be suspended during the eighteen month payment period and will be released completely upon final payment.
The Middlesex County Health Department (MCHD) issued us a number of notices of violation, or NOV, following the commencement of our operations at our Woodbridge facility in February 2009, for alleged violations of the New Jersey State Air Pollution Control Act, which prohibits certain off-site odors. The NOV alleged that odors emanating from our Woodbridge facility had impacted surrounding businesses and those odors were of sufficient intensity and duration to constitute air pollution under the act. As of the date of filing, the total amount of fines levied by the Middlesex County Health Department equaled $391,500, of which we have paid $87,750 (of which $86,000 were related to odor emissions), and currently have an unpaid balance of $305,500. We recorded a liability of $270,250 in our financial statements as of September 30, 2009 relating to the unpaid potion of the penalties. In addition, based on a change in operational procedures and working with two outside odor-control consultants, we believe we have significantly rectified the odor issues. MCHD recognized that we have made substantial efforts and improvements at our Woodbridge facility in odor control and as a result, has negotiated a sixteen (16) month payment plan for the odor violations issued from May 2009 through July 22, 2009 for an amount totaling $232,500.
The New Jersey Department of Environmental Protection (“NJDEP”) Bureau of Air Compliance and Enforcement issued us an Administrative Order in June 2009 for alleged violations of the air permit issued to us pursuant to the Air Pollution Control Act. The Administrative Order alleged that we were not operating in compliance with our air permit and that we had violated the New Jersey Administrative Code for various pre-constructions without permits. No penalties were assessed in the Administrative Order. However, the Administrative Order remains an open matter because, as the NJDEP stated in the Administrative Order, the provisions of the order remain in effect during pendency of the hearing request. Additionally, while we have taken corrective actions, such actions do not preclude the State from initiating a future enforcement action or seeking penalties with respect the violations listed in the Administrative Order.
The NJDEP Bureau of Solid Waste Compliance and Enforcement issued us a NOV for alleged violations of the New Jersey State Solid Waste Management Act in June 2009. The NOV alleged that our Woodbridge facility was not operating in accordance with the terms of the General Class C Permit Approval. No penalties were assessed by the NOV. However, the NOV constituted notification that the facility is allegedly out of compliance with certain provisions of the General Class C Permit and/or the NJDEP Solid Waste regulations. The NOV remains an open matter because, as NJDEP stated in the NOV, while we have taken corrective actions, such actions do not preclude the State from initiating a future enforcement action with respect to the violations listed in the NOV. "
Shares issued as of update:
"37,662,708 shares of common stock outstanding as of December 3, 2009"
December 2008 it was slightly less than 6 million shares, so we are up 600% in the number of issued shares, but I am not sure if that includes 17.5 million potential shares for H warrant conversion potential? I think it might, but I am not sure.
Nice to see an Oppenheimer fund hold 5.7% of outstanding shares still in that SEC report (Note all my quotes in this post are from the recent SEC amended report).
There is a LOT of other stuff in the SEC report(s), but these were the ones that struck me as the most negative, and important.
I still believe in their product, and customers seem to be giving it rave reviews, but they have yet to make a profit, and are running into new operational problems (corroding digesters and odors, and unhappy neighbors, and NOV fines and permit issues that concern me now.
This stock may continue to be very volatile for some time, and is not recommended for those with weak hearts!
Lastly they seem to be loosing huge, increasing amounts of money ($1 million a month lately?), at this stage, even while sales are rising, implying POSSIBLY lower stock prices in the near term.
Be sure to look at pages 14 and 15 of the SEC report for the restated stock holders equity based on the recent stock sale and potential H warrant conversion. They seem to contradicting them selves regarding stock holders equity and net tangible book value before they raised cash with the newly issued shares. Lastly keep in mind that unless the stock price goes up over $1.30 to get class H warrant conversions, they only have about 40% of the cash and new equity shown on page 14-15, as that higher number is based on assumption of eventual H warrant conversion, adding cash at $1.30 per share, and increasing issued shares again by 17.5 million. Until (and if) those warrants convert, that extra 17.5 million shares will be a no show! In other words, the Class H warrants and potential stock conversion is not a concern, and is a good reason for the stock to go up over $1.30 someday, IMHO.
Right now I think our biggest concern as investors is now the continuing losses, and their magnitude, about $1 million per month loss rate, and the corroded digester(s) and continuing odor and NOV permit problems, bringing in engineering and design questions to me, and both will cost money to fix (more losses?). If their engineers screwed up the digester specs, what else is screwed up?
I just don't see the stock price going up, maybe even down from here until they fix these operational problems (Tank corrosion and odor problems and permit violations), and reduce the equity loss rate. Hard to say if others have undervalued the stock recently based on recent stock issue dilution, and original 3rd quarter report, which did not include all the cash raised from the recent stock sales, but this last report has me worried about the tank corrosion, cost of the damage, issues with engineering design now, and odor and permit NOVs (More engineering issues and questions, concerns), as well as magnitude of continuing losses which have gone up, not down so far.
I cut back my stock position recently, holding only some of the COINU units now (taking a 70% hair cut on what I could have sold the common shares for this summer, and down about 35% on the COINU units now), and hopping the price does not drop further while they try to solve their problems. If the price takes a huge dump, I may buy and sell to trade the volatility for now, and average down, I still like the long term business plan, and they have a huge sunk cost invested already. But I will net bet the farm on these guys at this time!
I still hope they pull a rabbit out of their hat. They have had some impressive votes of confidence by investors and financiers this year, but the stock price has not done well at all lately, and the 2 year chart looks sick. If the loss rate was not climbing still, and the odor, permit NOVs, and tank corrosion problems were not there, I would be extremely bullish on this stock at this price, so I will be watching their news closely!
