prer14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 2 )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
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Preliminary Proxy Statement |
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Confidential, For
Use of the
Commission Only (As
permitted
by Rule 14a-6(e)(2)) |
o Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CONVERTED ORGANICS INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing. |
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Form, Schedule or Registration Statement No.: |
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TABLE OF CONTENTS
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Converted Organics Inc.
137A Lewis Wharf
Boston, MA 02110
617 624 0111
Dear Stockholder:
The Special Meeting of Stockholders of Converted Organics Inc. (the “Company”) will be
held at ____________________, ____________________, Boston, Massachusetts __________ on February
___, 2011 at 9:30 a.m. local time.
The attached material includes the Notice of Special Meeting and the Proxy Statement, which
describes the business to be transacted at the meeting. We ask that you give them your careful
attention.
We hope that you are planning to attend the Special Meeting personally, and we look forward to
seeing you. It is important that your shares be represented at the meeting whether or not you are
able to attend in person. Accordingly, the return of the enclosed proxy as soon as possible will be
greatly appreciated and will ensure that your shares are represented at the Special Meeting. If you
do attend the Special Meeting, you may, of course, withdraw your proxy if you wish to vote in
person.
The Board of Directors recommends that you approve the proposals set forth in this proxy.
On behalf of the Board of Directors, I would like to thank you for your continued support and
confidence.
Sincerely,
/s/ Edward J. Gildea
Edward J. Gildea
President, Chief Executive Officer and Chairman of the Board
January ___, 2011
Important Notice Regarding the Availability of Proxy Materials
for the Special Meeting to be Held on February ____, 2011:
The Proxy Statement is available at
http://______________________
Converted Organics Inc.
Notice of Special Meeting of Stockholders
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Converted Organics Inc.
(the “Company”) will be held at __________________ as follows:
Date: February ____, 2011
Time: 9:30 am
Place: [INSERT ADDRESS]
The purpose of the meeting is to vote on the following matters:
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To approve the issuance of 20% or more of our common stock related to the Notes and
Series B Warrants that were issued in the Initial Closing pursuant to the Securities Purchase Agreement
entered into by the Company on December 17, 2010 (the “Purchase Agreement”); |
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To approve any future adjustments of the exercise prices for both the Series A
and Series C Warrants below their floor prices in accordance with the terms of such
warrants that were issued pursuant to the Purchase Agreement; |
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To approve the issuance of 20% or more of our common stock related to the
Additional Notes and Warrants that may be issued at the Additional Closing pursuant to
the Purchase Agreement; and |
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To approve any future adjustments of the exercise price of the Company’s
currently outstanding Class G warrants below the temporary floor price in the Class G
warrants in accordance with the terms of such warrants. |
Further information about the meeting is contained in the accompanying Proxy Statement. All
stockholders of record on ___________________ may vote at this meeting.
By Order of the Board of Directors
/s/ Edward J. Gildea
Edward J. Gildea
President, Chief Executive Officer and Chairman of the Board
Boston, Massachusetts
______________________
Your vote is important.
If you do not plan to attend the meeting, please sign, date and promptly return the enclosed
proxy. A postage-paid reply envelope is enclosed for your convenience. A stockholder who submits a
proxy may revoke it at any time before the vote is taken at the meeting, or by voting in person at
the meeting.
Converted Organics Inc.
137A Lewis Wharf
Boston, MA 02110
PROXY STATEMENT
Special Meeting of Stockholders
February ___, 2011
Introduction
This proxy statement contains information about a Special Meeting of Stockholders (the
“Special Meeting”) of Converted Organics Inc. (the “Company,” “we,” “our,” or “us”) to be held at
____________________, February ___, 2011, at 9:30 a.m. local time, and at any postponements or
adjournments thereof. Our Board of Directors is using this proxy statement to solicit proxies for
use at the Special Meeting. This proxy statement and the enclosed proxy card are being mailed on or
about January ___, 2011 to stockholders entitled to vote at the Special Meeting.
Purpose of the Special Meeting
The purpose of the meeting is to vote on the following matters:
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To approve the issuance of 20% or more of our common stock related to the
Notes (as defined in this proxy statement) and Series B Warrants that were issued
in the Initial Closing pursuant to the Securities Purchase Agreement entered into by the Company on December
17, 2010 (the “Purchase Agreement”); |
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To approve any future adjustments of the exercise prices for both the Series
A and Series C Warrants below their floor prices in accordance with the terms of such
warrants that were issued pursuant to the Purchase Agreement; |
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To approve the issuance of 20% or more of our common stock related to the
Additional Notes and Warrants that may be issued at the Additional Closing pursuant to
the Purchase Agreement; and |
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To approve any future adjustments of the exercise price of the Company’s
currently outstanding Class G warrants below the temporary floor price in the Class G
warrants in accordance with the terms of such warrants. |
Each of the defined terms used in this section are defined in this proxy statement.
Who Can Vote
Stockholders of record as of the close of business on _________________ (the “Record Date”)
are entitled to receive notice of, to attend, and to vote at the Special Meeting. As of
__________________, there were ____________________shares of our common stock issued and
outstanding. Holders of our common stock are entitled to one vote per share. Cumulative voting is
not permitted. The enclosed proxy card shows the number of shares that you are entitled to vote.
How to Vote
You may give instructions on how your shares are to be voted by marking, signing, dating and
returning the enclosed proxy card in the accompanying postage-paid envelope.
A proxy, when executed and not revoked, will be voted in accordance with its instructions. If
no choice is indicated on the proxy, the shares will be voted:
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FOR the approval of the issuance of 20% or more of our common stock related to the
Notes and Series B Warrants that were issued in the Initial
Closing pursuant to the Purchase Agreement
(Proposal No. 1); |
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FOR the approval of any future adjustments of the exercise prices for both the
Series A and Series C Warrants below their floor prices in accordance with the terms
of such warrants that were issued pursuant to the Purchase Agreement (Proposal No. 2); |
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FOR the approval of the issuance of 20% or more of our common stock related to the
Additional Notes and Warrants that may be issued at the Additional Closing pursuant to
the Purchase Agreement (Proposal No. 3); and |
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FOR the approval of any future adjustments of the exercise price of the Company’s
currently outstanding Class G warrants below the temporary floor price in the Class G
warrants in accordance with the terms of such warrants (Proposal No. 4). |
Revoking a Proxy
A stockholder may revoke any proxy given pursuant to this solicitation by attending the
Special Meeting and voting in person, or by delivering to the Company’s Corporate Secretary at the
Company’s principal executive offices referred to above, prior to the Special Meeting, a written
notice of revocation or a duly executed proxy bearing a date later than that of the previously
submitted proxy. Please note that a stockholder’s mere attendance at the Special Meeting will not
automatically revoke that stockholder’s previously submitted proxy.
Quorum and Voting Requirements
A quorum of stockholders is necessary to hold a valid meeting. A quorum will exist if
stockholders holding one third (1/3) of the outstanding shares of common stock entitled to vote are
present at the meeting in person or by proxy. Shares of common stock that are voted “FOR,”
“AGAINST” or “ABSTAIN” are treated as being present at the meeting for purposes of establishing a
quorum. If a quorum is not present, the meeting may be adjourned until a quorum is obtained.
Shares that are voted “FOR,” “AGAINST” or “ABSTAIN” with respect to a matter will also be
treated as shares entitled to vote at the meeting with respect to such matter. Abstentions will be
counted for purposes of quorum and will have the same effect as a vote “AGAINST” a proposal.
Broker non-votes (i.e., votes from shares of common stock held as of the Record Date by
brokers or other custodians as to which the beneficial owners have given no voting instructions)
will be counted for purposes of determining the presence or absence of a quorum for the transaction
of business, but will not be counted for purposes of determining the number of votes cast with
respect to a particular proposal on which the broker has expressly not voted. Accordingly, broker
non-votes will not affect the outcome of the voting on a proposal.
Assuming the presence of a quorum at the Special Meeting:
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The affirmative vote of a majority of the common stock
present at the meeting and entitled to vote is required to approve the
issuance of 20% or more of our common stock related to the Notes and Series B
Warrants that were issued in the Initial
Closing pursuant to the Purchase Agreement; |
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The affirmative vote of a majority of the common stock
present at the meeting and entitled to vote is required to approve any future
adjustments of the exercise prices for both the Series A and Series C
Warrants below their floor prices in accordance with the terms of such
warrants that were issued pursuant to the Purchase Agreement; |
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The affirmative vote of a majority of the common stock present at the
meeting and entitled to vote is required to approve the issuance of 20% or
more of our common stock related to the Additional Notes and Warrants that
may be issued at the Additional Closing pursuant to the Purchase Agreement;
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The affirmative vote of a majority of the common stock
present at the meeting and entitled to vote is required to approve any future
adjustments of the exercise price of the Company’s currently outstanding
Class G warrants below the temporary floor price in the Class G warrants in
accordance with the terms of such warrants. |
Dissenter’s Rights of Appraisal
No action will be taken in connection with the proposal described in this Proxy Statement for
which Delaware law, our Certificate of Incorporation or Bylaws provide a right of a shareholder to
dissent and obtain appraisal of or payment for such shareholder’s shares.
Proxy Solicitation Costs and Methods
We will pay all costs of soliciting proxies. In addition to mailing proxy solicitation
material, our management, employees and agents also may solicit proxies in person, by telephone, or
by other electronic means of communication. We have retained to assist it in
soliciting proxies. We have agreed to pay a fee of $ , plus expenses, for its
services in connection with the special meeting.
PROPOSAL NO. 1
APPROVAL OF THE ISSUANCE OF 20% OR MORE OF OUR COMMON STOCK RELATED
TO THE CONVERTIBLE NOTES AND SERIES B WARRANTS ISSUED IN THE INITIAL
CLOSING PURSUANT TO THE
PURCHASE AGREEMENT
Nasdaq Listing Rule 5635(d) requires shareholder approval of a transaction other than a public
offering involving the sale, issuance or potential issuance of common stock (or securities
convertible into or exercisable for common stock) at a price that is less than the greater of book
or market value of the stock, if the number of shares of common stock to be issued is or may be
equal to 20% or more of the common stock, or 20% or more of the voting power, outstanding before
the issuance (the “20% Share Limitation”).
On December 17, 2010, we entered into the Purchase Agreement with certain institutional
investors (collectively, “Buyers”), pursuant to which we agreed to sell to Buyers certain Notes
(defined below) and Warrants (defined below). The following is a summary of the terms of the
Purchase Agreement, as well as a summary of certain provisions of the Purchase Agreement that would
require us to exceed the 20% Share Limitation. Until we receive shareholder approval for the
proposals set forth in this proxy statement, we are not permitted to exceed the 20% Share
Limitation.
Description of Notes
Pursuant to the Purchase Agreement, we agreed to sell to the Buyers convertible notes in the
aggregate original principal amount of $4,990,000 (the “Notes”), which Notes are convertible into
shares of our common stock, such Notes to be purchased by Buyers in two tranches, the first of
which involved the sale of Notes in the aggregate original principal amount of $3,939,473.68 (the
“Initial Notes”), and the closing of the purchase of the Initial Notes occurred simultaneously with
the execution of the Purchase Agreement (the “Initial Closing”). The Initial Notes were issued with
an original issue discount of approximately 4.8%, and the purchase price of the Initial Notes was
$3,750,000.
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The second tranche, which is subject to our receiving shareholder approval of the items set
forth in this proxy statement, will involve the sale of Notes in the aggregate original principal
amount of $1,050,526.32 (the “Additional Notes”) and shall be consummated upon the satisfaction (or
waiver) of the conditions to closing set forth in the Purchase Agreement (the “Additional
Closing”). The Additional Notes will also be issued with an original issue discount of
approximately 4.8%, and the purchase price of the Additional Notes is $1,000,000. 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.
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Notes are initially convertible at the sole option of the Note holders into shares of common stock at a conversion price of $1.00
per share; provided that if we make certain dilutive issuances (with limited exceptions), the
conversion price of the Notes will be lowered to the per share price for the dilutive issuances. 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 (with no limitation on the period during which we may specify that the Notes may be converted at such lower price). We are not required to exercise this right, and
would only do so if we believe making such election would encourage the Note holders to convert
their Notes into shares of common stock, thereby eliminating our requirement to repay the Notes in
cash.
For example, we may elect to lower the conversion price of the
Notes below the market price of our common stock in order to incentivize the Note
holders to convert the Notes into common stock and eliminate the debt more quickly.
As stated
above, the option to exercise the conversion rights rests solely with the Note holders, and there is no assurance that the Note
holders would exercise their conversion rights if we lowered the conversion price. For example, the Note holders may prefer to
receive the installment payments on the Notes over the six month term, as opposed to electing an earlier conversion.
The price and volume of our common stock has been volatile in the past, which may cause the Note holders
to choose not to elect an early conversion of the Notes. To the extent we exercise our right to permit the holders to exercise
the Notes at a lower conversion price and regardless of whether the Note holders choose to convert the Notes at such lower price,
such exercise or conversion will not result in the lowering of the exercise price of the Series A, B or C warrants.
We are required to repay the Notes in six equal installments commencing February 1, 2011 (with
respect to the Initial Notes), either in cash or in shares of our common stock.
Our obligation to repay the Notes in installments is not related to the Note holders ability to exercise
their conversion rights. We have the option to pay the installments either in cash or in shares of our common stock,
but our installment payment method will not effect the Note holders ability to exercise their conversion rights.
If we choose to
utilize shares of our common stock for the payment, we must make an irrevocable decision to use
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 then in effect and (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 holders 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 the notice electing to pay in our shares. 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 holders 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 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 all 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 holders or any of their
affiliates would beneficially own more than 4.9% of our common stock.
Description of Warrants
In addition, pursuant to the terms of the Purchase Agreement, we also 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 “Warrants”). The
Warrants will be issued in two tranches on the date the Initial Notes were issued and on the date
the Additional Notes are issued, on a pro rata basis based on the principal amount that was issued
or is being issued in the applicable closing based on the aggregate principal amount that could be
issued at both closings.
The Series B Warrants are exercisable anytime after the earlier to occur of our obtaining
shareholder approval of the proposals set forth in this proxy statement or the date on which the
Initial Notes are no longer outstanding and expires upon the earlier to occur of: (i) the first
anniversary of the date on which it becomes exercisable and (ii) the nine-month anniversary of the
date on which such shareholder approval is obtained. The Series B Warrants provide that the holders
are initially entitled to purchase an aggregate of 4,990,000 shares (warrants to purchase 3,939,474
shares of common stock were issued at the Initial Closing and warrants to purchase 1,050,526 shares
of common stock will be issued at the Additional Closing if it occurs) at an initial exercise price
of $1.00 per share. If we make certain dilutive issuances
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(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 (see above for a discussion of the Note installment payments). 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 ($3,939,474 for the Series B Warrants
issued in the Initial Closing and $1,050,526 for the Series B Warrants to be issued at the
Additional Closing if it occurs).
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 get shareholder approval of the proposals set
forth in this proxy statement, we may force the exercise of the Series B Warrants if we meet
certain conditions.
The Series A and Series C Warrants are exercisable anytime after the earlier to occur of (i)
the date on which shareholder approval of the proposals set forth in this proxy statement is
obtained and (ii) the six month and one day anniversary of the Initial Closing 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 will be issued at the
Additional Closing if it occurs) 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 will be issued at the Additional Closing if
it occurs) 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. For example, if a holder has exercised 20% (by dollar value) of its Series B Warrants,
then it may exercise 20% (by dollar value) of its Series C Warrants.
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 Initial Notes (see above for a discussion of
the Note installment payments). Until we obtain shareholder approval of the proposals set forth in
this proxy statement (see Proposal 2), the floor price of the Series A and Series C Warrants is
$0.345. Pursuant to Nasdaq’s guidance regarding the implementation of Listing Rule 5635(d), we
were required to set the initial exercise date for the Series A and C Warrants at six months and
one day after the Initial Closing and establish the floor price of $0.345, which was equal to the
consolidated closing bid price of our common stock on the date of the Purchase Agreement, or we
would have been required to obtain shareholder approval for the issuance of the Series A and C
Warrants. In the Purchase Agreement, we agreed to solicit shareholder approval to remove the floor
price for the Series A and C Warrants, and this approval is being sought at the special meeting.
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
its 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. Neither the Notes nor the
Series B Warrants may be converted or exercised, as applicable, if the total number of shares that
would be issued would exceed 19.99% of our
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common stock on the date the Purchase Agreement was executed, or 16,819,333 shares based on
84,096,669 shares outstanding as of December 17, 2010, prior to our receiving shareholder approval
of the proposals set forth in this proxy statement.
Conditions to Closing of the Additional Notes (and related Warrants)
The obligation of Buyers to purchase the Additional Notes (and related Warrants) at the
Additional Closing is subject to the satisfaction of certain conditions, including, without
limitation, the following:
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We shall have obtained the shareholder approval of the proposals set forth in this
proxy statement. |
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There is then no Equity Conditions Failure (as defined in the Notes). |
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Each and every representation and warranty of ours shall be true and correct as of
the date when made and as of the closing date of the Additional Notes as though
originally made at that time (except for representations and warranties that speak as
of a specific date, which shall be true and correct as of such date) and we shall have
performed, satisfied and complied in all respects with the covenants, agreements and
conditions required to be performed, satisfied or complied with by us at or prior to
such additional closing date. |
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Our common stock (I) shall be designated for quotation or listed on NASDAQ Capital
Market and (II) shall not have been suspended by the SEC or Nasdaq from trading on
such market. |
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Since the date of execution of the Purchase Agreement, no event or series of events
shall have occurred that reasonably would have or result in a material adverse effect
on us. |
Issuance of 20% or More of the Outstanding Common Stock
On December 17, 2010 and immediately after the execution of the Purchase Agreement, there were
84,096,669 shares of common stock issued and outstanding, which under Nasdaq Listing Rule 5635(d)
would prohibit us from issuing more than 16,819,333 shares of common stock without shareholder
approval. Shareholder approval was not sought in advance of entering into the Purchase Agreement
due to the fact that such approval was not required pursuant to Nasdaq rules and regulations and
would have unnecessarily delayed the execution of the transaction documents and our receipt of the
proceeds from the Initial Closing. By executing the transaction documents prior to receiving
shareholder approval, we were able to receive the proceeds of the financing from the Initial
Closing before incurring the expenses related to obtaining shareholder approval, including the
costs of preparing the proxy statement and holding the shareholder meeting.
Consequences of Failure to Receive Shareholder Approval
Shareholder approval is required to enable us to issue more than 16,819,333 shares of our
common stock pursuant to the transaction documents. In connection with the Notes, to the extent we
utilize our shares of common stock to pay the installments required under the Notes, our inability
to issue greater than 16,819,333 shares may require us to utilize our cash to repay the Notes,
which would reduce the amount of cash available to us to operate our business. In addition, the
Buyers are not required to purchase the Additional Notes unless, among other items, we receive
shareholder approval of the proposals set forth in this proxy statement. As such, our failure to
receive shareholder approval of the proposals set forth in this proxy statement would prevent us
from receiving $1,000,000 in gross proceeds from the sale of the Additional Notes plus any proceeds
from the exercise of the Warrants that would be issued in connection with the Additional Notes.
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In connection with the Series B Warrants, our inability to issue greater than 16,819,333
shares may limit the ability of the warrant holders to exercise the Series B Warrants, which would
lessen the amount of cash provided to us from this financing transaction. In connection with the
Series A and C Warrants, our inability to remove the floor price of the warrants (Proposal 2), may
prevent the warrant holders from exercising the Series A and C warrants to the extent the exercise
price of the warrants exceeds the market price of our common stock, which would lessen the amount
of cash provided to us from this financing transaction.
To the extent that are unable to receive shareholder approval of the proposals set forth in
this proxy statement, we agreed in the Purchase Agreement to cause an additional shareholder
meeting to be held every three months thereafter until such approval is obtained. As such, our
failure to receive shareholder approval of the proposals set forth in this proxy statement will
require us to incur the costs of holding one or more additional shareholder meetings until we
receive such approvals.
Until we receive shareholder approval of the proposals set forth in this proxy statement, we
may not, directly or indirectly, issue or sell, or, in accordance with terms set forth in the
Warrants, be deemed to have issued or sold, any shares of common stock (with limited exceptions)
for consideration per share less than the floor price of $0.345 per share at any time while any of
the Notes or Warrants are outstanding without the prior written consent of each Buyer, which
consent may be granted or withheld in each Buyer’s sole discretion. This limitation could prevent
us from raising additional capital in the future.
Risks Associated with Approval of Proposals
If we receive shareholder approval of the proposals set forth in this proxy statement, and if
we were to issue shares of our common stock in excess of the 16,819,333 shares currently permitted
to be issued pursuant to the Purchase Agreement, such issuances may affect the rights of existing
holders of our common stock to the extent that future issuances of common stock reduce each
existing shareholder’s proportionate ownership and voting rights. In addition, possible dilution
caused by future issuances of common stock could lead to a decrease in our net income per share in
future periods and a resulting decline in the market price of our common stock.
Assuming we receive shareholder approval of the proposals set forth in this proxy statement
and assuming we choose to repay the Notes solely in shares of our common stock (we may repay the
Notes in cash), the following table shows the number of shares that would be issuable under the
Notes and Warrants at various assumed Installment Conversion Prices:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Assumed |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
| average |
|
shares |
|
|
|
|
|
|
|
|
|
Total |
|
Number of |
|
proceeds |
|
|
|
|
| Installment |
|
required |
|
|
|
|
|
Number of |
|
proceeds |
|
shares |
|
to us upon |
|
Total |
|
|
| Conversion |
|
to repay |
|
Total |
|
shares |
|
to us upon |
|
underlying |
|
exercise of |
|
shares to |
|
Total |
| Price for |
|
the Notes |
|
proceeds |
|
underlying |
|
exercise of |
|
the Series |
|
the Series |
|
be issued |
|
proceeds |
| repayment |
|
solely in |
|
to us from |
|
the Series |
|
the Series |
|
A and C |
|
A and C |
|
in |
|
to us from |
| of the |
|
common |
|
sale of the |
|
B |
|
B |
|
Warrants |
|
Warrants |
|
financing |
|
financing |
| Notes (1) |
|
stock |
|
Notes |
|
Warrants |
|
Warrants |
|
(2) |
|
(2) |
|
(3) |
|
(3) |
$0.20 |
|
|
24,950,000 |
|
|
$ |
4,990,000 |
|
|
|
24,950,000 |
|
|
$ |
4,990,000 |
|
|
|
4,990,000 |
|
|
$ |
998,000 |
|
|
|
54,890,000 |
|
|
$ |
10,978,000 |
|
$0.30 |
|
|
16,633,333 |
|
|
$ |
4,990,000 |
|
|
|
16,633,333 |
|
|
$ |
4,990,000 |
|
|
|
4,990,000 |
|
|
$ |
1,497,000 |
|
|
|
38,256,667 |
|
|
$ |
11,477,000 |
|
$0.50 |
|
|
9,980,000 |
|
|
$ |
4,990,000 |
|
|
|
9,980,000 |
|
|
$ |
4,990,000 |
|
|
|
4,990,000 |
|
|
$ |
2,495,000 |
|
|
|
24,950,000 |
|
|
$ |
12,475,000 |
|
$0.75 |
|
|
6,653,333 |
|
|
$ |
4,990,000 |
|
|
|
6,653,333 |
|
|
$ |
4,990,000 |
|
|
|
4,990,000 |
|
|
$ |
3,742,500 |
|
|
|
18,296,667 |
|
|
$ |
13,722,500 |
|
$1.00 |
|
|
4,990,000 |
|
|
$ |
4,990,000 |
|
|
|
4,990,000 |
|
|
$ |
4,990,000 |
|
|
|
4,990,000 |
|
|
$ |
4,990,000 |
|
|
|
14,970,000 |
|
|
$ |
14,970,000 |
|
7
|
|
|
| (1) |
|
Installment Conversion Price is the lower of (i) the conversion price of the Notes then in
effect and (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. |
| |
| (2) |
|
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. |
| |
| (3) |
|
Assuming all Warrants are exercised and the Notes are repaid solely in common stock. |
Vote Required
The affirmative vote of a majority of the common stock present at the meeting and entitled to
vote is required to approve the issuance of 20% or more of our common stock related to the Notes
and Series B Warrants that were issued pursuant to the Purchase Agreement.
Recommendation
The Board recommends that the stockholders vote “FOR” the approval of the issuance of 20% or
more of our common stock related to the Notes and Series B Warrants that were issued pursuant to
the Purchase Agreement.
PROPOSAL NO. 2
APPROVAL OF ANY FUTURE ADJUSTMENTS OF THE EXERCISE PRICES FOR BOTH THE
SERIES A AND SERIES C WARRANTS BELOW THEIR FLOOR PRICES IN ACCORDANCE
WITH THE TERMS OF SUCH WARRANTS THAT WERE ISSUED PURSUANT TO THE
PURCHASE AGREEMENT.
General
Pursuant to the terms of the Purchase Agreement, we also issued to the Buyers Series A
Warrants and Series C Warrants. The Series A and Series C Warrants are exercisable anytime after
the earlier to occur of (i) the date on which shareholder approval of the proposals set forth in
this proxy statement is obtained and (ii) the six month and one day anniversary of the Initial
Closing 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 will be issued at the Additional Closing if it occurs) 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 will be issued at the
Additional Closing if it occurs) 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. For example, if a holder has exercised 20% (by dollar value) of
its Series B Warrants, then it may exercise 20% (by dollar value) of its Series C Warrants.
Floor Price Elimination
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 Initial Notes (see Proposal 1 above for a
discussion of the Note installment payments). The floor price of the Series A and Series C Warrants
is currently $0.345. Pursuant to Nasdaq’s guidance regarding the implementation of Listing Rule
5635(d), we were required to set the initial exercise date for the Series A and C Warrants at six
months and one day after the Initial Closing and establish the floor price of $0.345, which was
equal to the consolidated closing bid price of our common
8
stock on the date of the Purchase Agreement, or we would have been required to obtain
shareholder approval for the issuance of the Series A and C Warrants. In the Purchase Agreement,
we agreed to solicit shareholder approval to allow issuances below the floor price for the Series A and C
Warrants, and this approval is being sought at the special meeting pursuant to this Proposal 2.
Consequences of Failure to Receive Shareholder Approval for the Elimination of the Floor Prices
In
connection with the Series A and C Warrants, our inability to
allow issuances below the floor price of the
warrants, may prevent the warrant holders from exercising the Series A and C warrants to the extent
the exercise price of the warrants exceeds the market price of our common stock, which would lessen
the amount of cash provided to us from this financing transaction.
To the extent that are unable to receive shareholder approval of the proposals set forth in
this proxy statement, we agreed in the Purchase Agreement to cause an additional shareholder
meeting to be held every three months thereafter until such approval is obtained. As such, our
failure to receive shareholder approval of the proposals set forth in this proxy statement will
require us to incur the costs of holding one or more additional shareholder meetings until we
receive such approvals.
Until we receive shareholder approval of the proposals set forth in this proxy statement, we
may not, directly or indirectly, issue or sell, or, in accordance with terms set forth in the
Warrants, be deemed to have issued or sold, any shares of common stock (with limited exceptions)
for consideration per share less than the floor price of $0.345 per share at any time while any of
the Notes or Warrants are outstanding without the prior written consent of each Buyer, which
consent may be granted or withheld in each Buyer’s sole discretion. This limitation could prevent
us from raising additional capital in the future.
Risks Associated with Approval of the Elimination of the Floor Prices
If we receive shareholder approval to eliminate the floor prices for the Series A and C
warrants, there will be no floor for the exercise prices of the warrants. To the extent we have
dilutive issuances at less than the floor price or to the extent the Installment Conversion Prices
used to repay the Initial Notes is less than the floor price, the holders of the Series A and C
warrants will be permitted to exercise their warrants at prices that are less than the current
floor price, and that may be less than the market price of our common stock on the date of
exercise. Such below-market exercises, or the perception in the market that such below-market
exercises could occur, may cause the price of our common stock to decrease. In addition, if the
warrant holders exercise the Series A and C warrants at prices below the then market price and then
sell their shares of common stock, such sales could cause the price of our common stock to
decrease.
Vote Required
The affirmative vote of a majority of the common stock present at the meeting and entitled to
vote is required to approve any future adjustments of the exercise prices for both the Series A and
Series C Warrants below their floor prices in accordance with the terms of such warrants that were
issued pursuant to the Purchase Agreement.
Recommendation
The Board recommends that the stockholders vote FOR the approval of any future adjustments of
the exercise prices for both the Series A and Series C Warrants below their floor prices in
accordance with the terms of such warrants that were issued pursuant to the Purchase Agreement.
9
PROPOSAL NO. 3
APPROVAL OF THE ISSUANCE OF 20% OR MORE OF OUR COMMON STOCK RELATED
TO THE ADDITIONAL NOTES AND WARRANTS THAT MAY BE ISSUED AT THE
ADDITIONAL CLOSING PURSUANT TO THE PURCHASE AGREEMENT.
General
As further discussed in Proposal 1, pursuant to the Purchase Agreement, we agreed to sell to
the Buyers, Notes in the aggregate original principal amount of $4,990,000, such Notes to be
purchased by Buyers in two tranches, the first of which involved the sale of Initial Notes in the
aggregate original principal amount of $3,939,473.68, and the closing of the purchase of the
Initial Notes occurred simultaneously with the execution of the Purchase Agreement. The second
tranche, which is subject to our receiving shareholder approval of this Proposal 3, as well as the
other items set forth in this proxy statement, will involve the sale of the Additional Notes in the
aggregate original principal amount of $1,050,526.32. The Additional Notes will be issued with an
original issue discount of approximately 4.8%, and the purchase price of the Additional Notes is
$1,000,000. The Additional Notes are not interest bearing, unless we are in default on the
Additional Notes, in which case the Additional Notes carry an interest rate of 18% per annum. The
Additional Notes have the same terms and conditions of the Initial Notes; provided that the six
equal installment repayment dates will commence on the 24th trading day after the
issuance of the Additional Notes.
Issuance of 20% or More of the Outstanding Common Stock
On December 17, 2010 and immediately after the execution of the Purchase Agreement, there were
84,096,669 shares of common stock issued and outstanding, which under Nasdaq Listing Rule 5635(d)
would prohibit us from issuing more than 16,819,333 shares of common stock without shareholder
approval. Shareholder approval was not sought in advance of entering into the Purchase Agreement
due to the fact that such approval was not required pursuant to Nasdaq rules and regulations and
would have unnecessarily delayed the execution of the transaction documents and our receipt of the
proceeds from the Initial Closing. By executing the transaction documents prior to receiving
shareholder approval, we were able to receive the proceeds of the financing from the Initial
Closing before incurring the expenses related to obtaining shareholder approval, including the
costs of preparing the proxy statement and holding the shareholder meeting.
Consequences of Failure to Receive Shareholder Approval
The Buyers are not required to purchase the Additional Notes unless, among other items, we
receive shareholder approval of the proposals set forth in this proxy statement. As such, our
failure to receive shareholder approval of the proposals set forth in this proxy statement would
prevent us from receiving $1,000,000 in gross proceeds from the sale of the Additional Notes plus
any proceeds from the exercise of the Warrants that would be issued in connection with the
Additional Notes.
To the extent that are unable to receive shareholder approval of the proposals set forth in
this proxy statement, we agreed in the Purchase Agreement to cause an additional shareholder
meeting to be held every three months thereafter until such approval is obtained. As such, our
failure to receive shareholder approval of the proposals set forth in this proxy statement will
require us to incur the costs of holding one or more additional shareholder meetings until we
receive such approvals.
Risks Associated with Approval of Proposals and Issuance of Additional Notes and Warrants
If we receive shareholder approval of the proposals set forth in this proxy statement, and if
we were to issue shares of our common stock in excess of the 16,819,333 shares currently permitted
to be issued pursuant to the Purchase Agreement, such issuances may affect the rights of existing
holders of our common stock to the extent that future issuances of common stock reduce each
existing shareholder’s proportionate ownership and voting rights. In addition, possible dilution
caused by future issuances of common stock could lead to a decrease in our net income per share in
future periods and a resulting decline in the market price of our common stock.
10
If we receive shareholder approval of the proposals set forth in this proxy statement, the
Additional Notes and Warrants that will be issued will be convertible, repaid in shares of common
stock or exercisable, as applicable, into an unknown number of shares of our common stock. The
Additional Notes and Warrants will be convertible, repaid in shares of common stock or exercisable,
as applicable, at prices that may be lower than the market price of our common stock. In addition,
the Series A and C warrants will not have a floor price limiting the price at which these warrants
may be exercised. As a result, conversion or exercise of these securities at below-market prices,
or the perception in the market that such below-market conversions or exercises could occur, may
cause the price of our common stock to decrease. In addition, if the holders of the Additional
Notes and Warrants convert their Additional Notes (or receive repayments on the Additional Notes in
shares of common stock) or exercise their Warrants at prices below the then market price and then
sell their shares of common stock, such sales could cause the price of our common stock to
decrease.
Vote Required
The affirmative vote of a majority of the common stock present at the meeting and entitled to
vote is required to approve the issuance of 20% or more of our common stock related to the
Additional Notes and Warrants that may be issued at the Additional Closing pursuant to the Purchase
Agreement.
Recommendation
The Board recommends that the stockholders vote FOR the approval of the issuance of 20% or
more of our common stock related to the Additional Notes and Warrants that may be issued at the
Additional Closing pursuant to the Purchase Agreement.
PROPOSAL NO. 4
APPROVAL OF ANY FUTURE ADJUSTMENTS OF THE EXERCISE PRICE OF THE
COMPANY’S CURRENTLY OUTSTANDING CLASS G WARRANTS BELOW THE
TEMPORARY FLOOR PRICE IN THE CLASS G WARRANTS IN ACCORDANCE WITH THE
TERMS OF SUCH WARRANTS.
General
In September 2009, we completed a financing transaction with one of the Buyers in which we
issued and sold to the Buyer, and the Buyer purchased for $1,400,000: (i) a secured convertible
promissory note in the principal amount of $1,540,000 (which was repaid in cash) and (ii) a
five-year warrant to purchase 2,500,000 shares of our common stock (the “Class G Warrants”).
The Class G Warrants have an exercise price of $1.25 per share, subject to certain
anti-dilution rights for issuances below such exercise price; provided that absent shareholder
approval, the exercise price may not be reduced to less than $1.08 per share in certain instances.
Pursuant to Nasdaq’s guidance regarding the implementation of Listing Rule 5635(d), we were
required to establish the floor price of $1.08, which was equal to the consolidated closing bid
price of our common stock on the date we entered into the agreement to issue the Class G Warrants,
or we would have been required to obtain shareholder approval for the issuance of the Class G
Warrants.
Pursuant to the Purchase Agreement, we agreed to ask for shareholder approval at the special
meeting to eliminate the temporary floor price of the Class G Warrants. If this proposal is
approved, if we make certain dilutive issuances (with limited exceptions), the exercise price of
the Class G Warrants will be lowered to the exercise price of the dilutive issuances. If we
receive shareholder approval of this proposal, there will be no floor price for the Class G
Warrants. Notwithstanding the foregoing, the Class G Warrants will not be adjusted solely as a
result of the issuance of the Notes, Warrants or shares of common stock underlying the Notes and
Warrants.
11
Vote Required
The affirmative vote of a majority of the common stock present at the meeting and entitled to
vote is required to approve any future adjustments of the exercise price of the Company’s currently
outstanding Class G warrants below the temporary floor price in the Class G warrants in accordance
with the terms of such warrants.
Recommendation
The Board recommends that the stockholders vote FOR the approval of any future adjustments of
the exercise price of the Company’s currently outstanding Class G warrants below the temporary
floor price in the Class G warrants in accordance with the terms of such warrants.
BENEFICIAL OWNERSHIP OF SECURITIES
Set forth below is information regarding the beneficial ownership of our common stock, as of
December 17, 2010 by:
| |
• |
|
each person whom we know owned, beneficially, more than 5% of our common stock; |
| |
| |
• |
|
each of our directors; |
| |
| |
• |
|
each of our executive officers; and |
| |
| |
• |
|
all of the current directors and executive officers as a group. |
We believe that, except as otherwise noted below, each named beneficial owner has sole voting
and investment power with respect to the shares listed. Unless otherwise indicated herein,
beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting or investment power with respect to shares beneficially owned.
Shares of common stock to be received upon conversion of preferred stock, or subject to options or
warrants currently exercisable or exercisable on or within 60 days of the date of this proxy
statement, are deemed outstanding for computing the percentage ownership of the person holding such
options or warrants, but are not deemed outstanding for computing the percentage ownership of any
other person.
| |
|
|
|
|
|
|
|
|
| |
|
Number of Shares of Common |
|
Percentage of Outstanding |
| Name of Beneficial Owner(1) |
|
Stock Beneficially Owned |
|
Shares of Common Stock(2) |
Edward J. Gildea |
|
|
2,304,859 |
(3) |
|
|
2.7 |
% |
| |
David R. Allen |
|
|
400,141 |
(4) |
|
|
* |
|
| |
Robert E. Cell |
|
|
204,000 |
(5) |
|
|
* |
|
| |
John P. DeVillars |
|
|
204,000 |
(5) |
|
|
* |
|
| |
Edward A. Stoltenberg |
|
|
208,868 |
(6)(7) |
|
|
* |
|
| |
Marshall Sterman |
|
|
— |
|
|
|
— |
|
| |
All directors and officers
as a group (six persons) |
|
|
3,321,868 |
|
|
|
3.9 |
% |
12
|
|
|
| * |
|
Less than 1% |
| |
| (1) |
|
The address of all persons named in this table, with the exception of Oppenheimer Funds, Inc.
is: c/o Converted Organics Inc., 137A Lewis Wharf, Boston, MA 02110. |
| |
| (2) |
|
Percentage of common stock outstanding is based on 84,096,669 shares of our common stock
outstanding as of December 17, 2010. |
| |
| (3) |
|
Includes 1,400 Class B Warrants and options to purchase 725,000 shares. |
| |
| (4) |
|
Includes options to purchase 381,195 shares. |
| |
| (5) |
|
Includes options to purchase 204,000 shares. |
| |
| (6) |
|
Includes options to purchase 194,000 shares. |
| |
| (7) |
|
Includes 2,966 shares beneficially owned and held in trust. |
STOCKHOLDER PROPOSALS FOR THE 2011 ANNUAL MEETING
Should a stockholder desire to include in next year’s annual meeting proxy statement a
proposal other than those made by the Board, such proposal must be sent to the Corporate Secretary
of the Company at 137A Lewis Wharf, Boston, MA 02110. Stockholder proposals must be received at our
principal executive offices no later than 120 days prior to the first anniversary of the date our
fiscal 2010 annual meeting proxy statement was mailed to stockholders, which was May 19, 2010. All
stockholder proposals received after this date will be considered untimely and will not be included
in the proxy statement for the fiscal 2011 annual meeting. The deadline for submission of
shareholder proposals that are not intended to be included in our proxy statement is 45 days prior
to the first anniversary of the date our fiscal 2010 annual meeting proxy statement was mailed to
stockholders, which was May 19, 2010.
DELIVERY OF DOCUMENTS TO STOCKHOLDERS
Pursuant to the rules of the SEC, we and our agents that deliver communications to our
stockholders are permitted to deliver to two or more stockholders sharing the same address a single
copy of our proxy statement. Upon written or oral request, we will deliver a separate copy of the
proxy statement to any stockholder at a shared address who wishes to receive separate copies of
such documents in the future. Stockholders receiving multiple copies of such documents may likewise
request that we deliver single copies of such documents in the future. Stockholders may notify us
of their requests by calling or writing us at our principal executive offices at 137A Lewis Wharf,
Boston, MA 02110, and our phone number is (617) 624-0111.
OTHER MATTERS TO COME BEFORE THE MEETING
Pursuant to our Bylaws, no other matters may properly come for action at the special
meeting.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. You may read and copy
reports, proxy statements and other information filed by us with the SEC at its public reference
room located at 100 F Street, N.E., Washington, D.C. 20549-1004. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain
copies of the materials described above at prescribed rates by writing to the SEC, Public Reference
Section, 100 F Street, N.E., Washington, D.C. 20549-1004. We files our reports, proxy statements
and other information
13
electronically with the SEC. You may access information on us at the SEC web site containing
reports, proxy statements and other information at http://www.sec.gov.
By Order of the Board of Directors,
/s/ Edward J. Gildea
Edward J. Gildea
President, Chief Executive Officer and
Chairman of the Board
January ____, 2011
14
CONVERTED ORGANICS INC.
PROXY
SPECIAL MEETING OF SHAREHOLDERS — __________________, 2011
Proposals — The Board of Directors recommends a vote FOR Proposal 1, FOR
Proposal 2, FOR Proposal 3 and FOR Proposal 4.
|
|
| |
1. |
|
To approve the issuance of 20% or more of our common stock related to the Notes and
Series B Warrants that were issued in the Initial Closing pursuant to the Securities Purchase Agreement entered
into by the Company on December 17, 2010; |
|
|
| |
| |
|
|
For o Against o Abstain o |
| |
| |
| |
2. |
|
To approve any future adjustments of the exercise prices for both the Series A and
Series C Warrants below their floor prices in accordance with the terms of such warrants
that were issued pursuant to the Securities Purchase Agreement entered into by the
Company on December 17, 2010; |
| |
| |
| |
|
|
For o Against o Abstain o |
| |
| |
| |
3. |
|
To approve the issuance of 20% or more of our common stock related to the Additional
Notes and Warrants that may be issued at the Additional Closing pursuant to the
Securities Purchase Agreement entered into by the Company on December 17, 2010; and |
| |
| |
| |
|
|
For o Against o Abstain o |
| |
| |
| |
4. |
|
To approve any future adjustments of the exercise price of the Company’s currently
outstanding Class G warrants below the temporary floor price in the Class G warrants in
accordance with the terms of such warrants. |
| |
| |
| |
|
|
For o Against o Abstain o |
[Sign, date and return the Proxy Card promptly using the enclosed envelope.]
Dated: , 2011
SIGNATURE(S) should be exactly as the name or names appear on this Proxy. If stock is
held jointly, each holder should sign. If signing is by attorney, executor, administrator, trustee
or guardian, please give full title.
Signature
Print Name
Signature
Print Name