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.     )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Converted Organics Inc.
7A Commercial Wharf West
Boston, MA 02110
617 624 0111

 

Dear Stockholder:

 

A special meeting of stockholders of Converted Organics Inc. (the “Company”) will be held at Marriott’s Custom House, 3 McKinley Square, Boston MA 02109 on April 23, 2009 at 10:00 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.

 

Your vote is important. Please sign, date and return your proxy card as soon as possible to make sure that your shares are represented at the special meeting. If you are a stockholder of record, you may also cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank how to vote your shares, or you may cast your vote in person at the special meeting by obtaining a proxy from your brokerage firm or bank.

 

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.

 

/s/ Edward J. Gildea

Edward J. Gildea

President, Chief Executive Officer and

Chairman of the Board

 

Dated: March 25, 2009

 

TABLE OF CONTENTS

 

Converted Organics Inc.
7A Commercial Wharf West
Boston, MA 02110
(617) 624-0111

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on April 23, 2009

 

To our stockholders:

 

We invite you to a special meeting of stockholders, which will be held at Marriott’s Custom House, 3 McKinley Square, Boston MA 02109, on April 23, 2009 at 10:00 a.m., local time. At the meeting, our stockholders will consider and act upon the following matters:

 

1. To approve the potential issuance of common stock equal to or greater than 20% of the Company’s common stock upon conversion of convertible notes or shares issuable upon exercise of warrants issued pursuant to an agreement entered into by the Company on March 6, 2009 with Professional Offshore Opportunity Fund, Ltd.

 

2. To approve the ability of the Company’s chief executive officer to adjourn the special meeting for the purpose of soliciting additional proxies.

 

No other matters will be addressed at the special meeting or any adjournment or postponement thereof. Stockholders of record at the close of business on March 23, 2009, the record date for the special meeting, are entitled to notice of, and to vote at, the meeting.

 

Your vote is important regardless of the number of shares you own. Whether or not you expect to attend the meeting, we hope you will take the time to vote your shares. If you are a stockholder of record, you may submit a proxy over the Internet or by completing and mailing the enclosed proxy card in the envelope provided. If your shares are held in “street name,” that is, held for your account by a broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted.

 

By Order of the Board of Directors

 

Edward J. Gildea

President, Chief Executive Officer and

Chairman of the Board

 

Boston, Massachusetts

March 25, 2009

 

 

 

 

Converted Organics Inc.
7A Commercial Wharf West
Boston, MA 02110

 

PROXY STATEMENT

 

Special Meeting of Stockholders
April 23, 2009

 

This proxy statement contains information about a 2008 Special Meeting of Stockholders (the “Special Meeting”) of Converted Organics Inc. (the “Company,” “we,” “our,” or “us”) to be held at the Marriott’s Custom House, 3 McKinley Square, Boston MA 02109, April 23, 2009, at 10:00 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 March 25, 2009 to stockholders entitled to vote at the Special Meeting.

 

The purpose of the meeting is to vote on the following matters:

 

1. To approve the potential issuance of common stock equal to or greater than 20% of our issued and outstanding common stock upon conversion of convertible notes or shares issuable upon exercise of warrants issued pursuant to an agreement (the “securities purchase agreement”) entered into on March 6, 2009 (the “20% Proposal”).

 

2. To approve the ability of the Company’s chief executive officer to adjourn the special meeting for the purpose of soliciting additional proxies (the “Adjournment Proposal”).

 

Pursuant to our bylaws, no other matters may be brought at the special meeting.

 

Stockholders of record as of the close of business on March 23, 2009 (the “Record Date”) are entitled to receive notice of, to attend, and to vote at the Special Meeting. As of the Record Date, there were 8,888,473 shares of 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.

 

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. You may also vote online by logging onto the internet at www.investorvote.com and following the steps outlined on the secured website.

 

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 FOR the 20% Proposal and FOR the Adjournment Proposal.

 

A stockholder may revoke any proxy given pursuant to this solicitation by attending the special meeting and voting in person, or by delivering to our Corporate Secretary at our 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.

 

A quorum of stockholders is necessary to hold a valid meeting. A quorum will exist if stockholders holding a majority of the outstanding shares of common stock entitled to vote are present at the meeting in person or by proxy. Abstentions and broker-dealer non-votes will be counted as “shares present” in determining whether this quorum has been reached. If a quorum is not present, the meeting may be adjourned until a quorum is obtained.

 

 

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 stockholder to dissent and obtain appraisal of or payment for such stockholder’s shares.

 

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.

 

Set forth below is information regarding the beneficial ownership of our common stock, as of March 9, 2009, by:

 

 

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 underlying 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 the options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person.

 

 

 

 

Overview of Proposal

 

Nasdaq Rule 4350(i) requires stockholder approval of a transaction other than a public offering involving the sale, issuance or potential issuance by a Nasdaq listed company, such as Converted Organics, 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 Company 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 “Rule 4350(i) NASDAQ 20% Share Limitation”). If, however, stockholder approval is not obtained, the Company would not be permitted to issue any shares above the 20% threshold. In addition, Nasdaq Rule 4350(i) requires stockholder approval of a transaction that would result in a change of control of the Nasdaq listed company. The following is a summary of certain provisions of the securities purchase agreement, which may require the Company to issue more than 20% of its common stock, and which may result in a change of control of the Company.

 

Investor Agreements

 

On March 6, 2009, we entered into a into a securities purchase agreement with Professional Offshore Opportunity Fund, Ltd. (the “investor”) under which, if we receive stockholder approval, we will issue a series of 10% convertible notes in a principal amount totaling up to $1,500,000 with a 10% original issue discount. The investor has placed funds into escrow to acquire $500,000 in principal amount of the convertible notes to be released if we receive stockholder approval, and has agreed to acquire four additional $250,000 increments in principal amount of the convertible note with the first increment occurring on the 30th day after receiving stockholder approval, and the remaining three increments monthly thereafter. The full amount of the original issue discount will be deducted from the final $250,000 increment.

 

The convertible notes will be convertible at an initial rate of 85% of the closing bid price of our common stock for the trading day immediately preceding any conversion (the “Conversion Price”); provided that if we issue securities in an equity financing transaction at a lower price than the Conversion Price, the Conversion Price will be reduced to such lower price; provided further that if we default on the note, the Conversion Price will be the lowest of the above prices or 70% of the average of the three lowest market prices of our common stock during the 20-day trading period immediately prior to any conversion.

 

The series of convertible notes all, collectively, mature one year from the date the first $500,000 increment is released to us, which would be the date we receive stockholder approval at the special meeting. During the period leading up to the maturity date, the 10% interest payable on the series of convertible notes will become owed in its entirety on the day of each funding (assuming each convertible note was outstanding for a period of one year) and added to the principal amount of the convertible note. If an event of default has occurred, all the convertible notes then outstanding will automatically become immediately due and payable, and the interest rate will increase to 18% per annum during the pendency of the event of default. The following will cause us to incur an event of default (references to “us,” “our, or “we” in the bullets below include our subsidiaries):

 

 

 

 

As additional consideration for the financing, we will issue the investor an aggregate of 1,713,307 Class B warrants in pro rata increments upon the issuance of each increment of the convertible notes. The Class B warrants are exercisable at $11.00 per warrant share.

 

The following schedules shows the purchase price (before and after the original issue discount), principal amount of convertible notes, and warrants to be issued to the investor:

 

 

 

 

Under the securities purchase agreement, we are required to obtain stockholder approval for the issuance of the shares of common stock issuable upon conversion of the convertible notes. We are required to obtain stockholder approval on or before the later of (a) May 15, 2010 or (b) 45 calendar days after the filing of a definitive proxy statement, if the Securities and Exchange Commission (“Commission”) staff reviews our preliminary proxy statement.

 

We also entered into a registration rights agreement with the investors, under which we agreed to provide the investor with registration rights for the Class B warrants and the common stock underlying the convertible notes and Class B warrants (the “registrable securities”). If we are successful in obtaining stockholder approval, within 10 days of receiving such approval we are required to file a registration statement covering the resale of the registrable securities. If the registration statement required to be filed is not timely filed, then we are required to pay the investor the sum of 2% of the face amount of the convertible notes and 2% of the Class B warrant market value as liquidated damages, and not as a penalty, for each 30 calendar day period, on a pro rata basis, until the registration statement is filed. The registration rights agreement requires the registration statement be declared effective by the Commission on or prior to 90 days after the filing date. If the registration statement is not declared effective within 90 days following the filing date, then we are required to pay the investor the sum of 2% of the face amount of the convertible notes and 2% of the Class B warrant market value, as liquidated damages and not as a penalty, for each 30 calendar day period, on a pro rata basis, following the 90 calendar day period after the filing date, until the registration statement is declared effective, and 2% for each successive 30 calendar day period thereafter.

 

For accounting purposes, the proceeds from the issuance of the convertible notes and warrants are allocated between debt and paid in capital based upon their respective fair values at the time of issuance. On March 6, 2009, the closing date of the transaction, the closing price of the Class B warrants on the

Nasdaq Capital Market was $0.33 per warrant. Thus, at closing, the total aggregate value of the warrants was $565,391 which is calculated as follows:

 

 

Based upon the above relative values, the portion of the proceeds to be allocated to the convertible notes is equal to $985,500, or 73% of the total value of the convertible notes after original issue discount. Thus, a discount on the convertible notes of $369,500, which is calculated as the difference between the total value of the convertible notes after original issue discount of $1,355,000 and the portion of the proceeds allocated to the convertible notes of $985,500 was recorded. The discount on the convertible notes will be amortized over the term of the convertible notes.

 

Commencing on the initial issuance date of the convertible notes (after receipt of stockholder approval), we will recognize interest expense equal to 10% of the principal amount of the convertible notes (or $150,000 in total interest expense), in addition, upon the initial issuance date of the convertible notes we will recognize interest expense in the form of original issue discount of 10% (or $150,000 in total interest expense). In addition, we would recognize additional interest expense of $267,123 resulting from the recognition of the beneficial conversion feature associated with the original proceeds that were allocated to the convertible notes and would further recognize $369,500 in interest expense associated with the amortization of the discount on the original loans relating to the issuance of warrants. Therefore, we would recognize total interest expense of $936,623 in the twelve month period commencing with the issuance of the first convertible note. If we were to convert these loans into shares of common stock at the default conversion rate discussed above an additional $217,492 in interest expense would be associated with the beneficial conversion feature calculation. Furthermore, if the convertible notes were to go into default, the stated interest rate on the convertible notes will increase to 18% per annum.

 

Issuance of 20% or More of the Outstanding Common Stock

 

On March 9, 2009 there were 8,052,345 shares of common stock issued and outstanding, which under NASDAQ Rule 4350(i) would prohibit us from issuing more than 1,610,469 shares of common stock at a price that is less than the greater of the book or market value of our common stock without stockholder approval. Because the securities purchase agreement and related documents may require that we issue shares above this threshold number at a price that is less than the greater than the book or market value of our common stock, stockholder approval is being sought to give us the ability to issue the shares. Specifically, the convertible notes in the aggregate principal and pre-paid interest amount of up to $1,650,000 is convertible into shares of our common stock at the rate per share equal to the lowest of:

 

 

The convertible note provides that with limited exceptions as discussed below, in no event will the holder of the convertible note be entitled to convert the convertible note, or will we have the obligation or option to issue shares upon such conversion, to the extent that, after such conversion or issuance the sum of (1) the number of shares of common stock beneficially owned by the convertible note holder and its affiliates, and (2) the number of shares of common stock issuable upon such conversion of the convertible note, would result

in beneficial ownership by the convertible note holder and its affiliates in excess of 4.99% of the then outstanding shares of common stock (after taking into account the shares to be issued to the convertible note holder upon such conversion). Notwithstanding the foregoing, the convertible note holder may waive this restriction at its option by providing us with 61 days notice that such holder wishes to waive the restriction. In addition, the foregoing restriction will not apply during the 45 day period prior to the maturity date of a convertible note, or while there is outstanding a tender offer for any of our shares of common stock.

 

On March 6, 2009, we also entered into an agreement with the holders of its $17.5 million of New Jersey Economic Development Authority Bonds to release $2.0 million for capital expenditures on its New Jersey facility and to defer interest payments on the bonds thru July 30, 2009. These funds had been held in a reserve for bond principal and interest payments along with a reserve for lease payments. As consideration for the release of the reserve funds, we issued the bond holders 2,284,409 Class B warrants. The Class B warrants are exercisable at $11.00 per warrant share.

 

Effect on Outstanding Common Stock; Potential for Change of Control

 

The issuance and sale of shares of our common stock to the investor would likely have a dilutive effect on a stockholder’s percentage voting power in us. As the convertible note is convertible at prices below the then market price of our common stock, if we were to issue additional shares upon conversion of the convertible note, the dilution caused by such issuances could lead to a decrease in the market price of our common stock. In addition, since the conversion prices will be below the market price of our common stock, even if conversions do not take place, the existence of the conversion rights could lead to a decrease in the market price of our common stock.

 

In addition, the issuance our common stock to the investor would increase the proportionate ownership of our outstanding common stock by the investor. Through its ownership of our common stock, the investor may have significant influence over corporate actions requiring stockholder approval, such as the election of directors, amendment of our charter documents and the approval of merger or significant asset sale transactions, which could render more difficult or discourage an attempt to obtain a controlling interest in us or the removal of the incumbent board of directors and may discourage unsolicited takeover attempts which might be desirable to stockholders. As discussed above in the section “— Issuance of 20% or More of the Outstanding Common Stock,” although the convertible note provides that the investor is limited in the number of shares it may convert into such that it will not own in excess of 4.99% of our then outstanding shares of common stock, it may waive this restriction on 61 days notice. If the holder of the convertible notes waives the 4.99% restriction, based on the conversion price in effect at the time of a conversion, it is possible that the investor could convert the convertible notes into a number of shares that would result in a change of control of the Company.

 

Assuming that the holder of the convertible notes waives the 4.99% restriction or such restriction is not applicable, the following table shows the approximate number of shares of common stock that the full amount of convertible notes, or $1,650,000, may be converted into based on a conversion price of 85% of the closing bid price of our common stock for the trading day immediately preceding any conversion and assuming such closing bid price is:

 

 

 

 

 

 

If the convertible notes are partially converted and the holder sells the shares of common stock issued upon conversion into the market, the price of our common stock may decrease due to the additional shares in the market. If the price of our common stock decreases, the holder of the convertible notes will receive a greater number of shares upon the conversion of the remaining convertible notes.

 

Consequences if Stockholder Approval is Not Obtained

 

If we do not obtain stockholder approval as described in this proxy statement, we will not issue and sell the convertible notes and warrants to the investor as contemplated by the securities purchase agreement because doing so would not be in compliance with the Marketplace Rules of the NASDAQ Stock Market, and such non-compliance could result in the delisting of our common stock from the NASDAQ Capital Market. In addition, obtaining stockholder approval is one of the conditions to the investor’s obligation to consummate the transaction. Accordingly, if we do not obtain stockholder approval, we will not receive the proceeds from the sale of the convertible notes.

 

Even if our stockholders approve the issuance and sale the convertible notes to the investor, we can provide no assurance that such issuance and sale will actually take place. The securities purchase agreement contains certain closing conditions which we must meet before the investor is obligated to consummate the closings of the convertible notes. There can be no assurance that we will meet all of these closing conditions.

 

Recommendation

 

We intend to use the proceeds from the convertible notes to fund working capital requirements during the second and third quarters of 2009. Although we expect to generate revenues from both our New Jersey and California facilities during that period, we do not believe such revenues will be sufficient to generate positive cash flow from operations. Therefore, we will be dependent on external financing, including the funds provided from the convertible notes, until we can achieve positive cash flow from our operations. If our sales do not reach a level to generate positive cash flow from operations prior to July 2009, then the funding from these convertible notes will not provide sufficient funds to sustain our operations and we will need to seek additional financing. We do not have any commitment for such additional financing, and there can be no assurance that such financing would be available to us.

 

After careful consideration of all relevant factors, our board of directors believes that it is in our best interest to have the ability to issue an aggregate amount of common stock that may exceed the Rule 4350 (i) NASDAQ 20% Share Limitation, pursuant to the transaction documents, and which may result in a change of control of the Company.

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “FOR” APPROVING THE POTENTIAL ISSUANCE OF COMMON STOCK EQUAL TO OR GREATER THAN 20% OF THE COMPANY’S COMMON STOCK UPON CONVERSION OF THE CONVERTIBLE NOTES OR UPON EXERCISE OF WARRANTS ISSUED PURSUANT TO THE SECURITIES PURCHASE AGREEMENT.

 

This proposal allows our chief executive officer to submit a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the time of the special meeting to approve the 20% Proposal.

 

If this proposal is not approved by our stockholders, we may not be able to adjourn the special meeting to a later date in the event there are not sufficient votes at the time of the special meeting to approve the 20% Proposal.

 

Approval of the Adjournment Proposal requires the affirmative vote of the holders of a majority of our common stock present in person or represented by proxy at the special meeting and entitled to vote thereon. Abstentions will have the effect of a vote against this proposal, but broker non-votes will have no effect on the approval of the proposal.

 

Recommendation

 

After careful consideration of all relevant factors, our board of directors determined that the Adjournment Proposal of the special meeting for the purpose of soliciting additional proxies is in the best interests of the Company and its stockholders.

 

THE BOARD OF DIRECTORS RECOMMENDS VOTING “FOR” APPROVING THE ABILITY OF THE COMPANY’S CHIEF EXECUTIVE OFFICER TO ADJOURN THE SPECIAL MEETING FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES.

 

In connection with our annual meeting, a proxy statement and notice will be mailed to all stockholders approximately one month prior to our next annual meeting. In order to be eligible for inclusion in our proxy statement for our next annual meeting, a proposal of a stockholder should have been received by our Corporate Secretary at our principal executive offices at 7A Commercial Wharf West, Boston, MA 02110 by January 1, 2009; provided, however, that in the event that the date of the next annual meeting is changed by more than 30 days from the date of the 2008 Annual Meeting (which was June 6, 2008), notice by the stockholder of any proposals must be received at our principal executive offices within a reasonable time before we begin to print and send our proxy materials.

 

CONVERTED ORGANICS INC.
7A Commercial Wharf West
Boston, MA 02110

 

Whether or not you plan to attend, you are urged to complete, date and sign the enclosed proxy card and return it in the accompanying envelope or follow the instructions provided for voting via the Internet, if applicable. Prompt response will greatly facilitate arrangements for the meeting, and your cooperation is appreciated. Stockholders who attend the meeting may vote their shares personally even though they have sent in their proxy cards or voted via the Internet.

 

By Order of the Board of Directors,

 

Chief Executive Officer

 

March 25, 2009

CONVERTED ORGANICS INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON
APRIL 23, 2009

The undersigned stockholder acknowledges receipt of the Notice of Special Meeting of Stockholders and the Proxy Statement, each dated March 25, 2009, and hereby appoints Edward J. Gildea and David Allen, or either of them, proxies for the undersigned, each with full power of substitution, to vote all of the undersigned’s shares of common stock of Converted Organics Inc. (the “Company”) at the Special Meeting of Stockholders of the Company to be held at Marriott’s Custom House, 3 McKinley Square, Boston MA 02109, on April 23, 2009 at 10:00 a.m., local time, and at any adjournments or postponements thereof.

1.		o For o Against o Abstain		To approve the potential issuance of common stock equal to or greater than 20% of the Company’s common stock upon conversion of convertible notes or shares issuable upon exercise of warrants issued pursuant to an agreement entered into by the Company on March 6, 2009 with Professional Offshore Opportunity Fund, Ltd.
2.		o For o Against o Abstain		To approve the ability of the Company’s chief executive officer to adjourn the special meeting for the purpose of soliciting additional proxies.

The board of directors recommends a vote FOR each of the above proposals and if no specification is made, the shares will be voted for such proposals.

		Dated                                                                               2009
		Stockholder’s Signature
		Stockholder’s Signature

Signature should agree with name printed hereon. If stock is held in the name of more than one person, EACH joint owner should sign. Executors, administrators, trustees, guardians, and attorneys should indicate the capacity in which they sign. Attorneys should submit powers of attorney.

PLEASE SIGN, DATE AND RETURN THE PROXY IN THE ENVELOPE ENCLOSED. THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE ABOVE PROPOSALS. THIS PROXY WILL REVOKE ALL PRIOR PROXIES SIGNED BY YOU.

To vote by Internet, go to www.investorvote.com and follow the steps outlined on the secured website.