defm14a
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:
o Preliminary
Proxy Statement
o Confidential,
For Use of the Commission Only (As Permitted by
Rule 14a-6(e)(2))
þ 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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No fee required
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Fee computed on table below per Exchange Act
Rules 14a-6(i)(1)
and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
The outstanding membership units of TerraSphere Systems LLC
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(2)
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Aggregate number of securities to which transaction applies:
100% of the outstanding membership units of TerraSphere Systems
LLC
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(3)
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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 was determined): A maximum being paid for 100% of
the outstanding membership units of TerraSphere Systems LLC is
$18,962,500.18. The transaction value is based on
34,166,667 shares of Converted Organics Inc. common stock
being issued at the average of the high and low price of the
registrants common stock reported on the NASDAQ Stock
Market on July 6, 2010, or $0.555.
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(4)
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Proposed maximum aggregate value of transaction: $18,962,500.18
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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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(1)
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Amount Previously Paid: $1,352.03
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(2)
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Form, Schedule or Registration Statement No.:
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This proxy
statement is dated July 30, 2010 and is first being mailed
to stockholders on or about July 30, 2010.
Converted
Organics Inc.
137A Lewis Wharf
Boston, MA 02110
617 624 0111
Dear Stockholder:
A Special Meeting of Stockholders of Converted Organics Inc.
(the Company) will be held at Renaissance Boston
Waterfront Hotel, 606 Congress Street, Boston, MA, 02210,
on August 31, 2010 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.
On July 6, 2010, a Membership Interest Purchase Agreement
was entered into by and among the Company, TerraSphere, Inc., a
wholly owned subsidiary of the Company, TerraSphere Systems LLC
(TerraSphere) and the members of TerraSphere,
pursuant to which the Company agreed to acquire 100% of
TerraSphere. The maximum total purchase price for TerraSphere
will be $25,830,000, which includes earn-out payments of up to
$11,040,000, payable solely in shares of common stock valued at
$0.756 per share. Pursuant to the purchase agreement, if the
acquisition is approved by the Companys stockholders, the
Company will issue up to 34,166,667 shares of its common
stock to the members of TerraSphere in exchange for 100% of the
units of TerraSphere, subject to certain anti-dilution
adjustments described in this proxy statement. Of these shares,
19,563,492 shares will be issued at the closing of the
acquisition, and the remainder of the shares will be issued if
TerraSphere achieves certain milestones described in this proxy
statement. Upon completion of the proposed acquisition,
TerraSphere would become a wholly-owned subsidiary of the
Company. TerraSphere designs, builds and operates highly
efficient and scalable systems, featuring a patented,
proprietary technology that utilizes vertically-stacked modules
to house rows of plants, which are then placed perpendicular to
an interior light source to grow pesticide-free, organic fruits
and vegetables. Due to a controlled, indoor environment, the
system generates fresh produce year-round in any location or
climate world-wide.
Pursuant to the rules of the NASDAQ Stock Market, the
TerraSphere acquisition requires the approval of the
Companys stockholders.
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. You may also vote by
telephone or the internet, as described on the proxy card. 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.
This proxy statement sets forth more information about
TerraSphere, the TerraSphere members and the purchase agreement.
We encourage you to carefully read this proxy statement before
voting, including the section entitled Risk Factors
beginning on page 12.
On behalf of the Board of Directors, I would like to thank you
for your continued support and confidence.
Sincerely,
Edward J. Gildea
President, Chief Executive Officer and
Chairman of the Board
Important
Notice Regarding the Availability of Proxy Materials
for the Special Stockholder Meeting to be Held on
August 31, 2010:
The Proxy Statement is available at
[http://ir.convertedorganics.com/annuals.cfm]
Converted
Organics Inc.
137A Lewis Wharf
Boston, MA 02110
617 624 0111
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD AUGUST 31,
2010
TO THE STOCKHOLDERS OF CONVERTED ORGANICS INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
Converted Organics Inc., a Delaware corporation (the
Company), relating to the proposed acquisition with
TerraSphere Systems LLC, a Massachusetts limited liability
company (TerraSphere), will be held at
9:30 a.m. Eastern time on August 31, 2010, at
Renaissance Boston Waterfront Hotel, 606 Congress Street,
Boston, MA, 02210, to consider and vote upon the following
matter:
Proposal 1. The issuance of up to
34,166,667 shares of Company common stock to the members of
TerraSphere in exchange for 100% of the units of TerraSphere,
subject to upward adjustment based on certain anti-dilution
protections described in this proxy statement. This proposal is
called the TerraSphere Proposal.
Proposal 2. Any adjournment of the
special meeting for the purpose of soliciting additional
proxies. This proposal is called the Adjournment
Proposal.
On July 6, 2010, a Membership Interest Purchase Agreement
was entered into by and among the Company, TerraSphere, Inc., a
wholly owned subsidiary of the Company, TerraSphere and the
members of TerraSphere, pursuant to which the Company agreed to
acquire 100% of TerraSphere. The maximum total purchase price
for TerraSphere will be $25,830,000, which includes earn-out
payments of up to $11,040,000, payable solely in shares of
common stock valued at $0.756 per share. Pursuant to the
purchase agreement, if the acquisition is approved by the
Companys stockholders, the Company will issue up to
34,166,667 shares of its common stock, subject to upward
adjustment based on certain anti-dilution protections, to the
members of TerraSphere in exchange for 100% of the units of
TerraSphere. Of these shares, 19,563,492 shares will be
issued at the closing of the acquisition, and the remainder of
the shares will be issued if TerraSphere achieves certain
milestones described in this proxy statement. Upon completion of
the proposed acquisition, TerraSphere would become a
wholly-owned subsidiary of the Company. The acquisition of
TerraSphere will require the issuance of approximately 84.6% of
the outstanding shares of Company before the issuance and would
represent 45.7% of our voting shares following the issuance,
assuming the maximum number of shares are issued in the
transaction.
Pursuant to the rules of the NASDAQ Stock Market, the
TerraSphere acquisition requires the approval by a majority of
the total votes cast at a special meeting of stockholders at
which a quorum is present.
Mr. Edward J. Gildea, the Companys Chairman and Chief
Executive Officer, has an interest in 8.75% of the units of
TerraSphere, and family members of Mr. Gildea hold
significant units of TerraSphere and serve as officers of
TerraSphere. Our board of directors formed an Acquisition
Committee of disinterested directors to evaluate and, if
appropriate, negotiate the proposed TerraSphere acquisition
because of Mr. Gildeas interest in TerraSphere. The
Acquisition Committee obtained valuation advice and a fairness
opinion from an independent investment bank, and negotiated the
terms of the TerraSphere acquisition with TerraSphere
management. Mr. Gildea did not participate in the
negotiations. The Acquisition Committee unanimously determined
that the terms of the TerraSphere acquisition are advisable,
fair to, and in the best interests of our stockholders. Upon the
Acquisition Committees unanimous recommendation, our board
of directors then unanimously (with Mr. Gildea abstaining)
determined that the terms of the TerraSphere acquisition are
advisable, fair to, and in the best interests of, our
stockholders.
After careful consideration, and upon the unanimous
recommendation of an Acquisition Committee of the disinterested
directors, our board of directors has unanimously (with
Mr. Gildea abstaining) approved the proposal referred to
above and concluded that it is advisable, fair to, and in the
best interests of our stockholders. The Acquisition Committee
and our board of directors unanimously
recommend that our stockholders vote FOR the
TerraSphere Proposal referred to above, and FOR the
Adjournment Proposal.
The Companys board of directors has fixed the record date
as the close of business on July 21, 2010, as the date for
determining stockholders entitled to receive notice of and to
vote at the special meeting and any adjournment thereof. The
holders of record of the Companys common stock on the
record date are entitled to have their votes counted at the
special meeting or any adjournment.
The proxy statement accompanying this notice sets forth more
information about TerraSphere, the TerraSphere members, the
purchase agreement and the interests of Mr. Gildea in the
acquisition. The accompanying materials also provide
instructions on how to vote your shares in person at the special
meeting or by proxy.
Dated: July 30, 2010
By Order of the Board of Directors
Edward J. Gildea
President, Chief Executive Officer and
Chairman of the Board
Boston, Massachusetts
July 30, 2010
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.
TABLE OF
CONTENTS
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F-1
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ii
SUMMARY
TERM SHEET
This section summarizes information related to the proposal to
be voted on at the special meeting. The proposal is described in
greater detail elsewhere in this proxy statement. You should
carefully read this entire proxy statement and the other
documents to which you are referred.
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The purpose of the special meeting is to approve our acquisition
of TerraSphere Systems LLC, or TerraSphere, pursuant to the
Membership Interest Purchase Agreement, or purchase agreement,
between us, TerraSphere Inc., our wholly owned subsidiary,
TerraSphere and TerraSpheres members dated July 6,
2010. See the section entitled The TerraSphere
Acquisition Description of the TerraSphere
Acquisition on page 23 for more information about the
acquisition and see the section entitled The Purchase
Agreement on page 36 for more information about the
purchase agreement.
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The maximum total purchase price for TerraSphere will be
$25,830,000, which includes earn-out payments of up to
$11,040,000, payable solely in shares of common stock valued at
$0.756 per share. Pursuant to the purchase agreement, if the
acquisition is approved by our stockholders, we will issue up to
34,166,667 shares of our common stock to the members of
TerraSphere in exchange for 100% of the units of TerraSphere,
subject to upward adjustment based on certain anti-dilution
protections, which represents 84.6% of our voting shares prior
to the issuance and would represent 45.7% of our voting shares
following the issuance, assuming the maximum number of shares
are issued in the transaction, based on our outstanding capital
stock at July 6, 2010. Of these shares,
19,563,492 shares will be issued at the closing of the
acquisition, and the remainder of the shares will be issued if
TerraSphere achieves certain milestones described in this proxy
statement.
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TerraSphere designs, builds and operates highly efficient and
scalable systems, featuring a patented, proprietary technology
that utilizes vertically-stacked modules to house rows of
plants, which are then placed perpendicular to an interior light
source to grow pesticide-free, organic fruits and vegetables.
Due to a controlled, indoor environment, the system generates
fresh produce year-round in any location or climate world-wide.
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Our Chairman and Chief Executive Officer, Mr. Edward
Gildea, has an interest in 8.75% of the units of TerraSphere. In
addition, relatives of Mr. Gildea hold an additional 30.75%
of the units of TerraSphere. Furthermore, Mark C. Gildea, the
brother of Edward Gildea, is the President and Chief Executive
Officer of TerraSphere, and William A. Gildea, also the brother
of Edward Gildea, is an independent contractor of TerraSphere.
See section entitled The TerraSphere
Acquisition Interests of Our Officers and Directors
in the TerraSphere Acquisition on page 35.
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Because of Mr. Gildeas relationship with TerraSphere,
our board of directors formed an Acquisition Committee to
evaluate and, if appropriate, negotiate the proposed TerraSphere
acquisition. The Acquisition Committee obtained valuation advice
and a fairness opinion from an independent investment bank, and
negotiated the terms of the TerraSphere acquisition with the
TerraSphere management. Mr. Gildea did not participate in
the negotiations. See section entitled The TerraSphere
Acquisition Opinion of the Acquisition
Committees Financial Advisor Regarding the TerraSphere
Acquisition on page 30.
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Due to the number of shares that would be issued in the
acquisition and the related party nature of the acquisition,
Rule 5635(a) of the NASDAQ Marketplace Rules requires us to
obtain stockholder approval of the issuance of common stock to
the TerraSphere members.
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With limited exceptions, the shares to be issued to the
TerraSphere members are subject to
lock-up
restrictions on future sales for periods of between six and
eighteen months. See section entitled The TerraSphere
Acquisition Description of the TerraSphere
Acquisition
Lock-Up of
Shares on page 25 for more information.
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During the applicable
lock-up
period described above, we have agreed to provide certain of the
TerraSphere members anti-dilution rights that require us to
issue them additional shares if we sell our common stock at a
price per share that is lower than the price at which we valued
the shares to be issued in the TerraSphere acquisition.
Messrs. Edward Gildea and William Gildea have not been
provided this anti-dilution protection. See section entitled
The TerraSphere Acquisition Description of the
TerraSphere Acquisition Anti-Dilution
Protection on page 25 for more information.
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1
QUESTIONS
AND ANSWERS ABOUT THE TERRASPHERE ACQUISITION
AND THE SPECIAL MEETING
These Questions and Answers below are only summaries of matters
described in this proxy statement. They do not contain all of
the information that may be important to you. You should read
carefully the entire document, including the annexes to this
proxy statement. The terms Converted,
Company, we, or our refer to
Converted Organics Inc.
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What is being voted on? |
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There are two proposals being presented at the special meeting.
The TerraSphere Proposal is the approval of the acquisition of
TerraSphere Systems LLC, or TerraSphere, by us through the
issuance of up to 34,166,667 shares of our common stock to
the members of TerraSphere in exchange for 100% of the units of
TerraSphere, subject to certain anti-dilution adjustments
described in this proxy statement. Of these shares,
19,563,492 shares will be issued at the closing of the
acquisition, and the remainder of the shares will be issued if
TerraSphere achieves certain milestones described in this proxy
statement. |
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The Adjournment Proposal is the approval of any adjournment of
the special meeting for the purpose of soliciting additional
proxies. |
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Why am I being asked to approve the TerraSphere
acquisition? |
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Our stock is listed on the NASDAQ Capital Market.
Rule 5635(a) of the NASDAQ Marketplace Rules requires
listed companies to obtain stockholder approval of issuances of
common stock in certain circumstances, including in connection
with the acquisition of the stock or assets of another company,
if: |
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the securities to be issued represent 20% or more of
the number of shares of common stock outstanding before the
issuance;
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the common stock has or will have upon issuance
voting power equal to or in excess of 20% of the voting power
outstanding before the issuance of stock or securities
convertible into or exercisable for common stock; or
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any director, officer or substantial shareholder of
the listed company has a 5% or greater interest (or such persons
collectively have a 10% or greater interest), directly or
indirectly, in the listed company or assets to be acquired or in
the consideration to be paid in the transaction or series of
related transactions and the present or potential issuance of
common stock, or securities convertible into or exercisable for
common stock, could result in an increase in outstanding common
shares or voting power of 5% or more.
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You are being asked to approve the issuance of the shares to be
issued to the TerraSphere members because the issuance
implicates each of the circumstances listed above, and, pursuant
to the purchase agreement, our stockholders approval of
the issuance of the shares is a condition to closing the
TerraSphere acquisition. We will hold a special meeting of our
stockholders to obtain approval of the issuance of the shares.
This proxy statement contains important information about the
special meeting, us, TerraSphere, the TerraSphere members, the
purchase agreement and the interests of our Chairman and Chief
Executive Officer in the acquisition, and you should read it
carefully. |
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Why are we proposing the TerraSphere acquisition? |
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We believe that the acquisition will provide substantial
strategic and financial benefits to our stockholders. We believe
our acquisition of TerraSphere will expand our portfolio of
sustainable, environmentally-friendly businesses, and will
provide us with an immediate revenue stream. |
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For a description of the other factors considered by the
Acquisition Committee of our board of directors in determining
to recommend approval of the TerraSphere acquisition, see
The TerraSphere Acquisition Our Reasons for
the TerraSphere Acquisition beginning on page 28. |
2
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Do our Acquisition Committee and board of directors
recommend voting in favor of the TerraSphere
acquisition and issuance of the shares in
connection with the acquisition? |
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Yes. Our board of directors appointed an Acquisition Committee
of disinterested directors, who have no interest in TerraSphere
to evaluate and, if appropriate, negotiate the terms of the
acquisition. We refer to them in this proxy statement as the
Acquisition Committee. The Acquisition Committee unanimously
determined that the terms of the TerraSphere acquisition are
advisable, fair to, and in the best interests of our
stockholders. The Acquisition Committee has unanimously
recommended that you vote FOR approval of the
issuance of the shares in connection with the TerraSphere
acquisition. Based solely on the Acquisition Committees
unanimous recommendation, our board of directors (with
Mr. Gildea abstaining) has also unanimously recommended
that you vote FOR approval of the issuance of the
shares in connection with the TerraSphere acquisition. |
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The reasons the Acquisition Committees recommendation are
discussed in detail in The TerraSphere
Acquisition Our Reasons for the TerraSphere
Acquisition beginning on page 28. |
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Why are we proposing to approve any adjournment of the
special meeting? |
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We are proposing to approve any adjournment of the special
meeting so that we may delay the meeting in the event that it
appears that the other proposal to be presented at the meeting
will not be approved. This will provide our management with more
time to solicit stockholders to vote or change their votes. |
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What vote is required by our stockholders to approve
the issuance of the shares in connection with the
TerraSphere acquisition? |
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Pursuant to applicable NASDAQ Marketplace Rules and our by-laws,
the affirmative vote of a majority of the total votes cast at a
special meeting at which a quorum is present is required to
approve the issuance of the shares in connection with the
TerraSphere acquisition. As of the record date, our directors
and executive officers were entitled to vote less than 1% of our
outstanding shares of common stock. |
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Is the TerraSphere acquisition a related person
transaction? |
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Yes. Mr. Edward Gildea holds 8.75% of the units of
TerraSphere. In addition, relatives of Mr. Gildea hold an
additional 30.75% of the units of TerraSphere. If the
acquisition is completed, and assuming all milestones are
achieved, Mr. Gildea would receive 3,240,741 shares of
our common stock in exchange for his TerraSphere units and his
relatives would receive an additional 10,775,463 of our common
stock in exchange for their TerraSphere units. Furthermore, Mark
C. Gildea, the brother of Edward J. Gildea, is the President and
Chief Executive Officer of TerraSphere, and William A. Gildea,
also the brother of Edward J. Gildea, is an independent
contractor of TerraSphere. |
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Because of Mr. Gildeas relationship with TerraSphere,
our board of directors formed the Acquisition Committee to
evaluate and, if appropriate, negotiate the proposed TerraSphere
acquisition. The Acquisition Committee obtained valuation advice
and a fairness opinion from an independent investment bank, and
negotiated the terms of the TerraSphere acquisition with the
TerraSphere management. Mr. Gildea did not participate in
the negotiations. |
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For a further discussion of related persons, see The
TerraSphere Acquisition Interests of Our Officers
and Directors in the TerraSphere Acquisition beginning on
page 35. |
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How do our officers and directors intend to vote their
shares? |
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All of our officers and directors have indicated that they
intend to vote all of their common stock in favor of the
TerraSphere Proposal and the Adjournment Proposal. As of the
record date, our directors and executive officers were entitled
to vote less than 1% of our outstanding shares of common stock. |
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When do you expect the acquisition to be completed? |
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It is anticipated that the acquisition will be completed
promptly following the special meeting on August 31, 2010. |
3
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Q. |
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Do our stockholders have appraisal rights under
Delaware law? |
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Our stockholders do not have appraisal rights under Delaware law. |
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Q. |
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If I am not going to attend the special meeting in
person, should I return my proxy card instead? |
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A. |
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Yes. After carefully reading and considering the information in
this proxy statement, please fill out and sign your proxy card.
Then return it in the return envelope as soon as possible, so
that your shares may be represented at the special meeting. You
may also submit a proxy by telephone or on the internet, as
explained on the proxy card. A properly executed proxy will be
counted for the purpose of determining the existence of a quorum. |
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How do I change my vote? |
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You must send a later-dated, signed proxy card to our corporate
secretary prior to the date of the special meeting or attend the
special meeting in person and vote. If you have instructed your
broker to vote your shares, you must follow your brokers
directions in order to change those instructions. |
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If my shares are held in street name, will my
broker automatically vote them for me? |
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No. Your broker can vote your shares only if you provide
instructions on how to vote. You should instruct your broker to
vote your shares. Your broker can tell you how to provide these
instructions. |
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Who will bear the costs of the proxy solicitation? |
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We will bear the costs of soliciting proxies, including the
printing, mailing and filing of this proxy statement and any
additional information furnished to stockholders. Our directors,
officers and employees may also solicit proxies by telephone,
email, facsimile and in person, without additional compensation.
Upon request, we will reimburse brokerage houses and other
custodians, nominees and fiduciaries for their reasonable
out-of-pocket
expenses for distributing proxy materials. We have retained
Phoenix Advisory Partners to assist it in soliciting proxies. |
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We have agreed to pay Phoenix Advisory Partners, LLC a fee of
$7,500, plus expenses, for its services in connection with the
special meeting. |
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Who can help answer my questions? |
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A. |
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If you have questions, you may write or call:
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Phoenix Advisory Partners, LLC
110 Wall Street
27th Floor
New York, NY 10005
(866) 351-1539 |
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Q. |
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When and where will the special meeting be held? |
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A. |
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The meeting will be held at 9:30 a.m. Eastern time on
August 31, 2010 at Renaissance Boston Waterfront Hotel, 606
Congress Street, Boston, MA 02210. |
4
SUMMARY
OF THE PROXY STATEMENT
This summary highlights selected information from this proxy
statement and does not contain all of the information that is
important to you. To better understand the TerraSphere
acquisition, you should read carefully this entire document and
the other documents to which this proxy statement refers you,
including the purchase agreement attached as Annex A to
this proxy statement. The purchase agreement is the legal
document that governs the TerraSphere acquisition. The purchase
agreement is also described in detail elsewhere in this proxy
statement. See Where You Can Find More Information.
The
Parties
Converted
Organics Inc.
We operate processing facilities that use food waste and other
raw materials to manufacture all-natural fertilizer and soil
amendment products combining nutritional and disease suppression
characteristics. In addition to our sales in the agribusiness
market, we sell and distribute our products in the turf
management and retail markets. We also hope to achieve
additional revenue by licensing the use of our technology to
others. We currently operate two facilities:
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Woodbridge facility. A facility in Woodbridge,
New Jersey that we have equipped as our first internally
constructed organic waste conversion facility (the
Woodbridge facility). Operations at the Woodbridge
facility began in late June 2008 and we are processing solid
waste and are producing both liquid and dry fertilizer and soil
amendment products.
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Gonzales facility. A facility in Gonzales,
California that we acquired in January 2008, which is
operational and produces liquid fertilizer products (the
Gonzales facility). The Gonzales facility began to
generate revenue in February 2008.
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Our principal executive office is located at 137A Lewis Wharf,
Boston, MA 02110, and our phone number is
(617) 624-0111.
TerraSphere
Inc.
TerraSphere Inc. is a Delaware corporation that is our wholly
owned subsidiary formed for the sole purpose of holding the
units of TerraSphere.
TerraSphere
Systems LLC
TerraSphere is dedicated to building highly efficient systems
for growing pesticide-free, organic fruits and vegetables in a
controlled indoor environment. TerraSpheres clean
technology helps to promote the sustainable consumption of
natural resources by accelerating plant production and
maximizing crop yields, while improving environmental footprints
through the reduction of carbon emissions and fuel use
associated with traditional crop production and distribution.
TerraSpheres principal executive office is located at 137A
Lewis Wharf, Boston, MA 02110, and its phone number is
(617) 557-5440
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The
Purchase Agreement; Purchase Price;
Lock-Up of
Shares Issued; Anti-Dilution Protection (see
page 27)
We have agreed to acquire 100% of the equity interests in
TerraSphere pursuant to a purchase agreement we entered into
with TerraSphere and its members. Upon completion of the
acquisition, TerraSphere would become a wholly-owned subsidiary
of the Company.
Purchase
Price
The maximum total purchase price for TerraSphere will be
$25,830,000, which includes earn-out payments of up to
$11,040,000, payable solely in shares of common stock valued at
$0.756 per share. We will
5
issue up to 34,166,667 shares of our common stock, subject
to upward adjustment based on certain anti-dilution protections,
in consideration for 100% of the outstanding units of
TerraSphere, which represents 84.6% of our voting shares prior
to the issuance and would represent 45.7% of our voting shares
following the issuance, assuming the maximum number of shares
are issued in the transaction, based on our outstanding capital
stock at July 6, 2010.
Pursuant to the terms of the purchase agreement, each
TerraSphere member was given the option to receive either:
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such members pro rata portion of $21,000,000 worth
of our common stock, valued at $0.756 per share, which is the
price which was the average closing price for our common stock
over the fifteen day period preceding the date of the execution
of the purchase agreement (we refer to this $0.756 price in this
proxy statement as the Closing Price Per Share) (the
shares to be issued pursuant to this immediate payment structure
are referred to as the Option One Shares); or
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such members pro rata portion of up to $28,000,000
worth of our common stock, valued at the Closing Price Per
Share, in an earn-out payment structure consisting of up to four
milestone payments (the shares to be issued pursuant to this
earn-out payment structure are referred to as the Option
Two Shares).
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The earn-out payment is structured such that the TerraSphere
members electing to receive Option Two Shares will be paid their
respective pro rata portion of our common stock, valued
at the Closing Price Per Share, in accordance with the following
schedule:
(1) on the date of the closing, $12,000,000 of our common
stock;
(2) $5,000,000 of our common stock, if, and only if,
between the date of the purchase agreement and the earlier of
the 90th day following the closing or the 180th day
following the date of the purchase agreement, for a period of
five consecutive trading days, our Market Capitalization (as
defined in the section entitled The TerraSphere
Acquisition Description of the TerraSphere
Acquisition) exceeds the sum of: (1) our Initial
Market Capitalization (as defined in the section entitled
The TerraSphere Acquisition Description of the
TerraSphere Acquisition) on the date of the purchase
agreement plus (2) the Closing Price Per Share multiplied
by the number of shares of our common stock to be issued to
TerraSphere members electing Option One Shares, the number of
shares of our common stock to be issued pursuant to
paragraph 1 above and, if such calculation is being made
prior to the closing, the number of shares of our common stock
to be issued pursuant to this paragraph 2. Notwithstanding
the foregoing, if between the date of the purchase agreement and
the earlier of the 90th day following the closing or the
180th day following the date of the purchase agreement, we
complete a debt or equity financing with a third party other
than project financing, unless such project financing is
completed for TerraSphere (referred to as a
Financing), the cash received from the Financing
during such period shall be added to the Market Capitalization.
In addition, if between the closing and December 31, 2011,
we sell equity of either the TerraSphere or any of
TerraSpheres subsidiaries, any cash received from such
equity sales during such period shall be added to the Market
Capitalization.
(3) $2,000,000 of our common stock, if, and only if,
$2,000,000 of TerraSpheres accounts receivable as of the
date of the purchase agreement are received prior to
February 28, 2011;
(4) $5,000,000 of our common stock, or the Milestone Three
Payment, if TerraSphere generates Gross Margin (as defined in
the section entitled The TerraSphere
Acquisition Description of the TerraSphere
Acquisition) of $6,000,000 from its operations during the
period from the date of the purchase agreement through
December 31, 2011; provided that, if TerraSphere generates
Gross Margin of at least $4,200,000, or the Milestone Three
Gross Margin Threshold, from its operations during such period,
the TerraSphere members will be entitled to a pro rata
portion of the common stock; and
(5) $4,000,000 of our common stock, or the Milestone Four
Payment, if, and only if, TerraSphere generates Gross Margin of
$4,000,000, or the Milestone Four Gross Margin Target, from its
operations during any six-month period commencing on the date of
the purchase agreement and ending on
6
December 31, 2012; provided that, if TerraSphere achieves
the Milestone Three Gross Margin Threshold, but does not achieve
the Milestone Three Gross Margin Target, 83.3% of the difference
between the Milestone Three Gross Margin Target and the actual
Gross Margins achieved pursuant to paragraph 4 above may be
added by the TerraSphere members to the Milestone Four Payment
and the Milestone Four Gross Margin Target.
Lock-Up
of Shares
With limited exceptions, the shares to be issued to the
TerraSphere members are subject to the following sale
restrictions absent our approval:
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the Option One Shares are subject to a
lock-up the
term of which is six months, beginning on the closing of the
acquisition; and
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the Option Two Shares are subject to a
lock-up the
term of which is the longer of: (a) eighteen months,
beginning on the closing of the acquisition, or (b) six
months, beginning on the date when shares of common stock are
issued pursuant to the foregoing milestone payments.
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Anti-Dilution
Protection
During the applicable
lock-up
period described above, we have agreed to provide the
TerraSphere members anti-dilution rights. The rights provide
that if we issue shares of our common stock for cash
consideration in connection with a financing transaction at a
price less than the Closing Price Per Share, or $0.756 per
share, then the TerraSphere members shall receive additional
shares of our common stock based on a weighted average dilution
formula. See the section entitled The TerraSphere
Acquisition Description of the TerraSphere
Acquisition Anti-Dilution Protection for
details about the formula. Messrs. Edward Gildea and
William Gildea have not been provided this anti-dilution
protection.
The purchase agreement, which is the legal document governing
the TerraSphere acquisition, is attached at Annex A to this
document. You should read the agreement carefully and in its
entirety.
Voting
Power; Record Date
You will be entitled to vote or direct votes to be cast at the
special meeting if you owned shares of our common stock at the
close of business on July 21, 2010, the record date for the
special meeting. You will have one vote for each share of common
stock you owned at the close of business on the record date. On
the record date, there were 42,359,041 shares of common
stock outstanding.
Approval
of the TerraSphere Members
All of the TerraSphere members have approved the transactions
contemplated in the purchase agreement. Accordingly, no further
action by the TerraSphere members is needed to approve the
acquisition.
Quorum
and Vote Required to Approve the Proposals by the Our
Stockholders
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A quorum of our stockholders is necessary to hold a valid
meeting. A quorum will be present at the special meeting if a
majority of our outstanding shares entitled to vote at the
meeting are represented in person or by proxy. Abstentions will
count as present for the purposes of establishing a quorum for
the meeting. Brokers may not vote on the proposal without
stockholder action. We will not have any broker non-votes at the
meeting.
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The approval of the TerraSphere Proposal and the Adjournment
Proposal will require the affirmative vote of the holders of a
majority of the shares of common stock present in person or
represented by proxy and cast at the special meeting.
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7
Proxies
Proxies may be solicited by mail, telephone or in person. If you
grant a proxy, you may revoke your proxy before it is exercised
at the special meeting by sending a notice of revocation to our
corporate secretary, submitting a later-dated proxy statement or
voting in person at the special meeting.
Recommendations
of the Acquisition Committee and Our Board of Directors (see
pages 28 & 29)
After careful consideration, the Acquisition Committee of our
board of directors, which was delegated the authority to
evaluate and, if appropriate, negotiate the proposed acquisition
of TerraSphere, has unanimously determined that the terms of the
TerraSphere acquisition are advisable, fair to and in the best
interests of our stockholders, has unanimously recommended that
our board of directors approve the TerraSphere acquisition, has
unanimously recommended that our board of directors recommend
the TerraSphere acquisition, including the issuance of the
shares contemplated in the purchase agreement, to our
stockholders, and has unanimously recommended that you vote
FOR the issuance of the shares contemplated in the
purchase agreement, as described in this proxy.
Based solely upon the unanimous recommendations of the
Acquisition Committee, our board of directors has also
unanimously (with Mr. Gildea abstaining) determined that
the terms of the TerraSphere acquisition are advisable, fair to
and in the best interests of our stockholders, has unanimously
approved the TerraSphere acquisition, and authorized us to enter
into the purchase agreement, and has unanimously recommended
that you vote FOR the issuance of the shares
contemplated in the purchase agreement, as described in this
proxy.
The factors that our board of directors and the Acquisition
Committee relied upon to approve the TerraSphere acquisition and
to recommend stockholder approval are described in more detail
under the headings The TerraSphere Acquisition Our Reasons
for the TerraSphere Acquisition beginning on page 28
and The TerraSphere Acquisition
Recommendations of our Board of Directors beginning on
page 29.
Opinion
of the Acquisition Committees Financial Advisor (beginning
on page 30)
The Company engaged Duff & Phelps, LLC
(Duff & Phelps) to serve as the financial
advisor to the Acquisition Committee, and to provide an opinion
as to the fairness, from a financial point of view, to the
Company, and, accordingly, to the holders of the Companys
common stock, other than those holders who also own units of
TerraSphere, of the consideration to be paid by the Company in
the TerraSphere acquisition. On June 28, 2010,
Duff & Phelps rendered its oral opinion to the
Acquisition Committee, which opinion was subsequently confirmed
in a written opinion dated July 6, 2010, to the effect
that, subject to the limitations, exceptions, assumptions and
qualifications set forth therein, as of July 6, 2010, the
consideration to be paid by the Company in the TerraSphere
acquisition was fair, from a financial point of view, to the
Company and, accordingly, to the holders of the Companys
common stock, other than those holders who also own units of
TerraSphere.
The Duff & Phelps opinion was directed to the
Acquisition Committee and addresses only the fairness, from a
financial point of view, to the Company and, accordingly, to the
holders of the Companys common stock, other than those
holders who also own units of TerraSphere, of the consideration
to be paid by the Company in the TerraSphere acquisition. The
Duff & Phelps opinion:
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does not address the merits of the underlying business decision
to enter into the TerraSphere acquisition versus any alternative
strategy or transaction;
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is not a recommendation as to how the Acquisition Committee or
the Companys board of directors or any stockholder should
vote or act with respect to any matters relating to the
TerraSphere acquisition, or whether to proceed with the
TerraSphere acquisition or any related transaction; and
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does not indicate that the consideration paid is the best
possibly attainable under any circumstances.
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8
Instead, the Duff & Phelps opinion merely states
whether the consideration in the TerraSphere acquisition is
within a range suggested by certain financial analyses. The
decision as to whether to proceed with the TerraSphere
acquisition or any related transaction may depend on an
assessment of factors unrelated to the financial analysis on
which the Duff & Phelps opinion is based.
The full text of the written opinion of Duff & Phelps,
which sets forth, among other things, the assumptions made,
procedures followed, matters considered and qualifications and
limitations of the review undertaken in rendering the opinion,
is attached as Annex B to this proxy statement. The Company
encourages its stockholders to read the full text of the
Duff & Phelps opinion carefully and in its entirety.
Financial
Projections
Neither we nor TerraSphere, as a matter of course, publish our
respective business plans and strategies or make public
projections as to future revenues, earnings, or other results
other than our periodic revenue and earnings guidance. However,
TerraSpheres management prepared the respective
prospective financial information referenced in this proxy
statement to present certain projections of financial
performance for the respective companies, and these projections
were provided to our Acquisition Committee, Duff &
Phelps and our board of directors in connection with their
financial analysis of the proposed acquisition. The projections
were prepared by TerraSphere management solely for the purpose
of evaluating the TerraSphere acquisition.
This prospective financial information was not prepared with a
view toward public disclosure or with a view toward complying
with U.S. generally accepted accounting principles, or
GAAP, the published guidelines of the Securities and Exchange
Commission, or SEC, or the guidelines established by the
American Institute of Certified Public Accountants for
preparation and presentation of prospective financial
information, but, in the view of TerraSpheres management,
was prepared on a reasonable basis, reflects the best estimates
and judgments available as of the date of their preparation, and
presents, to the best of TerraSphere managements knowledge
and belief, a potential course of action and potential future
financial performance of the company at the time the projections
were prepared. However, this information is not fact and should
not be relied upon as being necessarily indicative of future
results, and readers of this proxy statement are cautioned not
to place undue reliance on the prospective financial information.
Neither our nor TerraSpheres independent auditors, nor any
other independent accountants, have compiled, examined, or
performed any procedures with respect to the prospective
financial information contained herein, nor have they expressed
any opinion or any other form of assurance on such information
or its achievability, and assume no responsibility for, and
disclaim any association with, the prospective financial
information.
The assumptions and estimates underlying the prospective
financial information are inherently uncertain and, though
considered reasonable by TerraSpheres management as of the
date of its preparation, are subject to a wide variety of
significant business, economic, and competitive risks and
uncertainties that could cause actual results to differ
materially from those contained in the prospective financial
information, including, among others, the risks and
uncertainties described in Risk Factors and
Special Note Regarding Forward-Looking Statements.
Accordingly, there can be no assurance that the prospective
results are indicative of our future performance or that of the
combined company or that actual results will not differ
materially from those presented in the prospective financial
information. Inclusion of the prospective financial information
in this proxy statement should not be regarded as a
representation by any person that the results contained in the
prospective financial information will be achieved.
Neither we nor TerraSphere intends to update or otherwise revise
the prospective financial information to reflect circumstances
existing or events occurring, including changes in general
economic or industry conditions, since its preparation, even if
any or all of the underlying assumptions are shown to be in
error.
Interests
of Our Officers and Directors in the TerraSphere Acquisition
(see page 35)
When you consider the unanimous recommendation of our board of
directors (with Mr. Gildea abstaining) in favor of the
TerraSphere acquisition you should note that Mr. Gildea has
an interest in 8.75% of the units of
9
TerraSphere. In addition, relatives of Mr. Gildea hold an
additional 30.75% of the units of TerraSphere. If the
acquisition is completed and assuming all milestones are
achieved, Mr. Gildea would receive 3,240,741 shares of
our common stock in exchange for his TerraSphere units and his
relatives would receive an additional 10,775,463 of our common
stock in exchange for their TerraSphere units. Furthermore, Mark
C. Gildea, the brother of Edward Gildea, is the President and
Chief Executive Officer of TerraSphere, and William A. Gildea,
also the brother of Edward Gildea, is an independent contractor
of TerraSphere.
Because of Mr. Gildeas relationship with TerraSphere,
our board of directors formed the Acquisition Committee to
evaluate and, if appropriate, negotiate the proposed TerraSphere
acquisition. The Acquisition Committee obtained valuation advice
and a fairness opinion from an independent investment bank, and
negotiated the terms of the TerraSphere acquisition with the
TerraSphere management. Mr. Gildea did not participate in
the negotiations.
Conditions
to the Closing of the Purchase Agreement (see
page 39)
Consummation of the purchase agreement is conditioned upon
certain closing conditions, including, without limitation:
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the receipt of the approval of our stockholders at the special
meeting;
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that there shall not have occurred and be continuing any event
or occurrence, or series of events or occurrences, that
individually or in the aggregate, would reasonably be expected
to have a material adverse effect on TerraSphere;
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we shall have restructured our $17,500,000 of New Jersey
Economic Development Bonds in such form as is reasonably
acceptable to a
majority-in-interest
of the TerraSphere members; and
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that no litigation, action, suit or other proceeding involving
us, TerraSphere or the TerraSphere members, is threatened or
commenced, which would question the validity of the purchase
agreement or would be reasonably expected to have a material
adverse effect on TerraSphere.
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Termination
of the Purchase Agreement (see page 40)
The purchase agreement may be terminated
and/or
abandoned at any time prior to the closing by:
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mutual written consent; or
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either party if there shall have been a material breach of any
representation, warranty, covenant or agreement on the part of
the other party; or
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either party if the closing has not been consummated on or
before September 7, 2010; or
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either party if the closing conditions have not been met or
waived.
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In the event of termination and abandonment by either party, all
further obligations of the parties shall terminate, no party
shall have any right against the other party, and each party
shall bear its own costs and expenses.
U.S.
Federal Income Tax Consequences of the TerraSphere
Acquisition
No gain or loss will be recognized by us or by holders of shares
of our common stock as a result of the TerraSphere acquisition.
Anticipated
Accounting Treatment
We will account for the TerraSphere acquisition as a purchase
under U.S. generally accepted accounting principles. Under
the acquisition method of accounting, the assets and liabilities
of TerraSphere will be recorded as of the date of the closing of
the TerraSphere acquisition, at their respective fair values,
and
10
consolidated with those of us. The results of operations of
TerraSphere will be consolidated with ours beginning on the date
of the closing of the TerraSphere acquisition.
Regulatory
Approvals
We are not aware of any governmental or regulatory approval
required for completion of the TerraSphere acquisition, other
than compliance with applicable corporate laws of Delaware,
compliance with securities laws and filing with the NASDAQ Stock
Market, with respect to the shares of our common stock to be
issued to the TerraSphere stockholders pursuant to the purchase
agreement. If any other governmental approvals or actions are
required, we intend to try to obtain them. We cannot assure you,
however, that we will be able to obtain any such approvals or
actions.
Risk
Factors
In evaluating the proposals to be voted on at the special
meeting, you should carefully read this proxy statement and
especially consider the factors discussed in the section
entitled Risk Factors.
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RISK
FACTORS
You should carefully consider the following risk factors,
together with all of the other information included in this
proxy statement, before you decide whether to vote or direct
your vote to be cast to approve the TerraSphere acquisition. In
assessing these risks, you should also refer to the other
information included in this proxy statement, including the
consolidated financial statements and the accompanying notes of
TerraSphere, as well as the pro forma financial information set
forth herein.
Risks
Relating to the TerraSphere Acquisition
We
will issue a large number of shares of common stock in
connection with the acquisition, which will result in
substantial dilution to our existing stockholders. Our
stockholders may not realize a benefit from the TerraSphere
acquisition commensurate with the ownership dilution they will
experience in connection with the shares issued to acquire
TerraSphere.
If the TerraSphere acquisition is approved and assuming all
milestones are achieved by TerraSphere, we will issue up to
34,166,667 shares of our common stock to the members of
TerraSphere in exchange for 100% of the units of TerraSphere,
subject to upward adjustment based on certain anti-dilution
protections, in consideration for 100% of the outstanding units
of TerraSphere, which represents 84.6% of our voting shares
prior to the issuance and would represent 45.7% of our voting
shares following the issuance, assuming the maximum number of
shares are issued in the transaction, based on our outstanding
capital stock at July 6, 2010. Our issuance of the shares
will result in substantial percentage dilution of our existing
stockholders ownership interests. Our issuance of the
shares may also have an adverse impact on our net income per
share in fiscal periods that include or follow the closing of
the TerraSphere acquisition.
If we are unable to realize sufficient strategic and financial
benefits from the TerraSphere acquisition, our stockholders will
have experienced substantial dilution of their ownership
interest without receiving commensurate benefit.
The
actual value of the consideration we will pay to the TerraSphere
members may exceed the value allocated to it at the time we
entered into the purchase agreement.
Under the purchase agreement, the number of shares of common
stock we will issue as consideration at closing or upon the
achievement of milestones is fixed, and there will be no
adjustment for changes in the market price of our common stock.
The per share value of the shares issued to the TerraSphere
members was based on the closing price of our common stock
during the
15-day
period preceding the date of the execution of the purchase
agreement, or $0.756. Neither we nor the TerraSphere members are
permitted to abandon or terminate the transaction solely because
of changes in the market price of our common stock between the
signing of the purchase agreement and the closing. Our common
stock has historically experienced significant volatility. Stock
price changes may result from a variety of factors that are
beyond our control, including changes in our business,
operations and prospects, regulatory considerations and general
market and economic conditions. The value of the shares we issue
to acquire TerraSphere may be significantly higher at the
closing or upon the achievement of milestones than when we
entered into the purchase agreement.
If the
conditions to the closing of the purchase agreement are not met,
the TerraSphere acquisition will not occur, which could
adversely impact the market price of our common stock as well as
our business, financial condition and results of
operations.
The purchase agreement is subject to closing conditions that
must be satisfied or waived before the TerraSphere acquisition
can be completed, including, without limitation, obtaining the
requisite approval of our stockholders with respect to our
proposed issuance of common stock in the acquisition. These
conditions are summarized in the section in this proxy statement
entitled The Purchase Agreement Conditions to
Closing beginning on page 39 and are described in
detail in the purchase agreement attached to this proxy
statement at Annex A. We cannot assure you that each of the
conditions will be satisfied.
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If the conditions are not satisfied or waived in a timely manner
and the TerraSphere acquisition is delayed, we may lose some or
all of the intended or perceived benefits of the transaction
which could cause our stock price to decline and harm our
business. If the acquisition is not completed for any reason,
our stock price may decline to the extent that the current
market price reflects a market assumption that the acquisition
will be completed.
In addition, we will be required to pay our costs related to the
acquisition even if the acquisition is not completed, such as
amounts payable to legal and financial advisors and independent
accountants, and such costs are significant. All of these costs
will be incurred whether or not the transaction is completed.
We may
be required to issue additional shares of common stock to
certain of the TerraSphere members if we issue shares of our
common stock at a price less than the price per share at which
we valued the shares issued to the TerraSphere
members.
The TerraSphere members are required to
lock-up the
shares they will receive in the acquisition for a period of
either six or eighteen months. During the applicable
lock-up
period, we have agreed to provide the TerraSphere members
anti-dilution rights. The rights provide that if we issue shares
of our common stock for cash consideration in connection with a
financing transaction at a price less than $0.756 per share,
then the TerraSphere members shall receive additional shares of
our common stock based on a weighted average dilution formula.
See the section entitled The TerraSphere
Acquisition Description of the TerraSphere
Acquisition Anti-Dilution Protection for
details about the formula. Messrs. Edward Gildea and
William Gildea have not been provided this anti-dilution
protection.
The
market price of our common stock may decline as a result of the
issuance of shares in connection with the TerraSphere
acquisition.
The market price of our common stock may decline as a result of
the TerraSphere acquisition for a number of reasons including if:
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|
|
|
|
we do not achieve the perceived benefits of the TerraSphere
acquisition as rapidly or to the extent anticipated by financial
or industry analysts;
|
|
|
|
the effect of the TerraSphere acquisition on our business and
prospects is not consistent with the expectations of financial
or industry analysts; or
|
|
|
|
investors react negatively to the effect on our business and
prospects from the TerraSphere acquisition.
|
As
shares of our common stock issued in the TerraSphere acquisition
become eligible for resale, the sale of those shares could
adversely impact our stock price.
All of the shares of our common stock issued to the TerraSphere
members in the acquisition will be restricted securities and may
not be sold absent registration under the Securities Act or
pursuant to Rule 144 or another available exemption from
registration. Additionally, TerraSphere members entitled to an
aggregate of 8,611,111 shares of common stock are required
to lock-up
the shares they will receive in the acquisition for a period of
six months and TerraSphere members entitled to an aggregate of
up to 25,555,556 shares of common stock (assuming all
milestones are achieved by TerraSphere) are required to
lock-up the
shares they will receive in the acquisition for a period of
eighteen months.
Accordingly, a substantial number of shares of our common stock
will become eligible for resale six months after the closing
date, with an additional substantial number of shares of our
common stock becoming eligible for resale eighteen months after
the closing date. Our stock price may suffer a significant
decline as a result of the sudden increase in the number of
shares sold in the public market or market perception that the
increased number of shares available for sale will exceed the
demand for our common stock.
13
We may
face challenges in integrating our business with
TerraSpheres and, as a result, we may not realize the
expected benefits of the proposed acquisition.
We will be required to integrate the operations and personnel of
both our company and TerraSphere, which will require a
significant investment of our managements time and effort
as well as the investment of capital. The successful integration
of the two companies will require, among other things,
coordination of sales and marketing operations and the
integration of TerraSpheres operations into our
organization. The diversion of the attention of our senior
management and any difficulties encountered in the process of
combining the companies could cause the disruption of, or a loss
of momentum in, the activities of the combined business.
The inability to successfully integrate the operations and
personnel of the two companies, or any significant delay in
achieving integration, could have a material adverse effect on
the combined business after the completion of the acquisition,
and, as a result, on our cash flows, results of operations and
financial position.
The
combined business will continue to require significant capital,
and financing may not be available to us on reasonable terms, if
at all.
Our current operations are not cash flow positive and have
required us to raise significant external financing. The
combined business will continue to require significant working
capital for the manufacturing and marketing activities as well
as the expansion and integration of TerraSpheres
operations. Our existing resources will be insufficient to
satisfy our liquidity requirements, and we will need to sell
additional equity or debt securities to finance these
operations. Any sale of additional equity or debt securities may
result in additional dilution to our stockholders, and we cannot
be certain that we will be able to obtain additional public or
private financing in amounts, or on terms, acceptable to us, or
at all.
The
financial projections in this proxy statement are only estimates
of future results and there is no assurance that we will achieve
the results shown in the financial projections.
The financial projections included elsewhere in this proxy
statement are only estimates of possible future operating
results and not guarantees of future performance. The future
operating results of the combined business will be affected by
numerous factors, including those discussed in this Risk
Factors section of this proxy statement. TerraSphere
prepared the financial projections in good faith based upon
assumptions. Although such assumptions are believed to be
reasonable, no assurance can be given regarding the
attainability of the projections or the reliability of the
assumptions on which they are based. The projections are subject
to the uncertainties inherent in any attempt to predict the
results of operations for a business, especially where new
products are involved. Certain of the assumptions used will
inevitably not materialize and unanticipated events will occur.
Therefore, the actual results of operations are likely to vary
from the projections and such variations may be material and
adverse to us. We will conduct our business in a manner
different from that set forth in the assumptions as changing
circumstances may require.
Risks
Relating to the Business of TerraSphere
TerraSphere
has a limited operating history, and its prospects are difficult
to evaluate.
TerraSphere is an early stage company and its activities have
been limited primarily to developing its technology, and
consequently there is limited historical financial information
related to operations available upon which you may base your
evaluation of TerraSpheres business and prospects. The
revenue and income potential of TerraSpheres business is
unproven. If TerraSphere is unable to develop its business, it
will not achieve its goals and could suffer economic loss or
collapse, which may have a material negative effect on our
financial performance.
14
TerraSpheres
licensees are generally early stage companies and the failure of
such licensees to be successful may adversely effect
TerraSpheres future revenues.
TerraSphere principally generates revenue from its licensing
activities. TerraSphere generates revenues from its licensee
partners initially from license fees payable from such partners,
followed by such partners purchasing equipment from TerraSphere
and finally from royalties from product sales. Many of
TerraSpheres licensees are early stage companies that may
be under capitalized. If these licensees are not successful they
may not be in a position to pay TerraSphere any future license
fees, or to purchase equipment or pay royalties in the future.
The failure of TerraSpheres licensees may have a material
adverse effect on TerraSpheres future revenues.
TerraSphere
is dependent on a small number of major customers for its
revenues.
To date, TerraSphere has relied on a few major customers for a
majority of its revenues. During the three month period ended
March 31, 2010, 100% of TerraSpheres revenues were
from two customers. The loss of any of TerraSpheres major
customers could adversely effect its results of operations.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements that
involve substantial risks and uncertainties. All statements,
other than statements of historical facts, included in this
proxy statement regarding strategy, future operations, future
financial position, future revenues, projected costs, prospects,
plans and objectives of management are forward-looking
statements. The words anticipate,
believe, estimate, expect,
intend, may, plan,
predict, project, will,
would and similar expressions are intended to
identify forward-looking statements, although not all
forward-looking statements contain these identifying words.
The parties may not actually achieve the plans, intentions or
expectations disclosed in the forward-looking statements, and
you should not place undue reliance on the forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements made by the parties. The parties to
this proxy statement have included important factors in the
cautionary statements included in this proxy statement,
particularly in the Risk Factors section, that the
parties believe could cause actual results or events to differ
materially from the forward-looking statements made by the
parties, including, among others:
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|
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the demand for organic fertilizer and the resulting prices that
customers are willing to pay;
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|
the availability of an adequate supply of food waste stream
feedstock and the competition for such supply;
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|
the unpredictable cost of compliance with environmental and
other government regulation;
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|
the time and cost of obtaining USDA, state or other organic
product labeling designations, and changes to such labeling
requirements that may adversely affect our ability to market our
products;
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our ability to manage expenses;
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our ability to remain in compliance with standards set by the
National Organic Program;
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supply of organic fertilizer products from the use of competing
or newly developed technologies;
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our ability to attract and retain key personnel;
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to the extent we complete any acquisitions, our ability to
finance those acquisitions, and our ability to efficiently
integrate future acquisitions, if any, or any other new lines of
business that we may enter in the future;
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adoption of new accounting regulations and standards;
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adverse changes in the securities markets;
|
15
|
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|
|
our ability to sell sufficient quantities of product to cover
operating expenses;
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|
|
our ability to maintain production levels sufficient to meet
customer demand;
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|
our ability to comply with continued listing requirements of the
NASDAQ Capital Market; and
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the availability of, and costs associated with, sources of
liquidity (including working capital requirements), as well as
our ability to obtain bond financing for future facilities.
|
Further, the forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers,
dispositions, joint ventures, collaborations, dividends or
investments made by the parties.
You should read this proxy statement, including all annexes to
this proxy statement, completely and with the understanding that
actual future results may be materially different from what the
parties expect. Neither we nor TerraSphere assume any obligation
to update any forward-looking statements.
16
SELECTED
SUMMARY HISTORICAL FINANCIAL INFORMATION FOR
TERRASPHERE
The following tables summarize TerraSphere consolidated
financial and other data. The consolidated statements of
operations data for the years ended December 31, 2009 and
2008 and the consolidated balance sheet data as of
December 31, 2009 and 2008 have been derived from
TerraSpheres audited consolidated financial statements
included elsewhere in this proxy statement. The consolidated
statement of operations data for the three months ended
March 31, 2010 and 2009, and the consolidated balance sheet
data as of March 31, 2010, have been derived from
TerraSpheres unaudited consolidated financial statements
included elsewhere in this proxy statement. The unaudited
consolidated financial statements have been prepared on a basis
consistent with TerraSpheres audited financial statements
and include, in the opinion of management, all adjustments that
management considers necessary for the fair statement of the
financial information set forth in those consolidated financial
statements. The following financial data should be read in
conjunction with, and is qualified by reference to,
TerraSpheres consolidated financial statements and related
notes and schedules included elsewhere in this proxy statement
and the information under TerraSpheres
Managements Discussion and Analysis of Financial Condition
and Results of Operations below. Historical results are
not necessarily indicative of the results to be expected in any
future period.
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|
|
|
|
|
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|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
36,732
|
|
|
$
|
1,458,569
|
|
Cost of goods sold
|
|
|
|
|
|
|
730,446
|
|
Gross profit
|
|
|
36,732
|
|
|
|
728,123
|
|
Income (loss) from operations
|
|
|
(1,261,850
|
)
|
|
|
14,342
|
|
Other income, net
|
|
|
45,896
|
|
|
|
78,614
|
|
Net income (loss)
|
|
|
(1,215,954
|
)
|
|
|
92,956
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2009
|
|
2008
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
197,046
|
|
|
$
|
8,083
|
|
Accounts receivable
|
|
|
|
|
|
|
400,000
|
|
Other assets
|
|
|
63,036
|
|
|
|
123,096
|
|
Leasehold improvements
|
|
|
161,948
|
|
|
|
|
|
Patent and patent costs, net
|
|
|
134,932
|
|
|
|
98,347
|
|
Total assets
|
|
|
591,527
|
|
|
|
629,526
|
|
Working capital (deficit)
|
|
|
(1,336,832
|
)
|
|
|
137,072
|
|
Total liabilities
|
|
|
1,625,787
|
|
|
|
390,341
|
|
Total members equity (deficit)
|
|
|
(1,034,260
|
)
|
|
|
239,185
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2010
|
|
2009
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,684,183
|
|
|
$
|
9,183
|
|
Cost of goods sold
|
|
|
703,301
|
|
|
|
|
|
Gross profit
|
|
|
980,882
|
|
|
|
9,183
|
|
Income (loss) from operations
|
|
|
533,067
|
|
|
|
(219,137
|
)
|
Other income (expenses)
|
|
|
13,285
|
|
|
|
(5,782
|
)
|
Income (loss) before provision for income taxes
|
|
|
546,352
|
|
|
|
(224,919
|
)
|
Net income (loss)
|
|
|
158,352
|
|
|
|
(224,919
|
)
|
17
|
|
|
|
|
|
|
As of March 31,
|
|
|
2010
|
|
Selected Balance Sheet Data:
|
|
|
|
|
Cash
|
|
$
|
106,830
|
|
Accounts receivable
|
|
|
950,000
|
|
Other assets
|
|
|
112,407
|
|
Leasehold improvements, net
|
|
|
158,819
|
|
Patent and patent costs, net
|
|
|
148,259
|
|
Total assets
|
|
|
1,557,332
|
|
Working capital (deficit)
|
|
|
(1,211,655
|
)
|
Total liabilities
|
|
|
2,375,006
|
|
Total members deficit
|
|
|
(817,674
|
)
|
18
SELECTED
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following tables summarize selected unaudited pro forma
consolidated condensed financial data. The unaudited pro forma
consolidated balance sheet data as of March 31, 2010 gives
effect to the acquisition of TerraSphere, on the balance sheet
of Converted Organics Inc., as if it had occurred on
March 31, 2010, and the unaudited pro forma consolidated
statements of operations data for the year ended
December 31, 2009 and for the three month period ended
March 31, 2010 give effect to the acquisition, on the
statements of operations of Converted Organics Inc., as if it
had occurred on January 1, 2009. The pro forma financial
statements are based upon available information and certain
assumptions that we believe are reasonable. The unaudited pro
forma consolidated financial statements do not purport to
represent what our financial condition or results of operations
would actually have been had these transactions in fact occurred
as of the dates indicated above or to project our results of
operations for the period indicated or for any other period. The
following pro forma financial data should be read in conjunction
with our
Form 8-K
dated July 6, 2010 and filed on July 7, 2010, the
historical financial statements and the related notes of
Converted Organics Inc., which are included in our Annual Report
on
Form 10-K
for the year ended December 31, 2009, the quarterly
financial statements and the related notes of Converted Organics
Inc., which are included in our
Form 8-K
as of March 31, 2010, and the TerraSphere Systems, LLC
financial statements and the unaudited pro forma consolidated
financial statements included elsewhere in this proxy.
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Three Months Ended March 31, 2010
|
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Historical
|
|
|
|
|
Converted
|
|
|
Pro Forma
|
|
Organics Inc.
|
|
|
Consolidated
|
|
and Subsidiaries
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,544,009
|
|
|
$
|
859,826
|
|
Cost of goods sold
|
|
|
2,669,402
|
|
|
|
1,966,101
|
|
Gross loss
|
|
|
(125,393
|
)
|
|
|
(1,106,275
|
)
|
Loss from operations
|
|
|
(4,980,173
|
)
|
|
|
(5,346,573
|
)
|
Other expenses
|
|
|
(1,019,835
|
)
|
|
|
(1,033,120
|
)
|
Loss before provision for income taxes
|
|
|
(6,000,008
|
)
|
|
|
(6,379,693
|
)
|
Net loss
|
|
|
(6,000,008
|
)
|
|
|
(6,379,693
|
)
|
Net loss per share, basic and diluted
|
|
|
(0.10
|
)
|
|
|
(0.17
|
)
|
Weighted average common shares outstanding
|
|
|
56,389,068
|
|
|
|
37,864,169
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
Historical
|
|
|
|
|
Converted
|
|
|
Pro Forma
|
|
Organics Inc.
|
|
|
Consolidated
|
|
and Subsidiaries
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,670,514
|
|
|
$
|
2,633,782
|
|
Cost of goods sold
|
|
|
6,914,857
|
|
|
|
6,914,857
|
|
Gross loss
|
|
|
(4,244,343
|
)
|
|
|
(4,281,075
|
)
|
Loss from operations
|
|
|
(17,994,628
|
)
|
|
|
(16,066,111
|
)
|
Other expenses
|
|
|
(4,993,781
|
)
|
|
|
(5,039,677
|
)
|
Loss before provision for income taxes
|
|
|
(22,988,409
|
)
|
|
|
(21,105,788
|
)
|
Net loss
|
|
|
(22,988,409
|
)
|
|
|
(21,105,788
|
)
|
Net loss per share, basic and diluted
|
|
|
(0.61
|
)
|
|
|
(1.08
|
)
|
Weighted average common shares outstanding
|
|
|
38,114,781
|
|
|
|
19,569,853
|
|
19
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010
|
|
|
|
|
Historical
|
|
|
|
|
Converted
|
|
|
Pro Forma
|
|
Organics Inc.
|
|
|
Consolidated
|
|
and Subsidiaries
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,220,189
|
|
|
|
4,113,359
|
|
Accounts receivable, net
|
|
|
1,445,450
|
|
|
|
495,450
|
|
Other prepaid expenses
|
|
|
730,840
|
|
|
|
624,319
|
|
Property and equipment, net
|
|
|
18,541,647
|
|
|
|
18,382,828
|
|
Construction-in-progress
|
|
|
409,654
|
|
|
|
328,637
|
|
Intangibles, net
|
|
|
11,923,617
|
|
|
|
1,923,617
|
|
Goodwill
|
|
|
12,370,000
|
|
|
|
|
|
Total assets
|
|
|
52,692,960
|
|
|
|
28,913,887
|
|
Working capital
|
|
|
983,247
|
|
|
|
1,804,969
|
|
Total liabilities
|
|
|
(26,957,014
|
)
|
|
|
(24,971,941
|
)
|
Total owners equity
|
|
|
25,735,946
|
|
|
|
(3,941,946
|
)
|
PRICE
RANGE OF SECURITIES AND DIVIDENDS
Converted
Organics
Our common stock has been listed on the NASDAQ Capital Market
under the symbol COIN since March 16, 2007.
Prior to March 16, 2007, there was no public market for our
common stock. The following table sets forth the range of high
and low closing prices per share as reported on NASDAQ for the
periods indicated.
|
|
|
|
|
|
|
|
|
2010
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
1.14
|
|
|
$
|
0.68
|
|
Second Quarter (through July 6, 2010)
|
|
$
|
1.18
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
4.05
|
|
|
$
|
.76
|
|
Second Quarter
|
|
$
|
2.19
|
|
|
$
|
.76
|
|
Third Quarter
|
|
$
|
1.48
|
|
|
$
|
.95
|
|
Fourth Quarter
|
|
$
|
1.30
|
|
|
$
|
.59
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
14.17
|
|
|
$
|
3.52
|
|
Second Quarter
|
|
$
|
10.37
|
|
|
$
|
4.50
|
|
Third Quarter
|
|
$
|
7.83
|
|
|
$
|
2.99
|
|
Fourth Quarter
|
|
$
|
6.46
|
|
|
$
|
2.00
|
|
Holders
As of July 2, 2010, there were approximately 7,000
beneficial holders of our common stock.
Dividends
Beginning with the first quarter of 2007, at the end of each
calendar quarter, holders of record of our common stock received
a 5% common stock dividend until the Woodbridge facility
commenced commercial
20
operations on June 30, 2008. We did not issue fractional
shares as a part of the dividend program nor did we issue shares
with respect to the calendar quarter in which we commenced
commercial operations. We also issued a special 15% common stock
dividend, payable on December 1, 2008, for all holders of
record of our common stock on November 17, 2008. During
2008, we issued 1,232,552 shares as stock dividends.
We have not declared or paid any cash dividends and do not
intend to pay any cash dividends in the foreseeable future. We
intend to retain any future earnings for use in the operation
and expansion of our business. Any future decision to pay cash
dividends on common stock will be at the discretion of our Board
of Directors and will depend upon our financial condition,
results of operation, capital requirements and other factors our
Board of Directors may deem relevant.
TerraSphere
TerraSphere securities are not publicly traded.
THE
SPECIAL MEETING
We are furnishing this proxy statement to our stockholders as
part of the solicitation of proxies by our board of directors
for use at the special meeting in connection with the proposed
acquisition of TerraSphere. This document provides you with the
information you need to know to be able to vote or instruct your
vote to be cast at the special meeting.
The Acquisition Committee of our board of directors unanimously
determined that the terms of the TerraSphere acquisition are
advisable, fair to, and in the best interests of our
stockholders. Upon the Acquisition Committees unanimous
recommendation, our board of directors then unanimously (with
Mr. Gildea abstaining) determined that the terms of the
TerraSphere acquisition are advisable, fair to, and in the best
interests of, our stockholders.
The special meeting has been called only to consider approval of
the TerraSphere Proposal and the Adjournment Proposal. Under
Delaware law and our bylaws, no other business may be transacted
at the special meeting.
Record Date; Who Is Entitled to
Vote. The record date for the
special meeting is July 21, 2010. Record holders of our
common stock at the close of business on the record date are
entitled to vote or have their votes cast at the special
meeting. On the record date, there were 42,359,041 outstanding
shares of our common stock. Each share of common stock is
entitled to one vote at the special meeting.
Vote Required. Approval of
TerraSphere Proposal and the Adjournment Proposal requires the
affirmative vote of the holders of a majority of the shares of
common stock present in person at the meeting or represented by
a proxy and entitled to vote thereon.
Abstentions; Broker
Non-Votes. Abstaining from voting or not
voting on the proposal, either in person or by proxy or voting
instruction, will have the effect of voting against the
TerraSphere Proposal and the Adjournment Proposal.
A broker non-vote occurs when a broker submits a proxy card with
respect to shares held in a fiduciary capacity (typically
referred to as being held in street name) but
declines to vote on a particular matter because the broker has
not received voting instructions from the beneficial owner and
does not have discretionary authority to vote on the proposal.
Under the rules that govern brokers who are voting with respect
to shares held in street name, brokers have the discretion to
vote such shares on routine matters, but
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not on non-routine matters. The matters currently planned to be
considered by the stockholders are not routine matters. As a
result, brokers can only vote the common stock if they have
instructions to do so. Broker non-votes will not be counted in
determining whether the proposal to be considered at the meeting
is approved.
Voting Your Shares. Each
share of common stock that you own in your name entitles you to
one vote per proposal.
There are three ways for holders of record to have their shares
represented and voted at the special meeting:
By signing and returning the enclosed proxy
card. If you duly sign and return a proxy card,
your proxy, whose names are listed on the proxy
card, will vote your shares as you instruct on the card. If you
sign and return the proxy card, but do not give instructions on
how to vote your shares, your shares will be voted as
recommended by our board of directors, which is FOR
approval of the TerraSphere Proposal and the Adjournment
Proposal.
By telephone or on the internet. You can
submit a proxy to vote your shares by following the telephone or
internet voting instructions included with your proxy card. If
you do, you should not return the proxy card.
You can attend the special meeting and vote in
person. We will give you a ballot when you
arrive. However, if your shares are held in the street
name of your broker, bank or another nominee, you must get
a proxy from the broker, bank or other nominee. That is the only
way we can be sure that the broker, bank or nominee has not
already voted your shares.
Questions About Voting. If
you have any questions about how to vote or direct a vote in
respect of your shares, you may call Phoenix Advisory Partners,
LLC at
(866) 351-1539.
You may also want to consult your financial and other advisors
about the vote.
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if you have already sent in a proxy, sending another proxy card
with a later date;
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if you voted by telephone or by internet, calling the same
number or going to the same website and following the
instructions;
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notifying us in writing before the special meeting that you have
revoked your proxy; or
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attending the special meeting, revoking your proxy and voting in
person.
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If your shares are held in street name, consult your
broker for instructions on how to revoke your proxy or change
your vote.
Solicitation Costs. We will
pay for all costs incurred in connection with the solicitation
of proxies from our stockholders on behalf of our board of
directors, including assembly, printing and mailing of this
document, its related attachments, and the proxy card. Our
directors, officers and employees may solicit proxies by
telephone, email, facsimile and in person, without additional
compensation. Upon request, we will reimburse brokerage houses
and other custodians, nominees and fiduciaries for their
reasonable
out-of-pocket
expenses for distributing proxy materials. We have agreed to pay
Phoenix Advisory Partners, LLC a fee of $7,500, plus expenses,
for its services in connection with the special meeting.
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THE
TERRASPHERE ACQUISITION PROPOSAL
Approval
of the TerraSphere acquisition and the issuance of the shares in
connection with the acquisition.
At the special meeting and any adjournment or postponement
thereof, our stockholders will be asked to consider and vote
upon a proposal to approve the issuance of at least
34,166,667 shares of our common stock to the members of
TerraSphere in exchange for 100% of the units of TerraSphere,
subject to upward adjustment based on certain anti-dilution
protections described in this proxy statement.
Further information with respect to the issuance of the shares,
the TerraSphere acquisition, TerraSphere, the purchase agreement
and TerraSpheres members is contained elsewhere in this
proxy statement.
The Acquisition Committee unanimously recommends a vote
FOR the TerraSphere acquisition and the issuance of
the shares in connection with the acquisition.
Upon the unanimous recommendation of the Acquisition
Committee, our board of directors unanimously (with
Mr. Gildea abstaining) recommends a vote FOR
the TerraSphere acquisition and the issuance of the shares in
connection with the acquisition.
THE
ADJOURNMENT PROPOSAL
This proposal allows our board of directors 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 TerraSphere Proposal. If this proposal is
not approved by our stockholders, our board of directors 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 TerraSphere Proposal.
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 our best interests and in the best interest of our
stockholders. The board of directors has approved and declared
the Adjournment Proposal advisable and recommends that you vote
or give instructions to vote FOR the proposal.
THE
TERRASPHERE ACQUISITION
The following is a description of the material aspects of the
TerraSphere acquisition, including the purchase agreement. While
we believe that the following description covers the material
terms of the acquisition, the description may not contain all of
the information that is important to you. We encourage you to
carefully read this entire proxy statement, including the
purchase agreement attached to this proxy statement at
Annex A, for a more complete understanding of the
acquisition.
Description
of the TerraSphere Acquisition
General
On July 6, 2010, we entered into a purchase agreement with
TerraSphere Inc., our wholly owned subsidiary, TerraSphere and
the members of TerraSphere. Pursuant to the purchase agreement,
the maximum total purchase price for TerraSphere will be
$25,830,000, which includes earn-out payments of up to
$11,040,000, payable solely in shares of common stock valued at
$0.756 per share. We will issue up to 34,166,667 shares of
our common stock, subject to upward adjustment based on certain
anti-dilution protections, in consideration for 100% of the
outstanding units of TerraSphere, which represents 84.6% of our
voting shares prior to the issuance and would represent 45.7% of
our voting shares following the issuance. Upon completion of the
proposed acquisition, TerraSphere would become our wholly-owned
subsidiary.
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Pursuant to the terms of the purchase agreement, each
TerraSphere member was given the option to receive either:
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such members pro rata portion of $21,000,000 worth
of our common stock, valued at $0.756 per share, which is the
price which was the average closing price for our common stock
over the fifteen day period preceding the date of the execution
of the purchase agreement (we refer to this $0.756 price in this
proxy statement as the Closing Price Per Share) (the
shares to be issued pursuant to this immediate payment structure
are referred to as the Option One Shares); or
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such members pro rata portion of up to $28,000,000
worth of our common stock, valued at the Closing Price Per
Share, in an earn-out payment structure consisting of up to four
milestone payments (the shares to be issued pursuant to this
earn-out payment structure are referred to as the Option
Two Shares).
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The earn-out payment is structured such that the TerraSphere
members electing to receive Option Two Shares will be paid their
respective pro rata portion of our common stock, valued
at the Closing Price Per Share, in accordance with the following
schedule:
(1) on the date of the closing, $12,000,000 of our common
stock;
(2) $5,000,000 of our common stock, if, and only if,
between the date of the purchase agreement and the earlier of
the 90th day following the closing or the 180th day
following the date of the purchase agreement, for a period of
five consecutive trading days, our Market Capitalization (as
defined below) exceeds the sum of: (1) our Initial Market
Capitalization (as defined below) on the date of the purchase
agreement plus (2) the Closing Price Per Share multiplied
by the number of shares of our common stock to be issued to
TerraSphere members electing Option One Shares, the number of
shares of our common stock to be issued pursuant to
paragraph 1 above and, if such calculation is being made
prior to the closing, the number of shares of our common stock
to be issued pursuant to this paragraph 2. Notwithstanding
the foregoing, if between the date of the purchase agreement and
the earlier of the 90th day following the closing or the
180th day following the date of the purchase agreement, we
complete a debt or equity financing with a third party other
than project financing, unless such project financing is
completed for TerraSphere (referred to as a
Financing), the cash received from the Financing
during such period shall be added to the Market Capitalization.
In addition, if between the closing and December 31, 2011,
we sell equity of either the TerraSphere or any of
TerraSpheres subsidiaries, any cash received from such
equity sales during such period shall be added to the Market
Capitalization.
(3) $2,000,000 of our common stock, if, and only if,
$2,000,000 of TerraSpheres accounts receivable as of the
date of the purchase agreement are received prior to
February 28, 2011;
(4) $5,000,000 of our common stock, or the Milestone Three
Payment, if TerraSphere generates Gross Margin (as defined
below) of $6,000,000 from its operations during the period from
the date of the purchase agreement through December 31,
2011; provided that, if TerraSphere generates Gross Margin of at
least $4,200,000, or the Milestone Three Gross Margin Threshold,
from its operations during such period, the TerraSphere members
will be entitled to a pro rata portion of the common
stock; and
(5) $4,000,000 of our common stock, or the Milestone Four
Payment, if, and only if, TerraSphere generates Gross Margin of
$4,000,000, or the Milestone Four Gross Margin Target, from its
operations during any six-month period commencing on the date of
the purchase agreement and ending on December 31, 2012;
provided that, if TerraSphere achieves the Milestone Three Gross
Margin Threshold, but does not achieve the Milestone Three Gross
Margin Target, 83.3% of the difference between the Milestone
Three Gross Margin Target and the actual Gross Margins achieved
pursuant to paragraph 4 above may be added by the
TerraSphere members to the Milestone Four Payment and the
Milestone Four Gross Margin Target.
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For the purposes of the above milestone calculations we agreed
upon the following definitions for Market
Capitalization, Initial Market Capitalization,
and Gross Margin:
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The term Market Capitalization means on any date the
number of shares of our common stock outstanding on such date,
less any shares issued in a Financing, multiplied by the closing
price of one share of our common stock as reported by the NASDAQ
Stock Market.
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The term Initial Market Capitalization means the
number of shares of our common stock outstanding on the date of
the purchase agreement multiplied by the Closing Price Per
Share, or $0.756.
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The term Gross Margin means:
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With respect to license revenue, the amount of such revenue
without deduction.
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With respect to royalty income from licenses, the amount of such
revenue without deduction.
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With respect to equipment sales, the dollars billed for the sale
of equipment to licensees or others, and subtracting all
external costs to manufacture, fabricate or produce, deliver and
install the equipment, including all parts, fabrication costs,
additional drawings and direct labor and consulting costs.
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With respect to revenues from build own operate projects, the
revenues from such projects, and subtracting costs related to
facility personnel, maintenance, utilities, disposal fees,
fertilizer, rent, permits and licenses.
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Lock-Up
of Shares
With limited exceptions, the shares to be issued to the
TerraSphere members are subject to the following sale
restrictions absent our approval:
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the Option One Shares are subject to a
lock-up the
term of which is six months, beginning on the closing of the
acquisition; and
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the Option Two Shares are subject to a
lock-up the
term of which is the longer of: (a) eighteen months,
beginning on the closing of the acquisition, or (b) six
months, beginning on the date when shares of common stock are
issued pursuant to the foregoing milestone payments.
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The above restrictions will not apply to the following
transfers; provided the transfers do not involve a disposition
for value and provided that we receive a
lock-up
agreement for the balance of the
lock-up
period discussed above from each donee, trustee, distributee, or
transferee, as the case may be:
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as a bona fide gift or gifts;
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to any trust for the direct or indirect benefit of the
TerraSphere members or the immediate family of the TerraSphere
members;
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as a distribution to members, partners or stockholders of a
TerraSphere member; or
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to any beneficiary of a TerraSphere member pursuant to a will or
other testamentary document or applicable laws of descent.
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Anti-Dilution
Protection
During the applicable
lock-up
period described above, we have agreed to provide the
TerraSphere members anti-dilution rights. The rights provide
that if we issue shares of our common stock for cash
consideration in connection with a financing transaction at a
price less than the Closing Price Per Share, or $0.756 per
share, then the TerraSphere members shall receive additional
shares of our common stock based on the following formula:
New shares to be issued =
[(A*B) / [B*(C/D)]] A
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A:
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For each TerraSphere member, the number of shares of our common
stock received at closing less any shares sold, assigned, or
transferred by such TerraSphere member.
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B:
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$0.756 (subject to adjustment for stock splits or dividends)
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C:
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The sum of the number shares of our common stock issued and
outstanding immediately prior to any dilutive issuance plus the
number of shares of our common stock which the consideration we
receive from the dilutive issuance would purchase at a price of
B. above.
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D:
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The sum of the number of shares of our common stock issued and
outstanding immediately prior to the dilutive issuance plus the
number of shares of our common stock so issued in connection
with the dilutive issuance.
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Messrs. Edward Gildea and William Gildea have not been
provided this anti-dilution protection.
Background
of the TerraSphere Acquisition
During March 2010, our Chief Financial Officer, Mr. David
Allen, contacted Atlas Advisors, LLC, or Atlas, a consulting
firm that was assisting us with business development to discuss
potential new acquisitions and new lines of business. As part of
the discussion, Mr. Allen suggested that Atlas contact
Mr. William Gildea and look into whether TerraSphere would
be a good acquisition candidate. Atlas met with Mr. William
Gildea to discuss TerraSphere and after their meeting Atlas
suggested that they believed we should conduct some preliminary
analysis as to whether TerraSphere would be a good fit for us.
On March 12, 2010, Mr. Edward Gildea introduced the
topic of holding discussions with TerraSphere with our board of
directors. Due to Mr. Gildeas relationship with
TerraSphere, our board decided to create an Acquisition
Committee comprised of the three independent and disinterested
directors, Messrs. Robert Cell, John DeVillars and Edward
Stoltenberg, to review and evaluate a possible transaction with
TerraSphere. Mr. Cell was made chairman of the committee.
Mr. Allen was instructed by the Acquisition Committee to
prepare an initial presentation for the committee regarding
TerraSphere and to begin discussions with Atlas regarding a
possible acquisition of TerraSphere.
On March 16, 2010, Mr. Allen and Atlas received
correspondence from Mr. William Gildea containing
TerraSpheres valuation model with an enterprise value of
$83 million.
Between March
22-29, 2010,
we and TerraSphere discussed possible deal structures, and we
continued performing due diligence on TerraSphere.
On March 30, 2010, the Acquisition Committee met with
Mr. Allen and Atlas to discuss the TerraSphere opportunity.
At the meeting, Atlas indicated that based on its review of
TerraSphere, it believed a $40 million valuation was fair
from a financial point of view for TerraSphere. Between March
30-31, 2010,
we continued to receive additional due diligence items from
TerraSphere.
On April 2, 2010, the Acquisition Committee met again to
discuss the transaction. The Acquisition Committee determined
that although it believed a TerraSphere acquisition had merit,
it do not feel it could proceed at the proposed valuation. The
Acquisition Committee instructed Mr. Cell (the chairman of
the committee) to continue to review the transaction.
Between April 2-9, 2010, we and the Acquisition Committee
continued to review a possible TerraSphere acquisition. During
this period, we authorized our outside legal counsel, Cozen
OConnor, to begin preparation of the purchase agreement.
On April 9, 2010, our board of directors held a previously
schedule meeting, at which the board continued to discuss a
possible transaction with TerraSphere.
On April
13-14, 2010,
Mr. Cell met Messrs. William Gildea and
Mr. Edward Gildea in Chicago to discuss the TerraSphere
transaction and TerraSpheres valuation assumptions.
On April 23, 2010, the Acquisition Committee met to discuss
Mr. Cells meeting with TerraSphere. After discussion
at the meeting, the Acquisition Committee instructed
Mr. Allen to contact Mr. William Gildea and
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to continue negotiations at an enterprise valuation of
$20 million and to attempt to purchase 100% of TerraSphere.
On April 23, 2010, Mr. Allen and Mr. William
Gildea discussed the revised proposed valuation and deal
structure.
On April 24, 2010, Mr. William Gildea delivered a
counterproposal to Mr. Allen that provided that we acquire
51% of TerraSphere with options to acquire the remaining
interest over a one year period. In addition, the proposal
required us to commit to certain funding requirements during
such period, if needed by TerraSphere. Further, the proposal
asked for price protection on the shares of our common stock
being issued such that if we issued shares in the future for
financings, the TerraSphere members would receive additional
shares of common stock.
On April 25, 2010, Mr. Allen contacted
Mr. William Gildea and proposed that the option for us to
acquire the remaining 49% of TerraSphere be exercisable by us on
a more expedited basis and that we were not willing to provide
price protection for Messrs. William Gildea or Edward
Gildea. On April 26, 2010, Mr. Allen met with
Mr. William Gildea at our offices to further discuss the
parameters of the price protection.
On April 27, 2010, Mr. Allen provided TerraSphere with
an initial draft of the purchase agreement prepared by Cozen
OConnor. On May 3, 2010, Clark, Balboni &
Gildea, or CBG, legal counsel to TerraSphere provided its
initial comments to the purchase agreement.
On May 4, 2010, TerraSphere notified us that based on
certain tax advice received it wished to structure the
acquisition as a 100% acquisition of the members interest. After
notifying the chairman of the Acquisition Committee,
Mr. Allen informed TerraSphere that he believed a 100%
acquisition would be in our best interest as well.
On May 5, 2010, Cozen OConnor sent a revised draft of
the purchase agreement to CBG with the revisions agreed to on
May 4, 2010. On May 7, 2010, CBG provided its comments
to the revised purchase agreement.
On May 11, 2010, the Acquisition Committee engaged
Duff & Phelps, LLC, or Duff & Phelps, to
provide the Acquisition Committee with an opinion as to the
fairness, from a financial point of view, to us and our
stockholders (other than our stockholders who are also
TerraSphere members) of the proposed consideration to be paid by
us in the TerraSphere transaction.
On May 12, 2010, the Acquisition Committee met to discuss
the status of the TerraSphere transaction.
On May 17, 2010, Cozen OConnor sent a revised draft
of the purchase agreement. On May 18, 2010, CBG provided
its comments to the revised purchase agreement. On May 18,
2010, Cozen OConnor responded to CBG comments on the
purchase agreement.
On May 20, 2010, Mr. Allen distributed draft
TerraSphere financial statements to the Acquisition Committee.
On May 21, 2010, the Acquisition Committee met to discuss
the transaction with Mr. Allen, Duff & Phelps and
Cozen OConnor. At the meeting, Duff & Phelps
informed the Acquisition Committee that it would not be able to
arrive at a favorable opinion as to the fairness of the
consideration to be paid by the Company in the TerraSphere
acquisition. However, Duff & Phelps suggested that the
parties consider restructuring the TerraSphere acquisition to
include an earn-out feature that would permit the Company to pay
a portion of the total consideration contingent upon
TerraSpheres achievement of specified milestones and, as a
result, less up-front consideration. Based on Duff &
Phelps suggestion, the Acquisition Committee instructed
Mr. Allen, Mr. Cell and Mr. Allen to prepare
alternative transaction structures that required less
consideration to be paid at closing with additional
consideration to be paid on the achievement of milestones by
TerraSphere.
On May 30, 2010, Mr. Allen sent a revised transaction
structure to Mr. William Gildea, which structure provided
for less consideration to be paid at closing with additional
consideration to be paid on the achievement of milestones by
TerraSphere. On May 31, 2010, Mr. William Gildea
informed Mr. Allen that the proposal sent by Mr. Allen
on May 30 would not be acceptable to the TerraSphere members.
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On June 2, 2010, the Acquisition Committee met to discuss
the status of the transaction. Mr. William Gildea attended
a portion of the meeting. At the meeting, the Acquisition
Committee informed Mr. William Gildea that it believed a
structured transaction with less consideration to be paid at
closing with additional consideration to be paid on the
achievement of milestones by TerraSphere was required due to the
early stage nature of TerraSpheres operations. At the
meeting, Mr. William Gildea informed the Acquisition
Committee that TerraSphere was willing to continue a dialogue of
a structured transaction.
Between June 3-8, 2010, Mr. Allen and Mr. William
Gildea negotiated a structured payout transaction with less
consideration to be paid at closing with additional
consideration to be paid on the achievement of milestones by
TerraSphere. On June 8, 2010, Mr. William Gildea
reported that he had come to an impasse with TerraSphere members
and they would not accept a structured transaction.
Between June 9-21, 2010, the parties continued to negotiate.
During this negotiation, the parties acknowledged that certain
of the TerraSphere members, particularly the smaller equity
holders, did not want to enter into a structured transaction,
but wanted to receive their consideration in full at closing. In
order to accommodate these members, the parties agreed to
provide the TerraSphere members with two options: (1) an
option to receive the $21 million valuation as previously
discussed with all consideration being paid at closing; and
(2) an option to receive an increased valuation of
$28 million with a portion of such consideration being paid
only upon the achievement of certain milestones. In negotiating
such two-tiered offer, Mr. Allen informed Mr. William
Gildea that such offer was contingent on a majority of
TerraSphere members accepting the second option in order to keep
the up-front consideration as low as possible. On June 21,
2010, the final transaction was agreed to by the parties.
On June 28, 2010, the Acquisition Committee met to discuss
the transaction. At the meeting, Duff & Phelps made a
presentation regarding the fairness to us, from a financial
point of view, of the consideration to be paid by us pursuant to
the purchase agreement. Duff & Phelps detailed for the
Acquisition Committee the analysis performed and made a
presentation concerning how it arrived at its opinion.
Duff & Phelps discussed at length with the Acquisition
Committee the different analyses used to determine whether the
consideration to be paid by us was fair from a financial point
of view to our stockholders (excluding the TerraSphere members
that are our stockholders). After considerable review and
discussion, the purchase agreement was unanimously approved and
the board of directors (with Mr. Gildea abstaining)
unanimously approved the purchase agreement. For a more detailed
description of the Duff & Phelps fairness opinion, see
the section entitled The TerraSphere Acquisition
Opinion of the Acquisition Committees
Financial Advisor Regarding the TerraSphere Acquisition.
On July 6, 2010, the purchase agreement was executed by us,
TerraSphere Inc., our wholly owned subsidiary, TerraSphere and
the TerraSphere members.
On July 19, 2010, we issued Atlas 1,623,333 shares of common
stock and a five-year warrant to acquire 1,623,333 shares of
common stock with an exercise price of $0.54 per share. The
issuance to Atlas was made pursuant to a Business Development
Agreement dated January 29, 2010 between us and Atlas. Under the
Business Development Agreement, we had agreed to compensate
Atlas in the event of any mergers and/or acquisitions that were
a result of the services provided by Atlas, such payment to have
included both cash payments and equity payments. Pursuant to the
agreement reached between us, in exchange for the equity
consideration described above, Atlas agreed that no further
consideration be paid to it in connection with our proposed
acquisition of TerraSphere. The all stock payment was made to
Atlas at a share price of $0.54, which was the closing price of
our common stock on the date of execution of the TerraSphere
purchase agreement.
Our
Reasons for the TerraSphere Acquisition
In the course of reaching its unanimous decision to recommend
that our board of directors approve the TerraSphere acquisition
and the purchase agreement and to recommend that our
stockholders vote to approve the acquisition pursuant to the
purchase agreement, the Acquisition Committee consulted with our
senior
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management and with its own independent financial advisors, and
considered a number of potentially positive factors in its
deliberations, including, but not limited to, the following:
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that the TerraSphere acquisition would allow us to expand our
environmentally sustainable business into the area of urban
agriculture, positioning us into what we believe is an area of
significant growth;
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that the TerraSphere acquisition would give us access to
proprietary technology, which is already tested, although not on
a commercial scale;
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that the TerraSphere acquisition would give us access to a
company which is producing revenue and expects to be cash flow
positive in 2010;
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that the TerraSphere acquisition compliments our existing
green tech businesses including food waste to
fertilizer and treatment of industrial waste water; and
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that the TerraSphere acquisition provides access to key
operating personnel including the inventor of the technology and
an existing client base.
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The Acquisition Committee also considered potential negative
factors relating to the TerraSphere acquisition, including:
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that TerraSphere was a related party to us due to
Mr. Edward Gildeas relationship with TerraSphere;
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that TerraSphere is a start up company, that has only produced
consistent revenues in the last six months other than one
contract in 2008;
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that TerraSpheres licensees are themselves start up
companies, which increased the credit risk to TerraSphere if
such licensees were not successful or sufficiently
capitalized; and
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that TerraSphere had not had produced product on a commercial
scale.
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Recommendation
of Our Board of Directors
After careful consideration of a variety of factors, including
the positive and negative factors described under the heading
The TerraSphere Acquisition Our Reasons for
the TerraSphere Acquisition, on June 28, 2010, the
Acquisition Committee unanimously recommended that our board of
directors and stockholders approve the acquisition, including
the issuance of the shares in connection with the acquisition.
In particular, the Acquisition Committee unanimously:
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determined that the terms of the TerraSphere acquisition are
advisable, fair to and in the best interests of our stockholders;
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recommended that our board of directors approve the TerraSphere
acquisition and the related transactions, and approve the
purchase agreement;
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recommended that our board of directors recommend the
TerraSphere acquisition and the related transactions, including
the issuance of the shares in connection with the acquisition
contemplated in the purchase agreement, to our
stockholders; and
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recommends that our stockholders approve the TerraSphere
acquisition and the issuance of the shares in connection with
the acquisition.
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The Acquisition Committee unanimously recommends that you
vote FOR the TerraSphere acquisition and the
issuance of the shares in connection with the acquisition.
Having received the recommendation of the Acquisition Committee,
for reasons including those described above under the heading
The TerraSphere Acquisition Our Reasons for
the TerraSphere Acquisition, on June 28, 2010, based
solely on the recommendation of the Acquisition Committee, our
board of directors unanimously (with Mr. Gildea abstaining)
approved the TerraSphere acquisition and related transactions
and
29
the issuance of the shares in connection with the acquisition,
and recommends such matters to our stockholders. In particular,
the board of directors unanimously (with Mr. Gildea
abstaining):
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determined that the terms of the TerraSphere acquisition are
advisable, fair to and in the best interests of our stockholders;
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approved the TerraSphere acquisition and related transactions,
and authorized us to enter into the purchase agreement; and
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recommends that our stockholders approve the TerraSphere
acquisition and the issuance of the shares in connection with
the acquisition.
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Based solely on the recommendation of the Acquisition
Committee, our board of directors unanimously (with
Mr. Gildea abstaining) recommends that you vote
FOR the TerraSphere acquisition and the issuance of
the shares in connection with the acquisition.
Opinion
of the Acquisition Committees Financial Advisor
The Company engaged Duff & Phelps to serve as the
financial advisor to the Acquisition Committee and to provide an
opinion as to the fairness, from a financial point of view, to
the Company, and, accordingly, to the holders of the
Companys common stock, other than those holders who also
own units of TerraSphere, of the consideration to be paid by the
Company in the TerraSphere acquisition. Duff & Phelps
is a leading independent financial advisory firm, offering a
broad range of valuation, investment banking services and
consulting services, including fairness and solvency opinions,
mergers and acquisitions advisory, mergers and acquisitions due
diligence services, financial reporting and tax valuation, fixed
asset and real estate consulting, ESOP and ERISA advisory
services, legal business solutions, and dispute consulting.
Duff & Phelps is regularly engaged in the valuation of
businesses and securities and the preparation of fairness
opinions in connection with mergers, acquisitions and other
strategic transactions.
On June 28, 2010, Duff & Phelps rendered its oral
opinion to the Acquisition Committee, which opinion was
subsequently confirmed in a written opinion dated July 6,
2010, to the effect that, subject to the limitations,
exceptions, assumptions and qualifications set forth therein, as
of July 6, 2010, the consideration to be paid by the
Company in the TerraSphere acquisition was fair, from a
financial point of view, to the Company and, accordingly, to the
holders of the Companys common stock, other than those
holders who also own units of TerraSphere.
The full text of the written opinion of Duff & Phelps,
which sets forth, among other things, the assumptions made,
procedures followed, matters considered and qualifications and
limitations of the review undertaken in rendering the opinion,
is attached as Annex B to this proxy statement. This
summary of the Duff & Phelps opinion set forth below
is qualified in its entirety by reference to the full text of
the Duff & Phelps opinion. The Company encourages its
stockholders to read the full text of the Duff &
Phelps opinion carefully and in its entirety.
In connection with its opinion, Duff & Phelps made
such reviews, analyses and inquiries as Duff & Phelps
deemed necessary and appropriate under the circumstances.
Duff & Phelps also took into account its assessment of
general economic, market and financial conditions, as well as
its experience in securities and business valuation, in general,
and with respect to similar transactions, in particular.
Duff & Phelps procedures, investigations, and
financial analysis with respect to the preparation of its
opinion included, but were not limited to, the items summarized
below:
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Discussed the TerraSphere acquisition, the operations, financial
condition, future prospects and projected operations and
performance of the Company and TerraSphere with the managements
of the Company and TerraSphere;
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Reviewed the Companys audited financial statements as
filed with the SEC for the years ending December 31, 2008
and 2009 as well as the March 31, 2010
10-Q;
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Reviewed TerraSpheres audited financial statements as of
December 31, 2009 and unaudited financial statements as of
March 31, 2010;
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Reviewed year-to-date unaudited trial balance of TerraSphere as
of June 22, 2010;
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Reviewed the three-year financial forecasts prepared by the
management of the Company and the five-year financial forecasts
prepared by the management of TerraSphere;
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Met with licensees of TerraSphere and discussed strategic plans
and business models;
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Reviewed a draft of the purchase agreement received on
June 28, 2010;
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Reviewed the due diligence packet pertaining to the sale of the
PharmaSphere division (PharmaSphere) of TerraSphere;
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Reviewed investor presentations of TerraSphere dated March 2010
and October 2009;
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Reviewed the historical trading price and trading volume of the
Companys common stock and the publicly traded securities
of certain other companies that Duff & Phelps deemed
relevant;
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Compared the financial performance of the Company and
TerraSphere and the prices and trading activity of the
Companys common stock with those of certain other publicly
traded companies that Duff & Phelps deemed
relevant; and
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Conducted such other analyses and considered such other factors
as Duff & Phelps deemed appropriate.
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In performing its analyses and rendering its opinion with
respect to the TerraSphere acquisition, Duff & Phelps,
with the Companys consent:
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Relied upon the accuracy, completeness, and fair presentation of
all information, data, advice, opinions and representations
obtained from public sources or provided to it from private
sources, including Company management, and did not independently
verify such information;
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Assumed that any estimates, evaluations, forecasts and
projections furnished to Duff & Phelps were reasonably
prepared and based upon the best currently available information
and good faith judgment of the person furnishing the same;
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Assumed that the final versions of all documents reviewed by
Duff & Phelps in draft form conform in all material
respects to the drafts reviewed;
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Assumed that information supplied to Duff & Phelps and
representations and warranties made in the purchase agreement
are accurate in all material respects;
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Assumed that all of the conditions required to implement the
TerraSphere acquisition will be satisfied and that the
TerraSphere acquisition will be completed in accordance with the
purchase agreement without any amendments thereto or any waivers
of any terms or conditions thereof;
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Relied upon the fact that the Acquisition Committee and the
Company have been advised by counsel as to all legal matters
with respect to the TerraSphere acquisition, including whether
all procedures required by law to be taken in connection with
the TerraSphere acquisition have been duly, validly and timely
taken;
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Assumed that all governmental, regulatory or other consents and
approvals necessary for the consummation of the TerraSphere
acquisition will be obtained without any adverse effect on the
Company or TerraSphere or the contemplated benefits expected to
be derived in the TerraSphere acquisition; and
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Assumed the offer from a private equity group to purchase newly
issued units of PharmaSphere for $6.7 million for an
approximate ownership of 52.9% of PharmaSphere was still
outstanding and available to be accepted by TerraSphere.
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The Duff & Phelps opinion noted that the management of
the Company directed Duff & Phelps to assume that
TerraSphere members owning 69% of the units of TerraSphere will
elect to receive Option Two
31
Shares. The Duff & Phelps opinion further noted that
the number of shares of the Companys common stock to be
issued in connection with the TerraSphere acquisition is subject
to certain potential anti-dilution adjustments after the closing
as to which Duff & Phelps expressed no opinion.
Duff & Phelps did not make any independent evaluation,
appraisal or physical inspection of the Companys solvency
or of any specific assets or liabilities (contingent or
otherwise). The Duff & Phelps opinion should not be
construed as a valuation opinion, credit rating, solvency
opinion, an analysis of the Companys credit worthiness, as
tax advice, or as accounting advice. Duff & Phelps was
not requested to, and did not, (a) initiate any discussions
with, or solicit any indications of interest from, third parties
with respect to the TerraSphere acquisition, the assets,
businesses or operations of the Company, or any alternatives to
the TerraSphere acquisition, (b) negotiate the terms of the
TerraSphere acquisition, and therefore, Duff & Phelps
assumed that such terms are the most beneficial terms, from the
Companys perspective, that could, under the circumstances,
be negotiated among the parties to the purchase agreement and
the TerraSphere acquisition, or (c) advise the Acquisition
Committee, the Companys board of directors or any other
party with respect to alternatives to the TerraSphere
acquisition. In addition, Duff & Phelps did not
express any opinion as to the market price or value of the
Companys common stock after announcement of the
TerraSphere acquisition. Duff & Phelps did not make,
and assumed no responsibility to make, any representation, or
render any opinion, as to any legal matter.
In rendering its opinion, Duff & Phelps did not
express any opinion with respect to the amount or nature of any
compensation to any of the Companys officers, directors,
or employees, or any class of such persons, relative to the
consideration to be received by any other party, or with respect
to the fairness of any such compensation. Duff &
Phelps also expressed no opinion with respect to the impact of
the TerraSphere acquisition on any particular holder of the
Companys common stock other than in its capacity as such.
The basis and methodology for the Duff & Phelps
opinion were designed specifically for the express purposes of
the Acquisition Committee and may not translate to any other
purposes. The Duff & Phelps opinion:
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does not address the merits of the underlying business decision
to enter into the TerraSphere acquisition versus any alternative
strategy or transaction;
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is not a recommendation as to how the Acquisition Committee or
the Companys board of directors or any stockholder should
vote or act with respect to any matters relating to the
TerraSphere acquisition, or whether to proceed with the
TerraSphere acquisition or any related transaction; and
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does not indicate that the consideration paid is the best
possibly attainable under any circumstances.
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Instead, the Duff & Phelps opinion merely states
whether the consideration in the TerraSphere acquisition is
within a range suggested by certain financial analyses. The
decision as to whether to proceed with the TerraSphere
acquisition or any related transaction may depend on an
assessment of factors unrelated to the financial analysis on
which the Duff & Phelps opinion is based. The
Duff & Phelps opinion should not be construed as
creating any fiduciary duty on the part of Duff &
Phelps to any party.
Duff & Phelps prepared the opinion effective as of
July 6, 2010. The Duff & Phelps opinion is
necessarily based upon market, economic, financial and other
conditions as they exist and can be evaluated as of July 6,
2010, and Duff & Phelps disclaims any undertaking or
obligation to advise any person of any change in any fact or
matter affecting the opinion which may come or be brought to the
attention of Duff & Phelps after July 6, 2010.
The following is a summary of the material analyses performed by
Duff & Phelps in connection with rendering its
opinion. Duff & Phelps noted that the basis and
methodology for its opinion have been designed specifically for
this purpose and may not translate to any other purposes. While
this summary describes the material information in
Duff & Phelps opinion, the material analyses
performed and the material factors considered by
Duff & Phelps, it does not purport to be a
comprehensive description of all analyses and factors considered
by Duff & Phelps. The Duff & Phelps opinion
is based on the comprehensive consideration of the various
analyses performed.
32
In performing its analyses, Duff & Phelps considered
general business, economic, industry and market conditions,
financial and otherwise, and other matters as they existed on,
and could be evaluated as of, the date of its written opinion.
No company, transaction or business used in Duff &
Phelpss analyses for comparative purposes is identical to
the Company, TerraSphere or the TerraSphere acquisition.
Duff & Phelps made judgments and assumptions with
regard to industry performance, general business, economic,
regulatory, market and financial conditions and other matters,
many of which are beyond the control of the Company, such as the
impact of competition on the business of the Company,
TerraSphere and on the industry generally, industry growth and
the absence of any adverse material change in the financial
condition and prospects of the Company, TerraSphere or the
industry or in the markets generally. Duff & Phelps
believes that mathematical analyses (such as determining average
and median) are not by themselves meaningful methods of using
selected company data and must be considered together with
qualities, judgments and informed assumptions to arrive at sound
conclusions. While the results of each analysis were taken into
account in reaching its overall conclusion with respect to
fairness, Duff & Phelps did not make separate or
quantifiable judgments regarding individual analyses. The
implied reference range values indicated by Duff &
Phelpss analyses are illustrative and not necessarily
indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than
those suggested by the analyses. In addition, any analyses
relating to the value of assets, businesses or securities do not
purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold, which may depend
on a variety of factors, many of which are beyond the control of
the Company and Duff & Phelps. Much of the information
used in, and accordingly the results of, Duff &
Phelpss analyses are inherently subject to substantial
uncertainty.
In arriving at its opinion, Duff & Phelps did not
attribute any particular weight to any particular analysis or
factor considered by it, but rather made qualitative judgments
as to the significance and relevance of each analysis and
factor. Several analytical methodologies were employed by
Duff & Phelps in its analyses, and no one single
method of analysis should be regarded as critical to the overall
conclusion reached by Duff & Phelps. Each analytical
technique has inherent strengths and weaknesses, and the nature
of the available information may further affect the value of
particular techniques. Accordingly, Duff & Phelps
believes that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors
considered by it, without considering all analyses and factors
in their entirety, could create a misleading or incomplete view
of the evaluation process underlying its opinion. The conclusion
reached by Duff & Phelps, therefore, is based on the
application of Duff & Phelps own experience and
judgment to all analyses and factors considered by
Duff & Phelps, taken as a whole.
The Duff & Phelps opinion was provided to the
Acquisition Committee in connection with its consideration of
the TerraSphere acquisition and was only one of many factors
considered by the Acquisition Committee in evaluating the
TerraSphere acquisition. Neither the Duff & Phelps
opinion nor its analyses were determinative of the consideration
to be paid by the Company in the TerraSphere acquisition or of
the views of the Acquisition Committee or the management of the
Company with respect to the TerraSphere acquisition.
The following is a summary of the material financial analyses
prepared in connection with the Duff & Phelps opinion
to the Acquisition Committee. The order of the analyses does not
represent relative importance or weight given to those analyses
by Duff & Phelps. The fact that any specific analysis
has been referred to in the summary below is not meant to
indicate that such analysis was given greater weight than any
other analysis. The financial analyses summarized below include
information presented in tabular format. In order to fully
understand the financial analyses used by Duff &
Phelps, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete
description of the financial analyses. Rather, the analyses
listed in the tables and described below must be considered as a
whole; considering any portion of such analyses and of the
factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the
process underlying Duff & Phelps opinion.
Transaction
Overview
The Company directed Duff & Phelps to assume that
holders of 69% of TerraSpheres outstanding units would
elect to receive Option Two Shares, resulting in 57.3% of the
aggregate consideration to be paid by the Company in connection
with the TerraSphere acquisition being paid at the closing of
the TerraSphere
33
acquisition and the balance being contingent and paid upon
TerraSpheres achievement of the four milestones
contemplated by the purchase agreement. Based on the average
closing price per share of the Companys common stock
during the
15-day
period ending July 2, 2010, the aggregate implied value of
the shares to be delivered upon closing of the TerraSphere
acquisition was approximately $14.8 million. To estimate
the range of potential values of the aggregate consideration to
be paid in connection with the TerraSphere acquisition,
including the shares paid at closing and pursuant to the
milestone payments, Duff & Phelps applied probability
percentages of 70%, 85% and 100% to the achievement of such
milestones and the value of the resulting milestone payments,
which, when added to the implied value of the shares to be paid
at closing of $14.8 million, resulted in implied aggregate
consideration values of approximately $22.5 million,
$24.2 million and $25.8 million, respectively, or a
range of implied aggregate consideration values of approximately
$22.5 million to $25.8 million.
Company
Analysis
Duff & Phelps reviewed the share price trading history
for the Companys common stock for the period commencing
March 16, 2007 and ending July 2, 2010.
Duff & Phelps also reviewed the volume weighted
average price of the Companys common stock for the
30-day,
60-day,
90-day,
6-month and
1-year
periods ending July 2, 2010. This analysis showed the
following:
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Volume Weighted
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Time Period Ending July 2, 2010
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Average Price
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30-day
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$
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0.83
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60-day
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$
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1.04
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90-day
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$
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1.04
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6-month
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$
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1.02
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1-year
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$
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1.04
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In addition, based on approximately 40.5 million shares of
the Companys common stock outstanding as of July 2,
2010, the closing price of the Companys common stock on
July 2, 2010 and the
15-day
average of the closing prices of the Companys common
stock, Duff & Phelps derived a range of equity values
for the Company of approximately $24.3 million to
$30.6 million. Duff & Phelps then added
approximately $18.5 million, the book value of the net debt
of the Company as of March 31, 2010, to derive a range of
enterprise values for the Company of approximately
$43 million to $49 million.
TerraSphere
Analysis
PharmaSphere
Analysis
Based on information provided by TerraSphere management,
Duff & Phelps noted that in February 2010, a private
equity group offered to purchase 52.9% of newly issued units of
PharmaSphere for an aggregate purchase price of
$6.7 million, and that such offer remained outstanding as
of July 6, 2010. After applying an assumed 20% illiquidity
discount, this aggregate offer price implied an equity value for
PharmaSphere of approximately $4.8 million.
Discounted
Cash Flow Analyses
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TerraSphere
Discounted Cash Flow Analysis
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Duff & Phelps performed a discounted cash flow
analysis to estimate the present value of the free cash flows of
TerraSphere (excluding cash flows from PharmaSphere) through the
calendar year ending December 31, 2029 (which takes into
consideration the life of the existing patents) based on
TerraSphere managements financial projections and
estimates as to the minimum milestones needed to achieve full
earnout payments under the purchase agreement, and discount
rates ranging from 30.0% to 50.0%. This analysis indicated a
range of enterprise values for TerraSphere of approximately
$15.6 million to $30.7 million, compared to a range of
implied aggregate transaction consideration values of
approximately $22.5 million to $25.8 million.
34
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TerraSphere
Existing Licensees Discounted Cash Flow Analysis
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Duff & Phelps also performed a discounted cash flow
analysis to estimate the present value of the free cash flows of
existing licensees of TerraSphere through the calendar year
ending December 31, 2029 based on TerraSphere
managements financial projections and discount rates
ranging from 25.0% to 35.0%. To estimate the value of the
existing licensees of TerraSphere products, Duff &
Phelps projected the revenues from the existing licensees
through 2029 (which takes into consideration the life of the
existing patents) and assumed TerraSphere would not obtain any
new licensees. This analysis indicated a range of enterprise
values for TerraSphere of approximately $9.2 million to
$12.8 million.
Using the ranges of enterprise values for TerraSphere of
approximately $15.6 million to $30.7 million
calculated using the discounted cash flow analysis summarized
above, Duff & Phelps then adjusted for cash and debt
and added the implied equity value of $4.8 million for
PharmaSphere and derived a range of implied equity values for
TerraSphere of approximately $20.3 million to
$35.4 million, compared to a range of implied aggregate
transaction consideration values of approximately
$22.5 million to $25.8 million.
Contribution
Analysis
Duff & Phelps analyzed the expected contribution
percentages of each of the Company and TerraSphere to the
post-transaction combined equity value as implied by the
estimated equity value ranges for TerraSphere calculated as
summarized above, as compared to the Companys market
capitalization, excluding any possible synergies that the
combined company may realize following the consummation of the
TerraSphere acquisition. Duff & Phelps noted that the
TerraSphere acquisition could result in holders of the
Companys common stock owning approximately 67.4% of the
combined company if no milestones payments are paid by the
Company and approximately 54.2% if all the milestone payments
are paid by the Company, compared to the relative contribution
by the Company to the combined company of earnings before
interest, taxes, depreciation and amortization, or
EBITDA, excluding EBITDA from PharmaSphere, based
upon forecasts prepared by Company management and TerraSphere
management, of 25.6% in 2011, 36.7% in 2012 and 45.7% in 2013.
Other
Items
The Duff & Phelps engagement letter and amendment with
the Company, dated May 11, 2010, and June 23, 2010,
respectively, provided that, for its services, Duff &
Phelps is entitled to receive from the Company a fee of
$250,000, which was due and payable as follows: $100,000
non-refundable retainer payable upon execution of the engagement
letter, and $150,000 payable upon Duff & Phelps
informing the Acquisition Committee that Duff & Phelps
is prepared to deliver its opinion. The engagement letter also
provided that Duff & Phelps would be paid additional
fees at its standard hourly rates for any time incurred should
Duff & Phelps be called upon to support its findings
subsequent to the delivery of the opinion. In addition, the
Company agreed to reimburse Duff & Phelps for its
reasonable out-of-pocket expenses and to indemnify
Duff & Phelps and certain related persons against
liabilities arising out of Duff & Phelps service
as a financial advisor to the Acquisition Committee. Other than
this engagement, during the two years preceding the date of its
opinion, Duff & Phelps performed financial advisory
services to a subsidiary of TerraSphere for which
Duff & Phelps received customary fees and
indemnification. Other than such services, during the two years
preceding the date of Duff & Phelps opinion,
Duff & Phelps did not have any material relationship
with any party to the TerraSphere acquisition for which
compensation was received or is intended to be received, nor is
any such material relationship or related compensation mutually
understood to be contemplated.
Interests
of Our Officers and Directors in the TerraSphere
Acquisition
When you consider the unanimous (with Mr. Gildea
abstaining) recommendation of our board of directors in favor of
the TerraSphere acquisition you should note that our Chairman
and Chief Executive Officer, Mr. Edward Gildea, has an
interest in 8.75% of the units of TerraSphere. In addition,
relatives of Mr. Gildea hold an additional 30.75% of the
units of TerraSphere. If the acquisition is completed, and
assuming all milestones are achieved, Mr. Gildea would
receive 3,240,741 shares of our common stock in exchange
for his
35
TerraSphere units and his relatives would receive an additional
10,775,463 of our common stock in exchange for their TerraSphere
units.
Furthermore, Mark C. Gildea, the brother of Edward J. Gildea, is
the President and Chief Executive Officer of TerraSphere, and
William A. Gildea, also the brother of Edward J. Gildea, is an
independent contractor of TerraSphere.
Effective April 2, 2010, Mark C. Gildea entered into an
employment agreement with TerraSphere, pursuant to which
TerraSphere employed Mr. Gildea as its President and Chief
Executive Officer for a term of five years.
Mr. Gildeas annual salary is $180,000, subject to
discretionary annual increases at the discretion of the board of
directors, and Mr. Gildea is entitled to an annual bonus of
at least $20,000. In the event Mr. Gildea is terminated
without cause and in connection with a change of control of
TerraSphere, he shall be entitled to severance, payable in a
single lump sum, equal to thirty-six months base salary and all
options or equity interests previously granted shall immediately
vest. Our acquisition of TerraSphere constitutes a change of
control as such term is defined in Mr. Gildeas
employment agreement, such that if Mr. Gildea is terminated
in connection with the change of control transaction, he shall
be entitled to the foregoing severance benefits.
Effective April 2, 2010, William A. Gildea entered into an
engagement agreement with TerraSphere, pursuant to which
TerraSphere engaged Mr. Gildea as an independent contractor
for a term of three years. Mr. Gildeas compensation
for such independent contracting services is a flat monthly fee
of $16,667 per month, and Mr. Gildea will be entitled to an
annual bonus equal to that which is paid to senior management
employees if TerraSphere develops a companywide bonus plan. In
the event Mr. Gildeas engagement is terminated
without cause during the first two years of the engagement, he
will be entitled to receive one-half of such annual compensation
(or $100,000) subject to his execution of a non-competition
agreement and release.
Because of Mr. Edward Gildeas relationship with
TerraSphere, our board of directors formed the Acquisition
Committee to evaluate and, if appropriate, negotiate the
proposed TerraSphere acquisition. The Acquisition Committee
obtained valuation advice and a fairness opinion from an
independent investment bank, and negotiated the terms of the
TerraSphere acquisition with the TerraSphere management.
Mr. Gildea did not participate in the negotiations.
U.S.
Federal Income Tax Consequences
No gain or loss will be recognized by us or by holders of shares
of our common stock as a result of the TerraSphere acquisition.
Regulatory
Approvals
We are not aware of any governmental or regulatory approval
required for completion of the TerraSphere acquisition, other
than compliance with applicable corporate laws of Delaware,
compliance with securities laws and filing with the NASDAQ Stock
Market, with respect to the shares of our common stock to be
issued to the TerraSphere stockholders pursuant to the purchase
agreement. If any other governmental approvals or actions are
required, we intend to try to obtain them. We cannot assure you,
however, that we will be able to obtain any such approvals or
actions.
THE
PURCHASE AGREEMENT
The discussion in this proxy statement of the TerraSphere
acquisition and the principal terms of the purchase agreement
described below are qualified in their entirety by reference to
the copy of the purchase agreement attached as Annex A
hereto, and incorporated herein by reference. The following
description summarizes the material provisions of the purchase
agreement, which agreement we urge you to read carefully because
it is the principal legal document that governs the TerraSphere
acquisition.
The representations and warranties described below and included
in the purchase agreement were made by us and TerraSphere as of
specific dates. The assertions embodied in these representations
and warranties
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may be subject to important qualifications and limitations
agreed to by us and TerraSphere in connection with negotiating
the purchase agreement. The representations and warranties may
also be subject to a contractual standard of materiality that
may be different from what may be viewed as material to
stockholders, or may have been used for the purpose of
allocating risk among us and TerraSphere, rather than
establishing matters as facts. The purchase agreement is
described in this proxy statement and included as Annex A
only to provide you with information regarding its terms and
conditions at the time it was entered into by the parties.
Accordingly, you should read the representations and warranties
in the purchase agreement not in isolation but rather in
conjunction with the other information contained in this
document.
General;
Unit Purchase Consideration
Pursuant to the purchase agreement, we agreed to acquire 100% of
the units of TerraSphere. We will make the acquisition by
issuing up to 34,166,667 shares of our common stock to the
TerraSphere members, subject to upward adjustment based on
certain anti-dilution protections, in exchange for 100% of the
units of TerraSphere. Upon completion of the proposed
acquisition, TerraSphere would become our wholly-owned
subsidiary. For a more detailed description of the share
issuance to be made pursuant to the purchase agreement, please
see the section The TerraSphere Acquisition
Description of the TerraSphere Acquisition
General.
With limited exceptions, the shares to be issued to the
TerraSphere members are subject to the following sale
restrictions absent our approval:
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the Option One Shares are subject to a
lock-up the
term of which is six months, beginning on the closing of the
acquisition; and
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the Option Two Shares are subject to a
lock-up the
term of which is the longer of: (a) eighteen months,
beginning on the closing of the acquisition, or (b) six
months, beginning on the date when shares of common stock are
issued pursuant to the foregoing milestone payments.
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During the applicable
lock-up
period described above, we have agreed to provide the
TerraSphere members anti-dilution rights. The rights provide
that if we issue shares of our common stock for cash
consideration in connection with a financing transaction at a
price less than $0.756 per share, then the TerraSphere members
shall receive additional shares of our common stock based on a
weighted average dilution formula. See the section entitled
The TerraSphere Acquisition Description of the
TerraSphere Acquisition Anti-Dilution
Protection for details about the formula.
Messrs. Edward Gildea and William Gildea have not been
provided this anti-dilution protection.
Representations
and Warranties
In the purchase agreement, TerraSpheres controlling
members, consisting of Messrs. William Gildea, Edward
Gildea and Nick Brusatore make certain representations and
warranties (subject to certain exceptions) relating to, among
other things:
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organization and standing;
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capitalization;
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authority and enforceability to enter into purchase agreement;
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no violation of organizational documents, contracts or laws;
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required consents and approvals;
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financial statements, accounts receivables and undisclosed
liabilities;
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real estate and personal property;
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intellectual property;
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material agreements;
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environmental matters;
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taxes;
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employee matters;
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permits;
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insurance matters;
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conflicts of interest; and
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information about customers.
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In the purchase agreement, we make certain representations and
warranties (subject to certain exceptions) relating to, among
other things:
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organization and standing;
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authority and enforceability to enter into purchase agreement;
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no violation of organizational documents, contracts or laws;
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required consents and approvals;
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legal matters; and
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due diligence.
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Conduct
of Business Pending Closing
Until the closing of the acquisition, TerraSphere agreed, among
other items:
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to use commercially reasonable efforts to carry on its
respective businesses in the ordinary course in substantially
the same manner as previously conducted;
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to preserve its business organization and goodwill;
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to maintain its material rights and franchises;
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to retain the services of its officers and key employees;
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to preserve its relationships with its customers, suppliers and
others; and
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to protect all confidential and proprietary information and
intellectual property from dissipation, destruction, theft or
other loss or disclosure.
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In addition, until the closing of the acquisition, TerraSphere
agreed not to, without our prior written consent, among other
things:
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declare or pay any dividends;
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issue any interests in TerraSphere;
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amend or propose to amend its organizational documents;
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merge or consolidate with or acquire any equity interest in any
person;
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assume or incur any indebtedness for borrowed money;
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enter into or modify any material contract;
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incur any large capital expenditures;
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record or effectuate the transfer of record ownership of, or
beneficial interest in, any units;
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make any change in its lines of business; or
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take any other action that would cause any of the
representations and warranties made not to remain true and
correct.
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Restrictive
Covenants; Non-Competition; Non-Solicitation
The purchase agreement also contains restrictive covenants of
the parties, including covenants providing for:
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the TerraSphere members protection of confidential
information of TerraSphere subject to certain exceptions as
required by law, regulation or legal or administrative process;
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each of the controlling members of TerraSphere, which consist of
Messrs. William Gildea, Edward Gildea and Nick Brusatore,
not to compete with TerraSphere for a period of five
years; and
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each of the controlling members of TerraSphere not to solicit
business from TerraSpheres customers for a period of five
years.
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Conditions
to Closing
Converted
Organics Closing Conditions
Our obligation to consummate the purchase agreement is
conditioned upon certain closing conditions, including:
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the approval of our shareholders authorizing us to consummate
the TerraSphere acquisition and to issue the common stock
pursuant to the purchase agreement;
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each of the representations and warranties of TerraSphere and
its members being true and correct in all material respects (if
not qualified by materiality) and in all respects (if qualified
by materiality) as of the date of the closing;
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since the date of the purchase agreement, that there shall not
have occurred and be continuing any event or occurrence, or
series of events or occurrences, that individually or in the
aggregate, would reasonably be expected to have a material
adverse effect on TerraSphere;
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no litigation, action, suit or other proceeding involving or
potentially involving a liability, obligation or loss on the
part of TerraSphere, which would question the validity of the
purchase agreement or be reasonably expected to have a material
adverse effect on TerraSphere, shall have been threatened or
commenced;
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all consents and all authorizations, permits, and approvals
required to consummate the transactions provided for in the
purchase agreement shall have been obtained; and
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we shall have received from the NASDAQ Stock Market all
approvals that are required to compete the TerraSphere
acquisition.
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TerraSphere
Closing Conditions
The obligation of TerraSphere and its members to consummate the
purchase agreement is conditioned upon certain closing
conditions, including:
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each of our representations and warranties being true and
correct in all material respects (if not qualified by
materiality) and in all respects (if qualified by materiality)
as of the date of the closing;
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no litigation, action, suit or other proceeding involving or
potentially involving a liability, obligation or loss on the
part of TerraSphere, which would question the validity of the
purchase agreement or be reasonably expected to have a material
adverse effect on TerraSphere, shall have been threatened or
commenced; and
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we shall have restructured our $17,500,000 of New Jersey
Economic Development Bonds in such form as is reasonably
acceptable to a
majority-in-interest
of the TerraSphere members.
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The parties may waive any inaccuracies in the representations
and warranties made to such party contained in the purchase
agreement and waive compliance with any agreements or conditions
for the benefit of itself or such party contained in the
purchase agreement. We cannot assure you that all of the
conditions will be satisfied or waived.
Indemnification
Indemnification
by the Controlling Members of TerraSphere
The controlling members of TerraSphere, which consist of
Messrs. William Gildea, Edward Gildea and Nick Brusatore,
have agreed, on a joint and several basis, to indemnify us from
any damages arising from: (a) any misrepresentation, breach
of representation or warranty or any non-fulfillment of any
covenant or agreement made by or to be performed by TerraSphere
or any controlling members; or (b) any and all actions,
suits, proceedings, demands, assessments, judgments, reasonable
attorneys fees, costs and expenses incident to any of the
foregoing.
With certain exceptions, the controlling members will have no
obligation to indemnify us with respect to misrepresentations or
breaches of warranties until the aggregate amount of all damages
incurred or suffered exceeds $100,000 in the aggregate, in which
event we will be entitled to indemnification for the amount of
damages arising under such indemnification in excess of such
amount.
With certain exceptions, the maximum aggregate amount of damages
subject to indemnification claims by us is the total purchase
price received by the controlling members (and any assignees of
such members interest), or $13,580,000 worth of our common
stock valued at $0.756 per share, assuming all milestones are
achieved. As all the controlling members selected the Option Two
Shares, if the milestones are not achieved by TerraSphere, such
members will receive fewer shares, which will reduce their
indemnification obligations.
Any claims for damages with respect to breaches of
representations and warranties by the controlling member shall
be satisfied by either cash, or to the extent the members hold
sufficient shares of our common stock, such member may return of
the appropriate number of shares of our common stock to us, with
the shares to be valued at the average closing price of the our
common stock for the five days prior to the date when the
subject claim accrued.
Indemnification
by Converted Organics
We have agreed to indemnify the TerraSphere members from any
damages arising from: (a) any misrepresentation, breach of
representation or warranty or any non-fulfillment of any
covenant or agreement made by or to be performed by the buyer of
TerraSphere; or (b) any and all actions, suits,
proceedings, demands, assessments, judgments, reasonable
attorneys fees, costs and expenses incident to any of the
foregoing.
With certain exceptions, we will have no obligation to indemnify
the TerraSphere members with respect to misrepresentations or
breaches of warranties until the aggregate amount of all damages
incurred or suffered exceeds $100,000 in the aggregate, in which
event the TerraSphere members will be entitled to
indemnification for the amount of damages arising under such
indemnification in excess of such amount.
With certain exceptions, the maximum aggregate amount of damages
subject to indemnification claims by the TerraSphere members is
the total purchase price received by the controlling members as
set forth above.
Termination
The purchase agreement may be terminated
and/or
abandoned at any time prior to the closing by:
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by mutual written consent;
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by either party if there shall have been a material breach of
any representation, warranty, covenant or agreement on the part
of the other party;
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by either party if the closing has not been consummated on or
before August 31, 2010 (provided such date will be extended
to September 30, 2010 if we receive comments from the SEC
on this proxy statement); or
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by either party if the closing conditions have not been met or
waived.
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In the event of termination and abandonment by either party, all
further obligations of the parties shall terminate, no party
shall have any right against the other party, and each party
shall bear its own costs and expenses.
Amendment,
Extension and Waiver
The purchase agreement may be amended by the parties thereto at
any time by execution of an instrument in writing signed by us
and the controlling members. At any time prior to the closing,
the parties, to the extent allowed by applicable law, may extend
the time for the performance of the obligations under the
purchase agreement, waive any inaccuracies in representations
and warranties made to the other party and waive compliance with
any of the agreements or conditions for the benefit of the other
party.
To the extent a waiver by any party renders the statements in
this proxy statement materially misleading, we intend to
supplement this proxy statement and resolicit proxies from our
stockholders to the extent required by law.
INFORMATION
ABOUT TERRASPHERE
General
TerraSphere Systems, LLC, or TerraSphere, designs and builds
highly efficient systems that grow an abundance of crops in
compact, safe, pollutant-free facilities. TerraSpheres
technology is fully contained, which means crops can be grown
year-round in any location using precise combinations of light,
water, and nutrients to maximize production. TerraSpheres
technology is patented in the United States, with several
international patents pending. TerraSpheres wholly owned
subsidiary, PharmaSphere, LLC, or PharmaSphere, is a pre-revenue
company that will use the TerraSphere technology to grow plants
and herbs that express high value compounds that are used as
pharmaceutical ingredients.
TerraSpheres units consist of vertically stacked modules
housing rows of plants that are placed perpendicular to an
interior light source (the TerraSphere System or
Technology). The modules produce an abundance of
crops with strong, compact, multi-directional growth.
TerraSphere believes the Technologys greatest advantage
over traditional growth methods is its ability to generate
higher yields per square foot of land than traditional growing
methods. The contained nature of the TerraSphere System also
provides many benefits related to year-round production, cost
control, food safety and environmental concerns.
In 2008, TerraSphere completed its system design and testing,
built a demonstration plant in Michigan under a joint venture
agreement, and sold its first license for the rights to utilize
the technology in the Province of British Columbia. In 2009,
TerraSphere began construction of the foregoing plant in
Vancouver.
TerraSphere has eight full-time employees. TerraSphere operates
out of its research and manufacturing facility in Vancouver and
its corporate office in Boston, Massachusetts. TerraSphere began
generating revenue in 2007.
TerraSphere believes its Technology has several key benefits
over competing growth methods. These include:
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higher productivity rates;
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full control of the growth environment;
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the ability to grow high quality, flavor rich produce year-round
in almost any location;
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food safety;
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reduced water use;
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minimal waste generation; and
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produce that is pathogen-free, chemical-free and has a
significantly longer shelf life (due to the controlled growth
environment and reduced transportation to end markets).
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TerraSphere uses its Technology to generate revenue in two ways:
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Licensing the Technology: TerraSphere licenses
its patented Technology along with facility plans, engineering
expertise, construction advice, and consulting and development
expertise. This model gives qualified partners the opportunity
to develop and operate a TerraSphere facility to meet their own
requirements. Licenses can be granted for a specific size
facility or specific menu of crops. TerraSphere will offer
consulting services to plant licensees for a limited period of
time to ensure the efficient and effective startup of operations.
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Entering into Partnerships to Own and Operate TerraSphere
Facilities: TerraSphere will seek qualified local
partners to build and operate TerraSphere facilities. Under the
joint-venture model, both parties contribute to the capital
costs of the project and split the associated risks by selling
TerraSphere Systems and equipment to licensees and project
partners.
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Overview
of the Technology
TerraSphere believes its Technology has a competitive advantage
over traditional growth methods, the most important of which is
its ability to generate significantly larger yields per square
foot of floor space. The Technology consists of collapsible
trays that contain rows of plants placed perpendicular to a
light source. The TerraSphere Technology has adjustable
lighting. As the plants mature, the lights can be adjusted for
maximum growth. The high pressure watering tanks and lines will
ensure even distribution of water and nutrition to vegetation.
The result is an abundance of plants with strong, compact, even
growth. The Technology can be used to grow numerous different
types of crops, from lettuce to tree seedlings to rare medicinal
herbs. The following is a brief overview of how the Technology
works and its advantages over other growth technologies.
Flat
Trays
The trays that make up the TerraSphere System allow for
efficient loading and unloading of the crops. The plastic trays
rest on an aluminum frame which then clamp on four galvanized
chains. These trays can be adjusted in height to accommodate any
type of plant. The fertilizer is fed at one end and drained at
the other by gravity, ensuring that each plant receives the
proper nutrition for maximum growth. A UV Protected food grade
ABS material is used for its light weight and cost savings.
The flat trays in which the crops are grown are a reusable
plastic injection molded unit which allows the addition of water
directly into each growing unit. The mechanical medium can be
reused for several years and does not require the use of
non-biodegradable rock wool, which is used by most traditional
hydroponic facilities and is known to pose environmental
challenges.
Collapsible
Flat Tray
Each steel frame structure can hold many different
configurations depending on the crop and the ceiling height of
the building.
The taller the ceiling the more tiers that can be added. The
trays extend and collapse by using a winch pulley system. When
the plants are being loaded the trays are completely collapsed.
When the top tray is filled with plants the winch moves up. The
next tray is filled and the cycle continues until all the trays
are filled. Unloading is the opposite. The collapsible trays are
made of stainless steel, anodized aluminum, and various other
common materials.
Facilities
Depending on the ceiling height of the building and the square
footage of the space, the TerraSphere System has the ability to
be scaled accordingly. A typical facility is 75% growing space
and 25% office and
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storage space. TerraSphere can design any size facility,
depending on what a customer wants to grow and in what volumes.
PharmaSphere
Overview
PharmaSphere is a pre-revenue wholly owned subsidiary of
TerraSphere. PharmaSpheres business plan is to utilize the
TerraSphere System for the production of high value biocompounds
sourced from plants and used as active pharmaceutical
ingredients, and for the production of transgenic plants
(genetically engineered plants) for the biotechnology market.
PharmaSphere will install TerraSphere Systems in retrofitted
warehouses, and extract and purify the compounds using
environmentally friendly technologies. Additional environmental
benefits include less water and fertilizer use by metered
dispensing, less waste water or fertilizer discharge due to
plant uptake, no chemical pesticides, no fuel and oil use by
agricultural machinery, and no transportation of bulk plant
materials to distant processing facilities.
PharmaSphere will cultivate native or
wild plants that naturally express biocompounds,
called natural products or extracts. Depending on
obtaining partners and financing, PharmaSphere would cultivate
transgenic plants, namely plants that have been
genetically altered by the insertion of foreign DNA encoding the
expression of a specific compound.
The model for PharmaSpheres natural product business is to
cultivate plants expressing biocompounds with well-established
pharmaceutical, nutraceutical and cosmeceutical uses, and
extract and purify the compounds for sale to customers for use
in their products as active ingredients or chemical
synthesis starting material. Unless there are a
number of potential buyers for the compound in question,
PharmaSphere will not grow the plant source without a partner or
a long-term purchase agreement.
A major concern of sellers of natural product drugs,
nutraceuticals and cosmeceuticals is the unreliable supply of
top quality active ingredients because the cultivation of source
plants in the field is erratic and the quality of extracts is
uneven. With the TerraSphere system and
state-of-the
art extraction, purification and quality control technologies,
PharmaSphere believes it can provide its customers a reliable
supply of consistently high quality plant compounds.
By isolating the plants from the environment, the TerraSphere
system allows each plant species growth parameters to be
optimized for maximum compound expression by the precise control
of light, temperature, water, carbon dioxide and fertilizer. The
benefits are:
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increased compound expression levels through
(a) optimization of growth parameters, and (b) removal
of the adverse impact of weather, soil conditions, disease and
pests;
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reduced costs of compound purification as the plants will not be
taking up field-growth contaminants such as pesticide residues,
fuel and oil leakage from machinery and impurities from the soil
and rain, all of which must be removed to purify compounds from
field-grown plants; and
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shortened plant growth cycles, or turns.
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PharmaSpheres transgenic plant business model is to form
development partnerships with pharmaceutical and biotechnology
companies having product pipelines that include recombinant
biopharmaceutical compounds (antibodies and other therapeutic
proteins and vaccines). A typical partnership would first
determine the feasibility of efficient expression of the
compound of interest in the TerraSphere system, and then scale
up production to the desired quantities. PharmaSphere would
receive upfront and milestone payments and royalties.
PharmaSphere does not intend to cultivate transgenic plants
without partners, and there is no assurance that PharmaSphere
will be able to find such partners.
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PharmaSphere
Plant Growth System
PharmaSphere believes the TerraSphere system is ideal for
growing both native plants and transgenic plants as it permits
full environmental containment and controlled growth conditions.
The expression of natural compounds from native plants grown in
the system is greatly enhanced by the absence of field-growth
hazards such as weather, soil conditions, pests and disease.
A typical PharmaSphere commercial-scale biopharmaceutical
production facility will contain hundreds of structures and
extraction and purification areas in one single-story industrial
building, and will comply with U.S. Food and Drug Administration
(FDA) current Good Manufacturing Practices (cGMPs).
The planting, harvest and storage areas of the building will
provide containment at the BL-2 level for transgenic plant
cultivation. USDA licensure for cultivating transgenic plants is
not necessary, as transgenic plants growing in the trays will
not be considered to be growing in the field, or in a greenhouse
with inadequate containment. USDA licensure is not required in
any event to grow native plants expressing natural compounds. A
facility for cultivating native plants to produce natural
products will comply with BL-2 to provide a flexible facility
that could also be used to grow transgenic plants.
Other
Applications
TerraSphere believes another potential application is the growth
of plants that naturally express various biocompounds and
substances that are used as nutrition supplements, cosmetic
ingredients or herbal remedies. They are not regulated as
drugs if health claims do not accompany their
marketing. PharmaSphere believes it can economically grow large
amounts of these plants using the TerraSphere System and can
increase the expressed quantities of the biocompounds by
optimizing and controlling growth conditions.
Market
Demand
TerraSphere
The U.S. organic produce market has grown significantly in
recent years. TerraSphere believes that a decrease in farmland
near urban areas coupled with the increase in demand for organic
foods creates a compelling opportunity to grow whole, organic
foods locally for urban consumers (businesses, food markets,
restaurants). Organic and natural foods are traditionally grown
on smaller farms across the country and in hydroponic facilities
on large farms in the western United States. The long distance
between western suppliers and east coast markets increases both
the economic cost and the environmental impacts of the produce.
Seasonal constraints make it impossible to stock locally-grown,
organic produce in northern cities year round. TerraSphere
offers the ability to deliver fresh, local produce to whole
foods markets, restaurants and other buyers, without seasonal
interruption. This is true not only in the United States, but in
cities throughout the world.
Food security is also a growing concern, which TerraSphere
believes creates demand for the Technology since it grows
produce in contained, secure facilities that are not dependent
on environmental conditions.
PharmaSphere
Natural Biocompounds (therapeutic biocompounds native to
a plant species): PharmaSphere intends to cultivate plants
expressing natural biocompounds, and to extract, purify and
market these compounds. As determined by customer requirements,
either crude extracts or purified compounds will be sold as
active pharmaceutical ingredients or as
starting material for chemical synthesis. Potential
customers are pharmaceutical companies with generic products, as
well as patented products, and those biotechnology companies
that add value to generic compounds with proprietary
formulations for safer and more effective delivery. Unless the
biocompound in question has a number of potential buyers,
PharmaSphere will not grow the plant source without a partner or
a long-term supply agreement. PharmaSphere expects revenues from
this market will not be achieved until approximately
12 months after completion of its first facility.
Transgenic or Recombinant Biopharmaceuticals (therapeutic
biocompounds from foreign DNA inserted in a plant host): In this
category, working with partners, PharmaSphere would produce high
value recombinant
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antibodies and other therapeutic proteins and subunit vaccines.
PharmaSphere believes plants offer the prospect of inexpensive
biopharmaceutical production without sacrificing product quality
or safety. PharmaSphere believes the use of transgenic plants
for pharmaceutical production has important safety and economic
advantages, including the absence of animal contaminants such as
viruses which are toxic to humans, less complex purification
requirements, quicker conduct of feasibility studies and more
rapid production implementation and
scale-up due
to shorter periods of time required for plant transformation and
cultivation of the needed quantities of transformed plants.
Transforming animals and building up transgenic herds require
substantially more time.
Competitive
Advantages
TerraSphere competes with both traditional field agriculture and
greenhouses. TerraSphere believes its Technology has several
advantages over both types of competitors, which include:
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Higher Productivity: The difference in
productivity between growing in cubic feet versus square feet is
considerable and gives TerraSpheres Technology a
competitive advantage. Furthermore, yields are higher than in
plants grown in the field since variable weather and soil
conditions, and the presence of pests and diseases, which
adversely impact yields, are not a factor. Finally, the ability
to grow crops year round increases productivity.
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Lower Energy Costs: A TerraSphere facility
uses less energy than traditional agricultural methods. With
unpredictable and often rising energy costs coupled with finite
energy resources, this is a competitive advantage.
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Controlled Environment: A fully automated,
mechanized system that grows plants in peat provides many
advantages, such as no cross contamination of the product (as is
the case with certain organic produce), no exposure for
contamination in water, and complete control of fertilizer type
and quality.
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Ease of Facility Siting: TerraSpheres
automated Technology allows people to grow crops in their
community that are not indigenous to the geography or region.
The TerraSphere System and harvesting stations can be installed
in almost any location, including any retrofitted
industrial/warehouse building with a minimum clearance of
25 feet.
|
|
|
|
Extended Produce Shelf Life: The ability to
locate facilities near end markets, regardless of geography or
climate, means produce is fresher when it arrives and has a
longer shelf life.
|
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|
Lower Cleaning and Product Preparation
Costs: Cleaning and product preparation costs are
substantially lower because impurities, including pesticide
residues, fuel and oil leakage from machinery, and impurities
from the soil and rain that are taken up by plants in the field
are not a factor.
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Minimal Fertilizer and No
Pesticides: Precisely controlled growth
conditions mean that plants grown in the TerraSphere System
require less fertilizer than plants grown in the field or a
greenhouse. The controlled environment also means that no
chemical pesticides are required.
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Water Conservation: The TerraSphere
Systems watering injection system recycles water;
therefore, the TerraSphere System requires less water and
generates little to no wastewater. Water is a significant cost
for farms and greenhouses and wastewater is a major
environmental concern associated with traditional methods.
|
Government
Regulation
In order to assure pharmaceutical product safety, quality and
consistency, PharmaSphere is required to produce active
pharmaceutical ingredients and chemical synthesis
starting material in compliance with current
Good Manufacturing Practices (or cGMPs) promulgated by the
FDA. If PharmaSphere were to produce finished, end-use drugs, it
would also be required to comply with cGMPs. In general, cGMPs
entail process and equipment validation, maintenance of rigorous
quality control procedures and extensive documentation.
PharmaSphere facilities will be inspected by the FDA, including
those located abroad that manufacture product to be sold in the
United States. Similar regulation exists in Canada and other
countries.
45
PharmaSpheres plant cultivation system, in addition to its
extraction and purification operations, must comply with cGMPs.
If PharmaSphere intends to cultivate, extract and purify
controlled substances, it will be required to register with the
U.S. Drug Enforcement Administration (DEA) as a
controlled substance bulk manufacturer. Registration entails the
DEAs inspecting and testing PharmaSpheres physical
security systems, verifying its compliance with state and local
laws, and reviewing its background and history.
The field cultivation, interstate movement and importation of
transgenic plants in the United States is regulated by the
U.S. Department of Agriculture (USDA) under the
Plant Protection Act. A separate permit is required for each
activity, the most important and complex of which is the
field-growing permit. Biopharmaceuticals, which are regulated by
the FDA, are also subject to the USDA regulatory framework if
produced by transgenic plants.
If PharmaSphere cultivates transgenic plants within the
TerraSphere System, a field-growing permit from the USDA under
the Plant Protection Act would not be necessary. If PharmaSphere
were to transport transgenic plant materials such as seeds,
seedlings or leaves across state lines or import them from
abroad, it would be required to obtain a movement or importation
permit from the USDA. PharmaSphere anticipates engaging in such
transportation and importation from time to time. A development
partner might require harvested transgenic plants or plant
materials to be transported across state lines to its own
facilities for processing. If so, PharmaSphere will be required
to obtain a USDA movement permit.
PharmaSphere will submit to the FDA and maintain a Drug
Master File for each native plant compound it sells to
customers in the United States as an active pharmaceutical
ingredient or chemical synthesis starting
material. If other countries where it solicits customers
have similar systems, it will make filings as required.
Should PharmaSphere sell products as finished, end-use drugs in
the United States, it will be required to obtain premarket
approval for each such drug product and its intended use from
the FDA under the Federal Food, Drug, and Cosmetic Act. In
general, if a drug is novel, it cannot be sold unless covered by
an approved New Drug Application (NDA) after the
completion of lengthy and expensive three-phase clinical trials.
Similar regulation exists in foreign countries. PharmaSphere
does not intend to sell finished drugs requiring NDA approval
without a partner to fund the clinical trials and regulatory
submissions.
A nutraceutical, cosmeceutical, or herbal product if marketed
without specific health claims and labeling is not a
drug, but may be a dietary supplement, a
food, or a cosmetic as defined and
regulated under the FDA laws. PharmaSphere could produce such
products on its own or with partners.
PharmaSpheres facilities in the United States will be
subject to federal, state and local laws and regulations
regarding the use, storage, handling and disposal of hazardous
materials, including materials routinely used in life science
research laboratories and for bioprocessing activities such as
compound extraction and purification. Foreign countries
generally have comparable laws and regulations.
46
TERRASPHERES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated year-end and unaudited interim financial statements
and related notes to the consolidated year-end and interim
unaudited financial statements included elsewhere in this
report. This discussion contains forward-looking statements that
relate to future events or TerraSpheres future financial
performance. These statements involve known and unknown risks,
uncertainties and other factors that may cause
TerraSpheres actual results, levels of activity,
performance or achievements to be materially different from any
future results, levels of activity, performance or achievement
expressed or implied by these forward-looking statements. These
forward-looking statements are based largely on
TerraSpheres current expectations and are subject to a
number of uncertainties and risks. Actual results could differ
materially from these forward-looking statements.
TerraSphere
Overview
TerraSphere Systems LLC, located in Boston, Massachusetts
designs and builds highly efficient systems for growing organic
fruits and vegetables in a controlled, indoor environment.
TerraSphere partners with private businesses and public
institutions to create solutions for food production challenges.
TerraSphere derives its revenues from licensing fees and
royalties, the sale of equipment and expects future revenue from
operating facilities using the TerraSphere System. The
TerraSphere System uses technology to operate automated,
software driven plant growth systems that can be used to grow a
variety of crops, from lettuce to tree seedlings to rare
medicinal herbs.
PharmaSphere, LLC, located in Boston, Massachusetts, is a
wholly-owned subsidiary of TerraSphere. PharmaSpheres
business plan is to utilize the TerraSphere System for the
production of high value biocompounds sourced from plants and
used as active pharmaceutical ingredients and for the production
of transgenic plants (genetically engineered plants) for the
biotechnology market. PharmaSphere has a wholly-owned subsidiary
PharmaSphere Worcester, LLC, which was formed to build a
facility in Worcester, Massachusetts utilizing
PharmaSpheres business plan. The building of the facility
has not commenced. PharmaSphere has no revenue to date.
TerraSphere Systems Canada, Inc., or TerraSphere Canada, located
in Vancouver, British Columbia, operates the research and
manufacturing facility for TerraSphere and is 85% owned by
TerraSphere.
Future
Development
TerraSphere plans on entering into partnerships to own and
operate TerraSphere facilities. TerraSphere will seek qualified
local partners to build and operate TerraSphere facilities.
Under the joint-venture model, both parties contribute to the
capital costs of the project and split the associated risks by
selling TerraSphere systems and equipment to licensees and
project partners. TerraSphere will also continue to market its
exclusive licensing agreements to interested third parties
throughout North America, Asia and Europe.
Trends
and Uncertainties Affecting Operations
TerraSphere is subject to a number of factors that may affect
its operations and financial performance. These factors include,
but are not limited to, the ability of entering into
partnerships to own and operate TerraSphere facilities, the
ability to market its exclusive licensing agreements to
interested third parties and market acceptance of TerraSphere
patented technology. Furthermore, TerraSpheres plans call
for raising debt
and/or
equity financing to expand its operations. Currently there has
been a slowdown in lending in both the equity and bond markets
which may hinder its ability to raise the required funds.
Results
of Operations for the Three Months Ended March 31, 2010 and
2009
For the three month period ended March 31, 2010,
TerraSphere had revenue of approximately $1,684,000 compared to
$9,000 for the same period in 2009. The $1,675,000 increase is
comprised of equipment sales of $675,000 and granting a
licensing fee for approximately $1,000,000.
47
For the three month period ended March 31, 2010,
TerraSphere had cost of goods sold of approximately $703,000
compared to no cost of goods sold for the same period in 2009.
The increase in cost of goods sold is related to the equipment
sales of $675,000 as well as additional work on previous
equipment sold in prior years.
TerraSphere had general and administrative expenses of
approximately $437,000 and $227,000 for the three month periods
ended March 31, 2010 and 2009, respectively. The
approximately $210,000 increase in general and administrative
expenses from 2010 to 2009 is composed of increases in legal and
professional fees related to the future construction of the
Worcester PharmaSphere facility.
Provision for income taxes totaling $388,000 was recorded for
the three month period ended March 31, 2010 as TerraSphere
elected to be treated as a taxable association effective
February 22, 2010 for United States federal and state tax
purposes.
Net income after tax for the three month period ended
March 31, 2010 was $158,000 compared to a loss of $225,000
for the three month period ended March 31, 2009. The
increase in net income of $383,000 is made up of equipment sales
of $675,000 and granting a licensing fee for approximately
$1,000,000.
Results
of Operations for the Years Ended December 31, 2009 and
2008
For the year ended December 31, 2009, TerraSphere had
revenues of approximately $37,000 compared to $1,459,000 for the
same period in 2008. The decrease was due to no new licensing
fees or equipment sales being consummated in 2009.
For the year ended December 31, 2009, TerraSphere had no
cost of goods sold. Cost of goods sold for the year ended
December 31, 2008 totaling $730,000 were related to
equipment sales of $622,000 and licensing fees of $800,000.
TerraSphere had general and administrative expenses of
approximately $1,292,000 and $674,000 for the years ended
December 31, 2009 and 2008, respectively. The approximately
$618,000 increase in general and administrative expenses from
2009 to 2008 is composed of increases in legal and professional
fees related to the future construction of the Worcester
PharmaSphere facility.
Net loss for the year ended December 31, 2009 was
$1,216,000 compared to a net income of $93,000 for the year
ended December 31, 2008. The decrease in net income is the
result of no new licensing fees or equipment sales being
consummated in 2009 to offset the increase in general and
administrative expenses.
Results
of Operations for the Years Ended December 31, 2008 and
2007
For the year ended December 31, 2008, TerraSphere had
revenues of approximately $1,459,000 compared to $21,000 for the
same period in 2007. The increase is due to equipment sales of
$622,000 and licensing fees of $800,000 in 2008. There were no
equipment sales or licensing fees consummated in 2007.
For the year ended December 31, 2008, TerraSphere had cost
of goods sold of approximately $730,000 compared to $405,000 for
the same period in 2007. Cost of goods sold increase in 2008 is
related to equipment sales of $622,000 and licensing fees of
$800,000.
TerraSphere had general and administrative expenses of
approximately $674,000 and $346,000 for the years ended
December 31, 2008 and 2007, respectively. The approximately
$327,000 increase in general and administrative expenses from
2008 to 2007 is composed of increases in legal and professional
fees related to the future construction of the Worcester
PharmaSphere facility.
Net income for the year ended December 31, 2008 was $93,000
compared to a net loss of $625,000 for the year ended
December 31, 2007. The increase in net income is the result
of equipment sales of $622,000 and licensing fees of $800,000 in
2008.
48
Changes
in Balance Sheet
As of March 31, 2010, TerraSphere had current assets of
approximately $1.2 million compared to $289,000 as of
December 31, 2009. TerraSpheres total assets were
approximately $1.6 million as of March 31, 2010
compared to approximately $592,000 as of December 31, 2009.
The majority of the increase in assets from December 31,
2009 to March 31, 2010 is due to an increase in accounts
receivable arising from the granting of an exclusive licensing
agreement.
As of March 31, 2010, TerraSphere had current liabilities
of approximately $2.4 million compared to $1.6 million
at December 31, 2009. This increase is due largely to legal
and professional fees incurred and the recording of a deferred
tax liability.
As of December 31, 2009, TerraSphere had current assets of
approximately $289,000 compared to $527,000 as of
December 31, 2008. TerraSpheres total assets were
approximately $592,000 as of December 31, 2009 compared to
approximately $630,000 as of December 31, 2008, a decrease
in total assets of $38,000.
As of December 31, 2009, TerraSphere had current
liabilities of approximately $1.6 million compared to
$390,000 at December 31, 2008. This increase is due largely
to legal and professional fees incurred.
Liquidity
and Capital Resources
As of March 31, 2010 and December 31, 2009,
TerraSphere had $106,000 and $197,000, respectively, in cash on
hand. The major uses of cash during the three months ended
March 31, 2010 were approximately $119,000 for operating
activities and $97,000 for investing activities offset by an
increase in cash of approximately $162,000 from financing
activities.
Subsequent to March 31, 2010, TerraSphere entered into
exclusive licensing agreements totaling $3.8 million. Based
on the terms of these agreements, TerraSphere will receive
installment payments throughout the year with the final
installment payment being received in March 2011.
Off-Balance
Sheet Transactions
TerraSphere does not engage in material off-balance sheet
transactions.
Critical
Accounting Policies
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect reported amounts and disclosures in
the consolidated financial statements. Actual results could
differ from those estimates.
Foreign
Operations
The accounting records of TerraSphere Canada are maintained in
Canadian dollars, its functional currency. Revenue and expense
transactions are translated to U.S. dollars using the
average exchange rate of the month in which the transaction took
place. Assets and liabilities are translated to
U.S. dollars using the exchange rate in effect as of the
balance sheet date. Equity transactions are translated to
U.S. dollars using the exchange rate in effect as of the
date of the equity transaction. Translation gains and losses are
reported as a component of accumulated other comprehensive
income or loss. Gains and losses resulting from transactions
which are denominated in other than the functional currencies
are reported as foreign currency exchanges gain (loss) in the
statements of operations and comprehensive income (loss) in the
period the gain or loss occurred.
49
Patent
and Patent Costs, Net
TerraSphere accounts for its patent and patent related costs in
accordance with ASC 250, which requires that intangible
assets with finite lives, such as TerraSpheres,
specifically identifiable costs for patent and patent
applications, be capitalized and amortized over their respective
estimated lives and reviewed for impairment whenever events or
other changes in circumstances indicate that the carrying amount
may not be recoverable.
Pre-Construction
Costs
Pre-construction costs include architectural and engineering
services related to the building of the PharmaSphere facility.
Revenue
Recognition
Revenue is recognized when all of the following criteria are
met: persuasive evidence of a sales arrangement exists; delivery
of the product has occurred; the sales price is fixed or
determinable; and, collectability is reasonably assured.
In those cases where all four criteria are not met, TerraSphere
defers recognition of revenue until the period these criteria
are satisfied. Revenue is generally recognized upon shipment or
upon completed performance on exclusive technology licenses
where the term is equal to the life of the associated
intellectual property.
TerraSphere recognizes deferred revenue when payment has been
received for product sales but the revenue recognition criteria
has not been met. In addition, TerraSphere defers revenue when
payment has been received for future services to be provided.
Income
Taxes
TerraSphere elected to be treated as a taxable association
effective February 22, 2010 for United States federal and
state tax purposes. TerraSphere accounts for income taxes
following the asset and liability method in accordance with
ASC 740. Under such method, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years that the asset is expected to be recovered
or the liability settled.
Management performs an evaluation of TerraSpheres tax
positions, ensuring that these tax return positions meet the
more likely than not recognition threshold and can
be measured with sufficient precision. These evaluations provide
management with a comprehensive model for how TerraSphere should
recognize, measure, present and disclose in its financial
statements certain tax positions that TerraSphere has taken or
expects to take on income tax returns.
50
BENEFICIAL
OWNERSHIP OF SECURITIES
Security
Ownership of Converted Organics
Set forth below is information regarding the beneficial
ownership of our common stock, as of July 7, 2010, by:
|
|
|
|
|
each person whom we know owned, beneficially, more than 5% of
the outstanding shares of our common stock;
|
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|
|
each of our directors;
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|
|
each of our executive officers that were included in our annual
meeting proxy statement; and
|
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|
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all of our 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 report, 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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of Common
|
|
Percentage of Outstanding
|
Name of Beneficial Owner(1)
|
|
Stock Beneficially Owned
|
|
Shares of Common Stock(2)
|
|
|
Before the
|
|
After the
|
|
Before the
|
|
After the
|
|
|
TerraSphere
|
|
TerraSphere
|
|
TerraSphere
|
|
TerraSphere
|
|
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Acquisition
|
|
Acquisition
|
|
Acquisition
|
|
Acquisition
|
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Edward J. Gildea
|
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898,970
|
(3)
|
|
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3,413,311
|
(3)
|
|
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2.2
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%
|
|
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4.5
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%
|
David R. Allen
|
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390,141
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(4)
|
|
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390,141
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(4)
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|
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1.0
|
%
|
|
|
*
|
|
Robert E. Cell
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204,000
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(5)
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|
204,000
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(5)
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|
|
*
|
|
|
|
*
|
|
John P. DeVillars
|
|
|
204,000
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(5)
|
|
|
204,000
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(5)
|
|
|
*
|
|
|
|
*
|
|
Edward A. Stoltenberg
|
|
|
213,269
|
(6)(7)
|
|
|
213,269
|
(6)(7)
|
|
|
*
|
|
|
|
*
|
|
All directors and officers as a group (five persons)
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1,910,380
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5,151,121
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|
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4.5
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%
|
|
|
6.7
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%
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5% Shareholders
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Oppenheimer Funds, Inc.(8)
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2,284,409
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|
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|
|
|
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5.3
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%
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|
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3.0
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%
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|
* |
|
Less than 1% |
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(1) |
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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. |
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(2) |
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Percentage of common stock outstanding before the TerraSphere
acquisition is based on 40,520,708 shares of our common
stock outstanding as of July 7, 2010, and percentage of
common stock outstanding after the TerraSphere acquisition
assumes the issuance of 34,166,667 shares of common stock
in connection with the TerraSphere acquisition, which assumes
that all milestones are achieved by TerraSphere. |
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(3) |
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Includes 1,400 Class B Warrants and options to purchase
725,000 shares. The After the TerraSphere
Acquisition amount includes 3,240,741 shares that
Mr. Gildea would receive if all milestones are achieved by
TerraSphere. |
|
(4) |
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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. |
51
|
|
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(8) |
|
The following information is based on the Schedule 13G
filed February 2, 2010. Oppenheimer Funds, Inc. is an
investment adviser in accordance with
Rule 13d-1(b)(1)(ii)(E)
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. All beneficial ownership is disclaimed pursuant to
Rule 13d-4
of the Exchange Act. All positions reported reflect the exercise
of warrants for shares of common stock. The principal address of
Oppenheimer Funds, Inc. is Two World Financial Center, 225
Liberty Street, New York, NY 10289. |
STOCKHOLDER
PROPOSALS FOR THE 2011 ANNUAL MEETING
Should a stockholder desire to include in next years
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.
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
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.
52
INDEX TO
FINANCIAL STATEMENTS
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TERRASPHERE SYSTEMS LLC.
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F-3
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CONSOLIDATED FINANCIAL STATEMENTS
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F-4
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F-5
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F-6
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F-7
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F-8
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TERRASPHERE SYSTEMS LLC.
|
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|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
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|
|
|
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|
F-16
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|
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F-17
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|
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F-18
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F-19
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F-20
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CONVERTED ORGANICS INC.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
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F-28
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F-31
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F-32
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F-33
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F-34
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F-1
TERRASPHERE
SYSTEMS LLC
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009 AND 2008
AND FOR THE YEARS ENDED
DECEMBER 31, 2009, 2008 AND 2007
WITH REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
TerraSphere Systems LLC
We have audited the accompanying consolidated balance sheets of
TerraSphere Systems LLC (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations and comprehensive income (loss),
changes in members equity (deficit) and cash flows for the
years ended December 31, 2009, 2008 and 2007. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of TerraSphere Systems LLC as of December 31, 2009
and 2008, and the results of their operations and their cash
flows for the years ended December 31, 2009, 2008 and 2007
in conformity with accounting principles generally accepted in
the United States of America.
/s/ CCR LLP
Glastonbury, Connecticut
June 3, 2010
F-3
TERRASPHERE
SYSTEMS LLC
DECEMBER
31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
197,046
|
|
|
$
|
8,083
|
|
Accounts receivable
|
|
|
|
|
|
|
400,000
|
|
Other receivables
|
|
|
15,244
|
|
|
|
109,080
|
|
Inventories work in process
|
|
|
34,565
|
|
|
|
|
|
Prepaid expenses
|
|
|
42,100
|
|
|
|
10,250
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
288,955
|
|
|
|
527,413
|
|
Leasehold improvements
|
|
|
161,948
|
|
|
|
|
|
Patent and patent costs, net
|
|
|
134,932
|
|
|
|
98,347
|
|
Other assets
|
|
|
5,692
|
|
|
|
3,766
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
591,527
|
|
|
$
|
629,526
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Note payable member
|
|
$
|
20,000
|
|
|
$
|
|
|
Due to member
|
|
|
102,292
|
|
|
|
|
|
Accounts payable
|
|
|
732,866
|
|
|
|
258,454
|
|
Accrued expenses
|
|
|
6,862
|
|
|
|
6,388
|
|
Deferred revenue
|
|
|
763,767
|
|
|
|
125,499
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,625,787
|
|
|
|
390,341
|
|
|
|
|
|
|
|
|
|
|
Members equity (deficit)
|
|
|
|
|
|
|
|
|
TerraSphere Systems LLC members equity (deficit)
|
|
|
|
|
|
|
|
|
Members equity (deficit)
|
|
|
(1,043,475
|
)
|
|
|
247,412
|
|
Accumulated other comprehensive income (loss)
|
|
|
(42,254
|
)
|
|
|
6,614
|
|
|
|
|
|
|
|
|
|
|
Total TerraSphere Systems LLC members equity (deficit)
|
|
|
(1,085,729
|
)
|
|
|
254,026
|
|
Noncontrolling interest
|
|
|
51,469
|
|
|
|
(14,841
|
)
|
|
|
|
|
|
|
|
|
|
Total members equity (deficit)
|
|
|
(1,034,260
|
)
|
|
|
239,185
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity (deficit)
|
|
$
|
591,527
|
|
|
$
|
629,526
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TERRASPHERE
SYSTEMS LLC
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
|
|
|
$
|
621,877
|
|
|
$
|
|
|
Licensing and marketing fees
|
|
|
36,732
|
|
|
|
836,692
|
|
|
|
21,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,732
|
|
|
|
1,458,569
|
|
|
|
21,427
|
|
Cost of goods sold
|
|
|
|
|
|
|
730,446
|
|
|
|
404,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
36,732
|
|
|
|
728,123
|
|
|
|
(383,333
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
1,291,586
|
|
|
|
673,805
|
|
|
|
346,372
|
|
Research, development and testing expense
|
|
|
613
|
|
|
|
26,941
|
|
|
|
16,159
|
|
Amortization expense
|
|
|
6,383
|
|
|
|
13,035
|
|
|
|
1,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,261,850
|
)
|
|
|
14,342
|
|
|
|
(747,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
19,356
|
|
|
|
123,566
|
|
|
|
114,113
|
|
Foreign currency gain (loss)
|
|
|
35,758
|
|
|
|
(44,952
|
)
|
|
|
8,778
|
|
Interest expense
|
|
|
(9,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
45,896
|
|
|
|
78,614
|
|
|
|
122,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1,215,954
|
)
|
|
|
92,956
|
|
|
|
(624,857
|
)
|
Net income (loss) attributable to noncontrolling interest
|
|
|
74,934
|
|
|
|
16,647
|
|
|
|
(26,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to TerraSphere Systems LLC before
other comprehensive income (loss)
|
|
|
(1,290,888
|
)
|
|
|
76,309
|
|
|
|
(597,970
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(57,491
|
)
|
|
|
31,678
|
|
|
|
(21,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(1,348,379
|
)
|
|
|
107,987
|
|
|
|
(619,870
|
)
|
Comprehensive income (loss) attributable to noncontrolling
interest
|
|
|
(8,623
|
)
|
|
|
4,752
|
|
|
|
(3,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to TerraSphere Systems
LLC
|
|
$
|
(1,339,756
|
)
|
|
$
|
103,235
|
|
|
$
|
(616,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TerraSphere Systems LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Members Equity
|
|
|
|
Members Equity
|
|
|
Comprehensive
|
|
|
|
|
|
Noncontrolling
|
|
|
(Deficit)
|
|
|
|
(Deficit)
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Interest
|
|
|
Total
|
|
|
Balance, December 31, 2006
|
|
|
244,093
|
|
|
|
(1,697
|
)
|
|
|
242,396
|
|
|
|
(6,068
|
)
|
|
|
236,328
|
|
Contributions
|
|
|
215,000
|
|
|
|
|
|
|
|
215,000
|
|
|
|
|
|
|
|
215,000
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(18,615
|
)
|
|
|
(18,615
|
)
|
|
|
(3,285
|
)
|
|
|
(21,900
|
)
|
Net loss
|
|
|
(597,970
|
)
|
|
|
|
|
|
|
(597,970
|
)
|
|
|
(26,887
|
)
|
|
|
(624,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
(138,877
|
)
|
|
$
|
(20,312
|
)
|
|
$
|
(159,189
|
)
|
|
$
|
(36,240
|
)
|
|
$
|
(195,429
|
)
|
Contributions
|
|
|
309,980
|
|
|
|
|
|
|
|
309,980
|
|
|
|
|
|
|
|
309,980
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
26,926
|
|
|
|
26,926
|
|
|
|
4,752
|
|
|
|
31,678
|
|
Net income
|
|
|
76,309
|
|
|
|
|
|
|
|
76,309
|
|
|
|
16,647
|
|
|
|
92,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
247,412
|
|
|
|
6,614
|
|
|
|
254,026
|
|
|
|
(14,841
|
)
|
|
|
239,185
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(48,868
|
)
|
|
|
(48,868
|
)
|
|
|
(8,623
|
)
|
|
|
(57,491
|
)
|
Net income (loss)
|
|
|
(1,290,888
|
)
|
|
|
|
|
|
|
(1,290,888
|
)
|
|
|
74,934
|
|
|
|
(1,215,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
(1,043,475
|
)
|
|
$
|
(42,254
|
)
|
|
$
|
(1,085,729
|
)
|
|
$
|
51,469
|
|
|
$
|
(1,034,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,215,954
|
)
|
|
$
|
92,956
|
|
|
$
|
(624,857
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of patents and patent costs
|
|
|
6,383
|
|
|
|
13,035
|
|
|
|
1,884
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
400,000
|
|
|
|
(400,000
|
)
|
|
|
|
|
Other receivables
|
|
|
103,392
|
|
|
|
(3,503
|
)
|
|
|
59,763
|
|
Inventories
|
|
|
(34,565
|
)
|
|
|
23,043
|
|
|
|
(23,043
|
)
|
Prepaid expenses
|
|
|
(31,850
|
)
|
|
|
36,006
|
|
|
|
(46,256
|
)
|
Other assets
|
|
|
(1,493
|
)
|
|
|
|
|
|
|
1,163
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
452,871
|
|
|
|
127,980
|
|
|
|
73,234
|
|
Accrued expenses
|
|
|
474
|
|
|
|
6,389
|
|
|
|
|
|
Deferred revenue
|
|
|
638,268
|
|
|
|
(418,609
|
)
|
|
|
544,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
317,526
|
|
|
|
(522,703
|
)
|
|
|
(14,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent costs
|
|
|
(42,968
|
)
|
|
|
(34,966
|
)
|
|
|
(60,098
|
)
|
Expenditures for leasehold improvements
|
|
|
(149,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(192,604
|
)
|
|
|
(34,966
|
)
|
|
|
(60,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
|
|
|
|
309,980
|
|
|
|
215,000
|
|
Advances from member
|
|
|
102,292
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable member
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
122,292
|
|
|
|
309,980
|
|
|
|
215,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(58,251
|
)
|
|
|
28,357
|
|
|
|
(36,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
188,963
|
|
|
|
(219,332
|
)
|
|
|
104,445
|
|
Cash, beginning of year
|
|
|
8,083
|
|
|
|
227,415
|
|
|
|
122,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, ending of year
|
|
$
|
197,046
|
|
|
$
|
8,083
|
|
|
$
|
227,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-7
TERRASPHERE
SYSTEMS LLC
DECEMBER
31, 2009 AND 2008
NOTE 1
NATURE OF OPERATIONS
TerraSphere Systems LLC (TerraSphere), located in
Boston, Massachusetts designs and builds highly efficient
systems for growing organic fruits and vegetables in a
controlled, indoor environment. The Company partners with
private businesses and public institutions to create solutions
for food production challenges. The Company derives its revenues
from licensing fees and royalties, the sale of equipment and
expects future revenue from operating facilities using the
TerraSphere System. The TerraSphere System uses technology to
operate automated, software driven plant growth systems that can
be used to grow a variety of crops, from lettuce to tree
seedlings to rare medicinal herbs.
PharmaSphere, LLC (PharmaSphere), located in Boston,
Massachusetts, is a wholly owned subsidiary of TerraSphere.
PharmaSpheres business plan is to utilize the TerraSphere
System for the production of high value biocompounds sourced
from plants and used as active pharmaceutical ingredients, and
for the production of transgenic plants (genetically engineered
plants) for the biotechnology market. PharmaSphere has a
wholly-owned subsidiary PharmaSphere Worcester, LLC which was
formed to build a facility in Worcester, Massachusetts utilizing
PharmaSpheres business plan. The building of the facility
has not commenced. PharmaSphere has no revenue to date.
TerraSphere Systems Canada, Inc., (TerraSphere
Canada) located in Vancouver, British Columbia, operates
the research and manufacturing facility for TerraSphere and is
eighty-five percent owned by TerraSphere.
NOTE 2
MANAGEMENTS PLAN OF OPERATIONS
The Company has sustained a net loss in 2009 and has a
members deficit totaling approximately $1,034,000 and has
negative working capital totaling approximately $1,337,000 at
December 31, 2009. Subsequent to December 31, 2009,
the Company has entered into four exclusive licensing agreements
totaling $3,800,000 and has received installment payments on
those agreements totaling $760,000 with the remaining
installments to be made on a quarterly basis through April 2011
(See Note 11). Management believes the above
licensing agreements will provide the necessary working capital
through 2010. The Company is currently pursuing additional
exclusive licensing agreements. The Company is also pursuing a
possible acquisition by another entity to further its mission of
creating solutions to food production challenges.
NOTE 3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the
transactions and balances of TerraSphere Systems LLC and its
wholly-owned subsidiary, PharmaSphere, LLC. The assets,
liabilities and results of operations of TerraSphere Systems
Canada, Inc. are included in the consolidated financial
statements with appropriate recognition of noncontrolling
interest. All intercompany transactions and balances have been
eliminated in consolidation.
CODIFICATION
Effective July 1, 2009, the Financial Accounting Standard
Boards (FASB) Accounting Standards
Codification (ASC) became the single official source
of authoritative, non-governmental U.S. generally accepted
accounting principles (GAAP). The historical GAAP
hierarchy was eliminated and the ASC became the only level of
authoritative GAAP. The Companys accounting policies were
not affected by the conversion to ASC.
F-8
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FOREIGN
OPERATIONS
The accounting records of TerraSphere Canada are maintained in
Canadian dollars, its functional currency. Revenue and expense
transactions are translated to U.S. dollars using the
average exchange rate of the month in which the transaction took
place. Assets and liabilities are translated to
U.S. dollars using the exchange rate in effect as of the
balance sheet date. Equity transactions are translated to
U.S. dollars using the exchange rate in effect as of the
date of the equity transaction. Translation gains and losses are
reported as a component of accumulated other comprehensive
income or loss. Gains and losses resulting from transactions
which are denominated in other than the functional currencies
are reported as foreign currency exchanges gain (loss) in the
statements of operations and comprehensive income (loss) in the
period the gain or loss occurred.
USE OF
ESTIMATES
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect reported amounts and disclosures in
the consolidated financial statements. Actual results could
differ from those estimates.
ACCOUNTS
RECEIVABLE
Accounts receivable represents balances due from customers, net
of applicable reserves for doubtful accounts. In determining the
need for an allowance, objective evidence that a single
receivable is uncollectible, as well as historical collection
patterns for accounts receivable are considered at each balance
sheet date. At December 31, 2009 and 2008, an allowance for
doubtful accounts was not required.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
determined by the first in, first out method. Inventories
consist of the
work-in-process
related to twelve TerraSphere System units at December 31,
2009. There were no inventory reserves at December 31, 2009
or 2008.
LEASEHOLD
IMPROVEMENTS
Leasehold improvements are carried at cost and are amortized
over their estimated service life or the remaining term of the
related lease, whichever is shorter. There was no amortization
expense incurred in the years ended December 31, 2009, 2008
or 2007 as the assets had not been placed in service.
PATENT
AND PATENT COSTS
The Company accounts for its patent and patent costs in
accordance with ASC 250, which requires that intangible
assets with finite lives, such as the Companys
specifically identifiable costs for patent and patent
applications, be capitalized and amortized over their respective
estimated lives and reviewed for impairment whenever events or
other changes in circumstances indicate that the carrying amount
may not be recoverable.
REVENUE
RECOGNITION
Revenue is recognized when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of a sales arrangement exists;
|
|
|
|
Delivery of the product has occurred;
|
|
|
|
The sales price is fixed or determinable, and;
|
|
|
|
Collectability is reasonably assured.
|
F-9
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In those cases where all four criteria are not met, the Company
defers recognition of revenue until the period these criteria
are satisfied. Revenue is generally recognized upon shipment or
upon completed performance on exclusive technology licenses
where the term is equal to the life of the associated
intellectual property.
The Company recognizes deferred revenue when payment has been
received for product sales when the revenue recognition criteria
have not been met. In addition, the Company defers revenue when
payment has been received for future services to be provided.
INCOME
TAXES
No provision for income taxes is recognized because the Company
is a limited liability company. In lieu of federal and state
income taxes, all income, losses, deductions and credits pass
through to the members for them to report on their personal
returns. Management has performed an evaluation of the
Companys tax positions, ensuring that these tax return
positions meet the more likely than not recognition
threshold and can be measured with sufficient precision. These
evaluations provide management with a comprehensive model for
how a company should recognize, measure, present and disclose in
its financial statements certain tax positions that the Company
has taken or expects to take on income tax returns. Based upon
these evaluations, management has concluded that the Company has
no uncertain tax positions that qualify for either recognition
or disclosure in the financial statements as of
December 31, 2009.
RESEARCH
AND DEVELOPMENT
Research and development costs are charged to operations as
incurred. For the years ended December 31, 2009, 2008 and
2007, the Company recorded $613, $26,941 and $16,159 in research
and development costs, respectively.
FAIR
VALUE MEASUREMENTS
The Company applies FASB ASC 820, which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. FASB ASC 820
applies to reported balances that are required or permitted to
be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any
new fair value measurements of reported balances.
FASB ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, FASB
ASC 820 establishes a fair value hierarchy that
distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting
entity (observable inputs that are classified within
Levels 1 and 2 of the hierarchy) and the reporting
entitys own assumptions about market participant
assumptions (unobservable inputs classified within Level 3
of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has
the ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets
and liabilities in active markets, as well as inputs that are
observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates and
yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or
liability, which are typically based on an entitys own
assumptions, as there is little, if any, related market
activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair
value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls
F-10
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is based on the lowest level input that is significant to the
fair value measurement in its entirety. The Companys
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and
considers factors specific to the asset or liability.
NOTE 4
CONCENTRATION OF CREDIT RISK
The Companys financial instrument that is exposed to a
concentration of credit risk is cash. The Company places its
cash deposits with credit worthy banking institutions in the
United States and Canada which are continually reviewed by
management. From time to time, the bank balances of the
Companys cash may exceed current United States and
Canadian insured limits. However, the Company has not
experienced any losses in this area and management believes its
cash deposits are not subject to significant credit risk. At
December 31, 2009 and 2008, the Companys did not have
cash balances on deposit that exceeded United States and
Canadian federal depository insurance limits.
NOTE 5
PATENT AND PATENT COSTS
The following reflects the Companys patent and patent
costs at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Carousel with spheres patent
|
|
$
|
32,407
|
|
|
$
|
32,407
|
|
Carousel with arcuate ribs patent
|
|
|
9,666
|
|
|
|
5,795
|
|
Rotatable carousel with arcuate ribs patent
|
|
|
13,582
|
|
|
|
8,192
|
|
Carousel with spheres application (Canadian)
|
|
|
7,199
|
|
|
|
5,321
|
|
Carousel with spheres application (Canadian)
|
|
|
5,836
|
|
|
|
3,976
|
|
Carousel with spheres application (European)
|
|
|
19,001
|
|
|
|
17,382
|
|
Carousel with spheres application (Chinese)
|
|
|
10,391
|
|
|
|
10,391
|
|
Carousel with spheres application (Hong Kong)
|
|
|
1,461
|
|
|
|
1,461
|
|
Carousel with spheres application (Japanese)
|
|
|
14,901
|
|
|
|
10,396
|
|
Rotatable carousel with arcuate ribs application
|
|
|
8,514
|
|
|
|
8,514
|
|
Rotatable carousel with drum-like members (Canadian)
|
|
|
4,760
|
|
|
|
|
|
Rotatable carousel with drum-like members application
|
|
|
5,267
|
|
|
|
|
|
Carousel with spheres application
|
|
|
10,040
|
|
|
|
10,040
|
|
Tray apparatus costs
|
|
|
5,780
|
|
|
|
440
|
|
Collapsible stack costs
|
|
|
6,140
|
|
|
|
|
|
Marchildon costs
|
|
|
2,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
157,283
|
|
|
|
114,315
|
|
Accumulated amortization
|
|
|
22,351
|
|
|
|
15,968
|
|
|
|
|
|
|
|
|
|
|
Total, net amortization
|
|
$
|
134,932
|
|
|
$
|
98,347
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2009,
2008 and 2007 was $6,383, $13,035 and $1,884, respectively.
F-11
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Aggregate expected amortization expense in future years is
expected to be as follows:
|
|
|
|
|
2010
|
|
$
|
6,724
|
|
2011
|
|
|
6,724
|
|
2012
|
|
|
6,724
|
|
2013
|
|
|
6,724
|
|
2014
|
|
|
6,724
|
|
Thereafter
|
|
|
101,312
|
|
|
|
|
|
|
Total
|
|
$
|
134,932
|
|
|
|
|
|
|
NOTE 6
NOTES PAYABLE
On May 29, 2009, the Company issued an unsecured note
payable to a member in the amount of $20,000 with a fixed rate
of 10% maturing July 29, 2009. The Company is in default of
the note and the member has not called the note as of
December 31, 2009. The principal due in 2010 is $20,000.
The Company has accrued and incurred $1,189 in interest as of
December 31, 2009.
NOTE 7
DUE TO MEMBER
During the year ended December 31, 2009, a member provided
an advance to the Company for working capital with an interest
rate of 10%. The amount due to member at December 31, 2009
is $102,292. The Company has accrued and incurred $5,673 in
interest as of and in the year ended December 31, 2009.
NOTE 8
DEFERRED REVENUE
The Company has recorded deferred revenue of $763,767 and
$125,499 at December 31, 2009 and 2008, respectively. On
May 18, 2007, TerraSphere Canada entered into a marketing
agreement with the Squamish Nation (Squamish) to
promote the TerraSphere System to other First Nations bands in
Canada for $200,000 Canadian dollars ($183,772 U.S.). The
Company is recognizing the marketing fee over the term of the
agreement (See Note 10). At December 31, 2009
and 2008, deferred revenue associated with this agreement is
approximately $89,000 and $125,000, respectively. The Company
also has deferred a $675,000 payment from the Squamish received
in December 2009 for the sale of twelve TerraSphere System units
to be delivered in the first quarter of 2010.
NOTE 9
COMMITMENTS AND CONTINGENCIES
LEASE
On September 30, 2009, the Company entered into an
operating lease agreement to begin November 1, 2009 for
warehouse space in Vancouver, British Columbia for TerraSphere
Canada. The term is five years and the Company has a right to
extend for an additional five years. Future minimum payments
under this lease are as follows:
|
|
|
|
|
2010
|
|
$
|
89,990
|
|
2011
|
|
|
89,990
|
|
2012
|
|
|
89,990
|
|
2013
|
|
|
89,990
|
|
2014
|
|
|
74,990
|
|
|
|
|
|
|
Total
|
|
$
|
434,950
|
|
|
|
|
|
|
F-12
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rent expense incurred in connection with this lease was $14,998
for the year ended December 31, 2009.
MARKETING
AGREEMENT
On May 18, 2007, TerraSphere Canada entered into a
marketing agreement with the Squamish Nation to promote the
TerraSphere System to other First Nations bands in Canada. The
Squamish paid TerraSphere $200,000 Canadian dollars ($183,772
U.S.) to secure the rights to work with the First Nations bands
across Canada through May 2012. This fee is being recognized as
revenue over the term of the agreement (Note 9). Revenue
recognized in connection with this agreement was $36,732,
$36,732 and $21,427 for the years ended December 31, 2009,
2008 and 2007, respectively.
In addition, the agreement stipulates that Squamish will receive
a fee of 10% of any license fee agreement executed between
TerraSphere and a First Nations band. Squamish also has the
right of first refusal to participate in an ownership interest
of any venture formed pursuant to First Nation band license
agreement. These rights must be executed no later than May, 2012.
NOTE 10
SUBSEQUENT EVENTS
In connection with the preparation of the consolidated financial
statements, management evaluated subsequent events after the
balance sheet date of December 31, 2009 through
June 3, 2010.
Subsequent to December 31, 2009, the Company entered into
four exclusive licensing agreements totaling $3,800,000. As of
the date the consolidated financial statements were issued, the
Company has received installment payments of $760,000 with the
remaining installments to be made on a quarterly basis through
April 2011. In addition to the licensing fees, the agreements
provide the Company royalty income of 3% 6% of net
sales.
F-13
TERRASPHERE
SYSTEMS LLC
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2010 (UNAUDITED)
AND DECEMBER 31, 2009 (AUDITED)
AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2010 (UNAUDITED) AND MARCH 31, 2009 (UNAUDITED)
F-14
TERRASPHERE
SYSTEMS LLC
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-16
|
|
|
|
|
F-17
|
|
|
|
|
F-18
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
F-15
TERRASPHERE
SYSTEMS LLC
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
106,830
|
|
|
$
|
197,046
|
|
Accounts receivable
|
|
|
950,000
|
|
|
|
|
|
Other receivables
|
|
|
52,796
|
|
|
|
15,244
|
|
Inventories work in process
|
|
|
|
|
|
|
34,565
|
|
Prepaid expenses
|
|
|
53,725
|
|
|
|
42,100
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,163,351
|
|
|
|
288,955
|
|
Leasehold improvements, net
|
|
|
158,819
|
|
|
|
161,948
|
|
Patent and patent related costs, net
|
|
|
148,259
|
|
|
|
134,932
|
|
Pre-construction costs
|
|
|
81,017
|
|
|
|
|
|
Other assets
|
|
|
5,886
|
|
|
|
5,692
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,557,332
|
|
|
$
|
591,527
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Note payable member
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Due to member
|
|
|
164,351
|
|
|
|
102,292
|
|
Accounts payable
|
|
|
1,357,304
|
|
|
|
732,866
|
|
Accrued expenses
|
|
|
10,767
|
|
|
|
6,862
|
|
Deferred tax liability
|
|
|
388,000
|
|
|
|
|
|
Deferred revenue
|
|
|
434,584
|
|
|
|
763,767
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,375,006
|
|
|
|
1,625,787
|
|
|
|
|
|
|
|
|
|
|
Members equity (deficit)
|
|
|
|
|
|
|
|
|
TerraSphere Systems LLC members equity (deficit)
|
|
|
|
|
|
|
|
|
Members equity (deficit)
|
|
|
(667,616
|
)
|
|
|
(1,043,475
|
)
|
Accumulated other comprehensive loss
|
|
|
(77,756
|
)
|
|
|
(42,254
|
)
|
|
|
|
|
|
|
|
|
|
Total TerraSphere Systems LLC members equity (deficit)
|
|
|
(745,372
|
)
|
|
|
(1,085,729
|
)
|
Noncontrolling interest
|
|
|
(72,302
|
)
|
|
|
51,469
|
|
|
|
|
|
|
|
|
|
|
Total members equity (deficit)
|
|
|
(817,674
|
)
|
|
|
(1,034,260
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity (deficit)
|
|
$
|
1,557,332
|
|
|
$
|
591,527
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated interim financial statements.
F-16
TERRASPHERE
SYSTEMS LLC
|
|
|
|
|
|
|
|
|
|
|
Three Month Periods Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
675,000
|
|
|
$
|
|
|
Licensing and marketing fees
|
|
|
1,009,183
|
|
|
|
9,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,684,183
|
|
|
|
9,183
|
|
Cost of goods sold
|
|
|
703,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
980,882
|
|
|
|
9,183
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
436,998
|
|
|
|
226,684
|
|
Amortization expense
|
|
|
10,817
|
|
|
|
1,636
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
533,067
|
|
|
|
(219,137
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
3,246
|
|
Foreign currency gain (loss)
|
|
|
17,190
|
|
|
|
(8,554
|
)
|
Interest expense
|
|
|
(3,905
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
13,285
|
|
|
|
(5,782
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) before tax provision
|
|
|
546,352
|
|
|
|
(224,919
|
)
|
Provision for income taxes
|
|
|
388,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
158,352
|
|
|
|
(224,919
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
(117,507
|
)
|
|
|
(16,932
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to TerraSphere Systems LLC before
other comprehensive income (loss)
|
|
|
275,859
|
|
|
|
(207,987
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(41,766
|
)
|
|
|
3,146
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
234,093
|
|
|
|
(204,841
|
)
|
Comprehensive income (loss) attributable to noncontrolling
interest
|
|
|
(6,264
|
)
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to TerraSphere Systems
LLC
|
|
$
|
240,357
|
|
|
$
|
(205,313
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated interim financial statements.
F-17
TERRASPHERE
SYSTEMS LLC
FOR THE
THREE MONTH PERIOD ENDED MARCH 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TerraSphere Systems LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Members Equity
|
|
|
|
Members Equity
|
|
|
Comprehensive
|
|
|
|
|
|
Noncontrolling
|
|
|
(Deficit)
|
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
Total
|
|
|
Interest
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
Balance, December 31, 2009
|
|
$
|
(1,043,475
|
)
|
|
$
|
(42,254
|
)
|
|
$
|
(1,085,729
|
)
|
|
$
|
51,469
|
|
|
$
|
(1,034,260
|
)
|
Contributions
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(35,502
|
)
|
|
|
(35,502
|
)
|
|
|
(6,264
|
)
|
|
|
(41,766
|
)
|
Net income (loss)
|
|
|
275,859
|
|
|
|
|
|
|
|
275,859
|
|
|
|
(117,507
|
)
|
|
|
158,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
$
|
(667,616
|
)
|
|
$
|
(77,756
|
)
|
|
$
|
(745,372
|
)
|
|
$
|
(72,302
|
)
|
|
$
|
(817,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated interim financial statements.
F-18
TERRASPHERE
SYSTEMS LLC
|
|
|
|
|
|
|
|
|
|
|
Three Month Periods Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
158,352
|
|
|
$
|
(224,919
|
)
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
Amortization of patents and patent related costs
|
|
|
2,364
|
|
|
|
1,636
|
|
Amortization of leasehold improvements
|
|
|
8,453
|
|
|
|
|
|
Deferred income taxes
|
|
|
388,000
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(950,000
|
)
|
|
|
400,000
|
|
Other receivables
|
|
|
(36,140
|
)
|
|
|
290
|
|
Inventories
|
|
|
34,565
|
|
|
|
|
|
Prepaid expenses
|
|
|
(11,625
|
)
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
3,766
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
612,026
|
|
|
|
(60,921
|
)
|
Accrued expenses
|
|
|
3,905
|
|
|
|
(5,681
|
)
|
Deferred revenue
|
|
|
(329,183
|
)
|
|
|
(9,183
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(119,283
|
)
|
|
|
104,988
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Patent and patent related costs
|
|
|
(15,691
|
)
|
|
|
(33,250
|
)
|
Pre-construction costs
|
|
|
(81,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(96,708
|
)
|
|
|
(33,250
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Member contributions
|
|
|
100,000
|
|
|
|
|
|
Advances from member
|
|
|
62,059
|
|
|
|
9,100
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
162,059
|
|
|
|
9,100
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(36,284
|
)
|
|
|
2,885
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash
|
|
|
(90,216
|
)
|
|
|
83,723
|
|
Cash, beginning of period
|
|
|
197,046
|
|
|
|
8,083
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
106,830
|
|
|
$
|
91,806
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated interim financial statements.
F-19
TERRASPHERE
SYSTEMS LLC
(UNAUDITED)
NOTE 1
NATURE OF OPERATIONS
TerraSphere Systems LLC (TerraSphere), located in
Boston, Massachusetts designs and builds highly efficient
systems for growing organic fruits and vegetables in a
controlled, indoor environment. The Company partners with
private businesses and public institutions to create solutions
for food production challenges. The Company derives its revenues
from licensing fees and royalties, the sale of equipment and
expects future revenue from operating facilities using the
TerraSphere System. The TerraSphere System uses technology to
operate automated, software driven plant growth systems that can
be used to grow a variety of crops, from lettuce to tree
seedlings to rare medicinal herbs. The Company is also pursuing
a possible acquisition by another entity to further its mission
of creating solutions to food production challenges.
PharmaSphere, LLC (PharmaSphere), located in Boston,
Massachusetts, is a wholly-owned subsidiary of TerraSphere.
PharmaSpheres business plan is to utilize the TerraSphere
System for the production of high value biocompounds sourced
from plants and used as active pharmaceutical ingredients and
for the production of transgenic plants (genetically engineered
plants) for the biotechnology market. PharmaSphere has a
wholly-owned subsidiary PharmaSphere Worcester, LLC, which was
formed to build a facility in Worcester, Massachusetts utilizing
PharmaSpheres business plan. The building of the facility
has not commenced. PharmaSphere has no revenue to date.
TerraSphere Systems Canada, Inc. (TerraSphere
Canada), located in Vancouver, British Columbia, operates
the research and manufacturing facility for TerraSphere and is
eighty-five percent owned by TerraSphere.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the
transactions and balances of TerraSphere System LLC and its
wholly-owned subsidiary, PharmaSphere, LLC. The assets,
liabilities and results of operations of TerraSphere Systems
Canada, Inc. are included in the consolidated financial
statements with appropriate recognition of noncontrolling
interest. All intercompany transactions and balances have been
eliminated in consolidation.
CODIFICATION
Effective July 1, 2009, the Financial Accounting Standard
Boards (FASB) Accounting Standards
Codification (ASC) became the single official source
of authoritative, non-governmental U.S. generally accepted
accounting principles (GAAP). The historical GAAP
hierarchy was eliminated and the ASC became the only level of
authoritative GAAP. The Companys accounting policies were
not affected by the conversion to ASC.
FOREIGN
OPERATIONS
The accounting records of TerraSphere Canada are maintained in
Canadian dollars, its functional currency. Revenue and expense
transactions are translated to U.S. dollars using the
average exchange rate of the month in which the transaction took
place. Assets and liabilities are translated to
U.S. dollars using the exchange rate in effect as of the
balance sheet date. Equity transactions are translated to
U.S. dollars using the exchange rate in effect as of the
date of the equity transaction. Translation gains and losses are
reported as a component of accumulated other comprehensive
income or loss. Gains and losses resulting from transactions
which are denominated in other than the functional currencies
are reported as foreign currency exchanges gain (loss) in the
statements of operations and comprehensive income (loss) in the
period the gain or loss occurred.
F-20
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (Continued)
USE OF
ESTIMATES
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect reported amounts and disclosures in
the consolidated financial statements. Actual results could
differ from those estimates.
ACCOUNTS
RECEIVABLE
Accounts receivable represent balances due from customers, net
of applicable reserves for doubtful accounts. In determining the
need for an allowance, objective evidence that a single
receivable is uncollectible, as well as historical collection
patterns for accounts receivable are considered at each balance
sheet date. At March 31, 2010 and December 31, 2009,
the Company has determined that an allowance for doubtful
accounts is not deemed necessary.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost
determined by the first in, first out method. Inventories
consisted of the
work-in-process
related to twelve TerraSphere System units at December 31,
2009. There were no inventory reserves at March 31, 2010 or
December 31, 2009.
LEASEHOLD
IMPROVEMENTS
Leasehold improvements are carried at cost and are amortized
over their estimated service life or the remaining term of the
related lease, whichever is shorter. Amortization expense
incurred for the three month periods ended March 31, 2010
and 2009 was $8,453 and $-0-, respectively.
PATENT
AND PATENT RELATED COSTS
The Company accounts for its patent and patent related costs in
accordance with ASC 250, which requires that intangible
assets with finite lives, such as the Companys
specifically identifiable costs for patent and patent
applications, be capitalized and amortized over their respective
estimated lives and reviewed for impairment whenever events or
other changes in circumstances indicate that the carrying amount
may not be recoverable.
PRE-CONSTRUCTION
COSTS
Pre-construction costs include architectural and engineering
services related to the building of the PharmaSphere facility.
REVENUE
RECOGNITION
Revenue is recognized when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of a sales arrangement exists;
|
|
|
|
Delivery of the product has occurred;
|
|
|
|
The sales price is fixed or determinable, and;
|
|
|
|
Collectability is reasonably assured.
|
In those cases where all four criteria are not met, the Company
defers recognition of revenue until the period these criteria
are satisfied. Revenue is generally recognized upon shipment or
upon completed
F-21
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (Continued)
performance on exclusive technology licenses where the term is
equal to the life of the associated intellectual property.
The Company recognizes deferred revenue when payment has been
received for product sales but the revenue recognition criteria
have not been met. In addition, the Company defers revenue when
payment has been received for future services to be provided.
INCOME
TAXES
No provision for income taxes is recognized for the period from
January 1, 2010 through February 21, 2010 because the
Company is a limited liability company. In lieu of federal and
state income taxes, all income, losses, deductions and credits
pass through to the members for them to report on their personal
returns.
The Company elected to be treated as a taxable association
effective February 22, 2010 for United States federal and
state tax purposes (Note 11). The Company accounts for
income taxes following the asset and liability method in
accordance with ASC 740. Under such method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years that the asset is expected to be recovered
or the liability settled.
Management has performed an evaluation of the Companys tax
positions, ensuring that these tax return positions meet the
more likely than not recognition threshold and can
be measured with sufficient precision. These evaluations provide
management with a comprehensive model for how the Company should
recognize, measure, present and disclose in its financial
statements certain tax positions that the Company has taken or
expects to take on income tax returns. Based upon these
evaluations, management has concluded that the Company has no
uncertain tax positions that qualify for either recognition or
disclosure in the financial statements as of March 31,
2010. See Note 9 for additional information.
RESEARCH
AND DEVELOPMENT
Research and development costs are charged to operations as
incurred. There were no research and development costs incurred
for the three month periods ended March 31, 2010 and 2009.
FAIR
VALUE MEASUREMENTS
The Company applies FASB ASC 820, which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. FASB ASC 820
applies to reported balances that are required or permitted to
be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any
new fair value measurements of reported balances.
FASB ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, FASB
ASC 820 establishes a fair value hierarchy that
distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting
entity (observable inputs that are classified within
Levels 1 and 2 of the hierarchy) and the reporting
entitys own assumptions about market participant
assumptions (unobservable inputs classified within Level 3
of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has
the ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1
F-22
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (Continued)
that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs may include quoted prices for
similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other
than quoted prices), such as interest rates, foreign exchange
rates and yield curves that are observable at commonly quoted
intervals. Level 3 inputs are unobservable inputs for the
asset or liability, which are typically based on an
entitys own assumptions, as there is little, if any,
related market activity. In instances where the determination of
the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls
is based on the lowest level input that is significant to the
fair value measurement in its entirety. The Companys
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and
considers factors specific to the asset or liability.
NOTE 3
CONCENTRATION OF CREDIT RISK
The Companys financial instruments that are exposed to a
concentration of credit risk are cash and accounts receivable.
Cash The Company places its cash
deposits with credit worthy banking institutions in the United
States and Canada which are continually reviewed by management.
From time to time, the bank balances of the Companys cash
may exceed current United States and Canadian insured limits.
The Company, however, has not experienced any losses in this
area and management believes its cash deposits are not subject
to significant credit risk. At March 31, 2010 and
December 31, 2009, the Companys did not have cash
balances on deposit that exceeded United States and Canadian
federal depository insurance limits.
Accounts receivable One customer
accounted for one hundred percent of the Companys accounts
receivable at March 31, 2010. Two customers accounted for
one-hundred percent of sales for the three month period ended
March 31, 2010.
F-23
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (Continued)
NOTE 4
PATENT AND PATENT RELATED COSTS
The following reflects the Companys patent and patent
related costs at:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
Carousel with spheres patent
|
|
$
|
32,407
|
|
|
$
|
32,407
|
|
Carousel with arcuate ribs patent
|
|
|
9,666
|
|
|
|
9,666
|
|
Rotatable carousel with arcuate ribs patent
|
|
|
13,582
|
|
|
|
13,582
|
|
Carousel with spheres application (Canadian)
|
|
|
10,259
|
|
|
|
7,199
|
|
Carousel with spheres application (Canadian)
|
|
|
6,711
|
|
|
|
5,836
|
|
Carousel with spheres application (European)
|
|
|
21,024
|
|
|
|
19,001
|
|
Carousel with spheres application (Chinese)
|
|
|
10,391
|
|
|
|
10,391
|
|
Carousel with spheres application (Hong Kong)
|
|
|
1,461
|
|
|
|
1,461
|
|
Carousel with spheres application (Japanese)
|
|
|
14,901
|
|
|
|
14,901
|
|
Rotatable carousel with arcuate ribs application
|
|
|
8,514
|
|
|
|
8,514
|
|
Rotatable carousel with drum-like members (Canadian)
|
|
|
4,760
|
|
|
|
4,760
|
|
Rotatable carousel with drum-like members application
|
|
|
5,267
|
|
|
|
5,267
|
|
Carousel with spheres application
|
|
|
10,040
|
|
|
|
10,040
|
|
Tray apparatus costs
|
|
|
5,780
|
|
|
|
5,780
|
|
Collapsible stack costs
|
|
|
6,140
|
|
|
|
6,140
|
|
Marchildon costs
|
|
|
2,338
|
|
|
|
2,338
|
|
Apparatus for growing plants costs
|
|
|
9,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
172,974
|
|
|
|
157,283
|
|
Accumulated amortization
|
|
|
24,715
|
|
|
|
22,351
|
|
|
|
|
|
|
|
|
|
|
Total, net amortization
|
|
$
|
148,259
|
|
|
$
|
134,932
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three month periods ended
March 31, 2010 and 2009 was $2,364, and $1,636,
respectively.
Aggregate expected amortization expense is expected to be as
follows in the years ending December 31:
|
|
|
|
|
2010
|
|
$
|
5,576
|
|
2011
|
|
|
7,940
|
|
2012
|
|
|
7,940
|
|
2013
|
|
|
7,940
|
|
2014
|
|
|
7,940
|
|
Thereafter
|
|
|
110,923
|
|
|
|
|
|
|
Total
|
|
$
|
148,259
|
|
|
|
|
|
|
NOTE 5
NOTES PAYABLE
On May 29, 2009, the Company issued an unsecured note
payable to a member in the amount of $20,000, with a fixed
interest rate of 10% per annum, maturing July 29, 2009. The
Company is in default of the note and the member has not called
the note as of March 31, 2010. The principal due as of
March 31, 2010 is $20,000. The Company has accrued interest
totaling $1,682 and $1,189 as of March 31, 2010 and
December 31, 2010, respectively and incurred $493 in
interest expense for the three months ended March 31, 2010.
F-24
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (Continued)
NOTE 6
DUE TO MEMBER
During the year ended December 31, 2009, a member provided
an advance to the Company for working capital with an interest
rate of 10% per annum. The amount due to the member at
March 31, 2010 and December 31, 2009 is $164,351 and
$102,292, respectively. The Company has accrued interest
totaling $9,085 and $5,673 as of March 31, 2010 and
December 31, 2009, respectively and incurred $3,412 and
$474 in interest for the three month periods ended
March 31, 2010 and 2009, respectively.
NOTE 7
DEFERRED REVENUE
The Company has recorded deferred revenue of $434,584 and
$763,767 at March 31, 2010 and December 31, 2009,
respectively.
On May 18, 2007, TerraSphere Canada entered into a
marketing agreement with the Squamish Nation
(Squamish) to promote the TerraSphere System to
other First Nations bands in Canada for $200,000 Canadian
dollars ($183,772 U.S.). The Company is recognizing the
marketing fee over the term of the agreement (See
Note 10). At March 31, 2010 and December 31,
2009, deferred revenue associated with this agreement is
approximately $80,000 and $89,000, respectively.
The Company has also deferred the recognition of licensing fee
deposits totaling $355,000 at March 31, 2010 as a result of
the revenue recognition criteria not being met.
The Company had deferred a $675,000 payment from the Squamish
received in December 2009 relating to twelve TerraSphere System
units which were delivered during the three month period ended
March 31, 2010. Accordingly, the associated revenue was
recognized during the same period.
NOTE 8
LICENSING FEES
The Company has developed a system of modules and processes for
growing plants in a controlled environment. The system uses and
controls precise combinations of light, water, nutrition,
gravity, centrifugal forces, and gasses to produce growing
conditions that can be controlled and manipulated to result in
desired plant growth and maximum crop production (the
Growth System). The Company has granted exclusive
licenses to use the Growth System for the remaining term of the
associated patents in accordance to the license agreement.
Revenue recognized in connection with these license agreements
was $1,000,000 for the three months ended March 31, 2010 as
the Company has determined the revenue recognition criteria have
been met.
NOTE 9
INCOME TAXES
The Company elected to be treated as a taxable association
effective February 22, 2010 (Note 2 and Note 11).
Income taxes for United States federal and state tax purposes
for the three month period ended March 31, 2010 consisted
of the following:
|
|
|
|
|
Current
|
|
$
|
|
|
Deferred
|
|
|
388,000
|
|
|
|
|
|
|
|
|
$
|
388,000
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts used for income tax
purposes on the cash basis of accounting and amounts of assets
and liabilities for financial reporting purposes. The principal
sources of these differences include the carrying value of
accounts
F-25
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (Continued)
receivable, accounts payable and deferred revenue for financial
statement purposes which are not recognized for income tax
purposes.
Principal components of the Companys net deferred tax
liability at March 31, 2010 are as follows:
|
|
|
|
|
Accounts receivable
|
|
$
|
361,000
|
|
Accounts payable
|
|
|
(78,000
|
)
|
Deferred revenue
|
|
|
121,000
|
|
Amortization expense
|
|
|
(16,000
|
)
|
|
|
|
|
|
|
|
$
|
388,000
|
|
|
|
|
|
|
The effective tax rate based on the federal and state statutory
rates is reconciled to the actual tax rate for the three month
period ended March 31, 2010 as follows:
|
|
|
|
|
Federal and state statutory income tax rates
|
|
|
34
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
Exclusion of net loss incurred in period prior to corporate tax
election
|
|
|
(13
|
)%
|
Exclusion of net loss in foreign subsidiary
|
|
|
(21
|
)%
|
Effect of conversion from accrual to cash basis of accounting
for income tax
|
|
|
71
|
%
|
|
|
|
|
|
Effective tax rate
|
|
|
71
|
%
|
|
|
|
|
|
NOTE 10
COMMITMENTS AND CONTINGENCIES
LEASE
On September 30, 2009, the Company entered into an
operating lease agreement to begin November 1, 2009 for
warehouse space in Vancouver, British Columbia for TerraSphere
Canada. The term is five years and the Company has a right to
extend for an additional five years. Future minimum payments
under this lease are as follows:
|
|
|
|
|
2010 (April 1, 2010 through December 31, 2010)
|
|
$
|
67,500
|
|
2011
|
|
|
89,990
|
|
2012
|
|
|
89,990
|
|
2013
|
|
|
89,990
|
|
2014
|
|
|
74,990
|
|
|
|
|
|
|
Total
|
|
$
|
412,460
|
|
|
|
|
|
|
Rent expense incurred in connection with this lease was $22,500
for the three months ended March 31, 2010.
MARKETING
AGREEMENT
On May 18, 2007, TerraSphere Canada entered into a
marketing agreement with the Squamish Nation to promote the
TerraSphere System to other First Nations bands in Canada. The
Squamish paid TerraSphere $200,000 Canadian dollars ($183,772
U.S.) to secure the rights to work with the First Nations bands
across Canada through May 2012. This fee is being recognized as
revenue over the term of the agreement (Note 7). Revenue
recognized in connection with this agreement was $9,183 for the
three months ended March 31, 2010 and 2009.
F-26
TERRASPHERE
SYSTEMS LLC
NOTES TO
CONSOLIDATED INTERIM FINANCIAL
STATEMENTS (Continued)
In addition, the agreement stipulates that Squamish will receive
a fee of 10% of any license fee agreement executed between
TerraSphere and a First Nations band. Squamish also has the
right of first refusal to participate in an ownership interest
of any venture formed pursuant to the First Nation band license
agreement. These rights must be executed no later than May 2012.
NOTE 11
SUBSEQUENT EVENTS
In connection with the preparation of the consolidated financial
statements, management evaluated subsequent events after the
balance sheet date of March 31, 2010 through June 15,
2010.
Subsequent to March 31, 2010, the Company entered into
exclusive licensing agreements totaling $2,800,000. The Company
deferred the receipt of licensing fee deposits totaling $355,000
related to these agreements at March 31, 2010. In addition
to the licensing fees, the agreements provide the Company
royalty income of 3% 5% of net sales.
On May 5, 2010, the Company elected to be treated as a
taxable association effective February 22, 2010 utilizing
the seventy five day retroactive option.
F-27
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction
On July 6, 2010, Converted Organics Inc. (the
Company) and its wholly-owned subsidiary TerraSphere
Inc. entered into a membership interest purchase agreement
(Agreement) with TerraSphere Systems LLC to acquire
100% of the membership interests in TerraSphere Systems LLC
(TerraSphere) subject to, among other items, the
Companys shareholder approval. This acquisition enables
the Company to license TerraSpheres patented Growth
System, which is a system of modules and processes for growing
plants in a controlled environment. The system uses and controls
precise combinations of light, water, nutrition, gravity,
centrifugal forces, and gasses to produce growing conditions
that can be controlled and manipulated to result in desired
plant growth and maximum crop production.
Terms
The Agreement allows for an election by TerraSphere members to
accept 1) a purchase price of $21,000,000 of Company common
stock upon closing of the transaction (with a 6 month
holding period) (Option One) or 2) a purchase
price of $12,000,000 of Company common stock upon closing of the
transaction with an option to earn an additional $16,000,000 in
contingent consideration based upon TerraSphere achieving
certain milestones and agreeing to an 18 month holding
period on stock distributed to them (Option Two).
Based on 31% of TerraSphere members electing Option One
and 69% electing Option Two, the maximum total purchase price is
$25,830,000 payable in the Companys common stock valued at
$0.756 per share. Per the Agreement, TerraSphere members who
elected Option One will receive $6,510,000 upon closing and
members electing Option Two will receive $8,280,000 upon closing
and up to an additional $11,040,000 based on achieving the
defined milestones (contingent consideration).
Milestone One Payment: $3,450,000 of Company
common stock, if, and only if, between the date of the Agreement
and the 90th day following the closing date or the
180th day following the date of the Agreement, the
following occurs (such shares to be payable within ten
(10) business days of achievement of the following or the
closing date, whichever is later): For a period of five
(5) consecutive trading days, the Companys market
capitalization exceeds the sum of: (1) the Companys
initial market capitalization on the date of execution of the
Agreement, plus (2) the closing price per share, or $0.756,
multiplied by the number of shares of Company common stock to be
issued at closing pursuant to the Agreement, and, if such
calculation is being made prior to the closing date, including
this Milestone One. If between the date of the Agreement and the
90th day following the closing date or the 180th day
following the date of the Agreement, the Company completes an
equity financing, the cash received from the equity financing
during such period shall be added to the market capitalization.
If between the closing date and December 31, 2011, the
Buyer sells equity of either the Company or any of the
Companys subsidiaries, any cash received from such equity
sales during such period shall be added to the market
capitalization;
Milestone Two Payment: $1,380,000 of Company
common stock, if, and only if, $2,000,000 of TerraSpheres
accounts receivable as of the date of the Agreement are received
prior to February 28, 2011;
Milestone Three Payment: $3,450,000 of Company
common stock, if, and only if, the Company generates gross
margin of $6,000,000 (gross margin target) from its operations
during the period commencing as of the date of the Agreement and
ending on December 31, 2011; provided that, if the Company
generates gross margin of at least $4,200,000 (gross margin
threshold) from its operations during such period, the Sellers
shall be entitled to a pro rata portion of the Company
common stock; and
Milestone Four Payment: $2,760,000 of Company
common stock, if, and only if, the Company generates gross
margin of $4,000,000 from its operations during any six-month
period commencing on the Agreement date and ending on
December 31, 2012; provided that, if the Company achieves
the Milestone Three gross margin threshold, but does not achieve
the Milestone Three gross margin target, 83.3% of the difference
between the Milestone Three gross margin target and the actual
gross margins achieved pursuant to the Agreement (the
Milestone Three Deficiency) may be added by the
Sellers to the Milestone Four Payment and the Milestone Four
gross margin target. Notwithstanding anything to the contrary
herein, the total
F-28
amounts payable pursuant to the Milestone Three Payment and
Milestone Four Payment shall be no more than $6,210,000 of
Company common stock.
The Company used the following assumptions to calculate fair
value of the contingent consideration:
Milestone One: The acquisition of TerraSphere
will diversify the Companys base while still sustaining
business practices that protect and value the environment,
current customers, colleagues, and shareholders. The likelihood
of meeting this milestone is largely dependent on the state of
the U.S. economy and future market conditions, both of
which are uncertain and unpredictable. If the U.S. economy
becomes stagnant or the market conditions are not favorable for
investors, the Company may not achieve this milestone. Based on
the uncertainty of the U.S. economy and the unpredictability of
the market over the next 6-12 months, the Company has
estimated that the likelihood of achieving this milestone is 75%
and, as such, has determined that the fair value of this
contingent payment is $2,588,000.
Milestone Two: The Company has reviewed the
customers credit worthiness and ability to make the
required installment payments. Based on this information, the
Company has estimated that the likelihood of achieving this
milestone is 95% and, as such, has determined that the fair
value of this contingent payment is $1,311,000.
Milestones Three and Four: The Company has
evaluated milestones three and four together as they can be
achieved over the same milestone period. The Company has
reviewed TerraSpheres operating estimates and historical
data and believes these milestones are achievable.
TerraSpheres plans are based on the U.S. economy
continuing to grow at a steady rate, investors investing in new
technology and market acceptance of the Growth System
technology. If the U.S. economy becomes stagnant or the
market conditions are not favorable or the technology is not
well received during the milestone periods, the Company may not
achieve the milestones. Based on the uncertainty of the U.S.
economy and the unpredictability of the market over the next
36 months, the Company has estimated that the likelihood of
achieving milestones three and four is 50% and as such, has
determined that the fair value of these contingent payments is
$3,105,000.
The estimated purchase price at fair value is as follows:
|
|
|
|
|
Election of Option One
|
|
$
|
6,510,000
|
|
Election of Option Two
|
|
|
8,280,000
|
|
Milestone one payment
|
|
|
2,588,000
|
|
Milestone two payment
|
|
|
1,311,000
|
|
Milestones three and four payments
|
|
|
3,105,000
|
|
|
|
|
|
|
|
|
$
|
21,794,000
|
|
|
|
|
|
|
The following unaudited pro forma consolidated financial
information gives effect to the Company acquiring 100% of the
membership interests in TerraSphere Systems, LLC and should be
read in conjunction with the Companys
Form 8-K
dated July 6, 2010 and filed on July 7, 2010, the
historical financial statements and the related notes of
Converted Organics Inc., which are included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2009, the quarterly
financial statements and the related notes of Converted
Organics, Inc., which are included in the Companys
Form 8-K
as of March 31, 2010, the TerraSphere Systems, LLC
financial statements which are included in this proxy statement.
The unaudited pro forma consolidated balance sheet as of
March 31, 2010 gives effect to the acquisition of
TerraSphere Systems, LLC transaction as if it had occurred on
March 31, 2010, and the unaudited pro forma consolidated
statements of operations and comprehensive income (loss) for the
year ended December 31, 2009 and for the three month period
ended March 31, 2010 give effect to the acquisition as if
it had occurred on January 1, 2009.
F-29
The unaudited pro forma consolidated financial statements
include all material pro forma adjustments necessary for their
preparation, as required by Article 11 of
Regulation S-X
and, accordingly, do not assume any benefits from cost savings
or synergies of operations.
The pro forma adjustments are based upon available information
and certain assumptions that the Company believes are
reasonable. The unaudited pro forma consolidated financial
statements do not purport to represent what the Companys
financial condition or results of operations would actually have
been had these transactions in fact occurred as of the dates
indicated above or to project the Companys results of
operations for the period indicated or for any other period.
Changes in the fair value of contingent consideration that the
Company recognizes after the acquisition date may be the result
of additional information about facts and circumstances that
existed at the acquisition date that the Company obtained after
that date. Such changes are considered to be measurement period
adjustments and would adjust the purchase price for changes
within one year from the acquisition date. Contingent
consideration classified as an asset or a liability that exceed
a year from the acquisition date is remeasured at fair value and
recognized in earnings.
F-30
CONVERTED
ORGANICS INC.
AS OF
MARCH 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Pro
|
|
|
|
|
|
Pro
|
|
|
|
Converted Organics
|
|
|
Forma
|
|
|
|
|
|
Forma
|
|
|
|
Inc. and Subsidiaries
|
|
|
Adjustments
|
|
|
Reference
|
|
|
Consolidated
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,113,359
|
|
|
$
|
106,830
|
|
|
|
(1
|
)
|
|
$
|
4,220,189
|
|
Restricted cash
|
|
|
233,316
|
|
|
|
|
|
|
|
|
|
|
|
233,316
|
|
Accounts receivable, net
|
|
|
495,450
|
|
|
|
950,000
|
|
|
|
(1
|
)
|
|
|
1,445,450
|
|
Inventories
|
|
|
371,301
|
|
|
|
|
|
|
|
|
|
|
|
371,301
|
|
Prepaid rent
|
|
|
641,781
|
|
|
|
|
|
|
|
|
|
|
|
641,781
|
|
Other prepaid expenses
|
|
|
624,319
|
|
|
|
106,521
|
|
|
|
(1
|
)
|
|
|
730,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,479,526
|
|
|
|
1,163,351
|
|
|
|
|
|
|
|
7,642,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
800,419
|
|
|
|
5,886
|
|
|
|
(1
|
)
|
|
|
806,305
|
|
Restricted cash
|
|
|
29,769
|
|
|
|
|
|
|
|
|
|
|
|
29,769
|
|
Other assets
|
|
|
166,667
|
|
|
|
|
|
|
|
|
|
|
|
166,667
|
|
Property and equipment, net
|
|
|
18,382,828
|
|
|
|
158,819
|
|
|
|
(1
|
)
|
|
|
18,541,647
|
|
Construction-in-progress
|
|
|
328,637
|
|
|
|
81,017
|
|
|
|
(1
|
)
|
|
|
409,654
|
|
Capitalized bond costs, net
|
|
|
802,424
|
|
|
|
|
|
|
|
|
|
|
|
802,424
|
|
Intangible assets, net
|
|
|
1,923,617
|
|
|
|
10,000,000
|
|
|
|
(1
|
)
|
|
|
11,923,617
|
|
Goodwill
|
|
|
|
|
|
|
12,370,000
|
|
|
|
(1
|
)
|
|
|
12,370,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,913,887
|
|
|
$
|
23,779,073
|
|
|
|
|
|
|
$
|
52,692,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND OWNERS EQUITY (DEFICIT)
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes payable current
|
|
$
|
1,812,764
|
|
|
$
|
184,351
|
|
|
|
(1
|
)
|
|
$
|
1,997,115
|
|
Accounts payable
|
|
|
1,150,770
|
|
|
|
1,353,304
|
|
|
|
(1
|
)
|
|
|
2,504,074
|
|
Accrued compensation, officers, directors and consultants
|
|
|
455,218
|
|
|
|
|
|
|
|
|
|
|
|
455,218
|
|
Accrued legal and other expenses
|
|
|
708,095
|
|
|
|
12,834
|
|
|
|
(1
|
)
|
|
|
720,929
|
|
Accrued interest
|
|
|
249,191
|
|
|
|
|
|
|
|
|
|
|
|
249,191
|
|
Deferred revenue
|
|
|
|
|
|
|
434,584
|
|
|
|
(1
|
)
|
|
|
434,584
|
|
Convertible notes payable, net of unamortized discount
|
|
|
286,450
|
|
|
|
|
|
|
|
|
|
|
|
286,450
|
|
Capital lease obligations current
|
|
|
12,069
|
|
|
|
|
|
|
|
|
|
|
|
12,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,674,557
|
|
|
|
1,985,073
|
|
|
|
|
|
|
|
6,659,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligation, net of current portion
|
|
|
25,654
|
|
|
|
|
|
|
|
|
|
|
|
25,654
|
|
Term notes payable, net of current portion
|
|
|
509,833
|
|
|
|
|
|
|
|
|
|
|
|
509,833
|
|
Derivative liabilities
|
|
|
2,261,897
|
|
|
|
|
|
|
|
|
|
|
|
2,261,897
|
|
Bonds payable
|
|
|
17,500,000
|
|
|
|
|
|
|
|
|
|
|
|
17,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,971,941
|
|
|
|
1,985,073
|
|
|
|
|
|
|
|
26,957,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OWNERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value, authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000 shares; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, authorized
75,000,000 shares
|
|
|
3,802
|
|
|
|
1,852
|
|
|
|
(1
|
)
|
|
|
5,654
|
|
Additional paid-in capital
|
|
|
60,209,902
|
|
|
|
21,792,148
|
|
|
|
(1
|
)
|
|
|
82,002,050
|
|
Accumulated deficit
|
|
|
(56,271,758
|
)
|
|
|
|
|
|
|
|
|
|
|
(56,271,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owners equity
|
|
|
3,941,946
|
|
|
|
21,794,000
|
|
|
|
|
|
|
|
25,735,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$
|
28,913,887
|
|
|
$
|
23,779,073
|
|
|
|
|
|
|
$
|
52,692,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma consolidated financial statements.
F-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
Converted Organics
|
|
|
Pro Forma
|
|
|
|
|
Pro Forma
|
|
|
|
Inc. and Subsidiaries
|
|
|
Adjustments
|
|
|
Reference
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
859,826
|
|
|
$
|
1,684,183
|
|
|
|
(2)
|
|
|
$
|
2,544,009
|
|
Cost of good sold
|
|
|
1,966,101
|
|
|
|
703,301
|
|
|
|
(2)
|
|
|
|
2,669,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(1,106,275
|
)
|
|
|
980,882
|
|
|
|
|
|
|
|
(125,393
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
4,089,501
|
|
|
|
436,998
|
|
|
|
(2)
|
|
|
|
4,526,499
|
|
Research and development
|
|
|
64,059
|
|
|
|
|
|
|
|
(2)
|
|
|
|
64,059
|
|
Depreciation expense
|
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
2,819
|
|
Amortization of capitalized costs
|
|
|
75,371
|
|
|
|
177,484
|
|
|
|
(2),(3)
|
|
|
|
252,855
|
|
Amortization of license
|
|
|
8,548
|
|
|
|
|
|
|
|
|
|
|
|
8,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,346,573
|
)
|
|
|
366,400
|
|
|
|
|
|
|
|
(4,980,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
281
|
|
Derivative gain/(loss)
|
|
|
(635,155
|
)
|
|
|
|
|
|
|
|
|
|
|
(635,155
|
)
|
Other income
|
|
|
|
|
|
|
17,190
|
|
|
|
(2)
|
|
|
|
17,190
|
|
Interest expense
|
|
|
(398,246
|
)
|
|
|
(3,905
|
)
|
|
|
(2)
|
|
|
|
(402,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,033,120
|
)
|
|
|
13,285
|
|
|
|
|
|
|
|
(1,019,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(6,379,693
|
)
|
|
|
379,685
|
|
|
|
|
|
|
|
(6,000,008
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,379,693
|
)
|
|
|
379,685
|
|
|
|
|
|
|
|
(6,000,008
|
)
|
Net income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
|
(117,507
|
)
|
|
|
(2)
|
|
|
|
(117,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Converted Organics Inc. before
other comprehensive income (loss)
|
|
|
(6,379,693
|
)
|
|
|
497,192
|
|
|
|
|
|
|
|
(5,882,501
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(41,766
|
)
|
|
|
(2)
|
|
|
|
(41,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(6,379,693
|
)
|
|
|
455,426
|
|
|
|
|
|
|
|
(5,924,267
|
)
|
Comprehensive income (loss) attributable to noncontrolling
interest
|
|
|
|
|
|
|
(6,264
|
)
|
|
|
(2)
|
|
|
|
(6,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Converted Organics
Inc.
|
|
$
|
(6,379,693
|
)
|
|
$
|
461,690
|
|
|
|
|
|
|
$
|
(5,918,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
(4)
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
37,864,169
|
|
|
|
|
|
|
|
(4)
|
|
|
|
56,389,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma consolidated financial statements.
F-32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
Converted Organics
|
|
|
Pro Forma
|
|
|
|
|
Pro Forma
|
|
|
|
Inc. and Subsidiaries
|
|
|
Adjustments
|
|
|
Reference
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
2,633,782
|
|
|
$
|
36,732
|
|
|
|
(2)
|
|
|
$
|
2,670,514
|
|
Cost of good sold
|
|
|
6,914,857
|
|
|
|
|
|
|
|
|
|
|
|
6,914,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(4,281,075
|
)
|
|
|
36,732
|
|
|
|
|
|
|
|
(4,244,343
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
10,049,830
|
|
|
|
1,291,586
|
|
|
|
(2)
|
|
|
|
11,341,416
|
|
Research and development
|
|
|
637,142
|
|
|
|
613
|
|
|
|
(2)
|
|
|
|
637,755
|
|
Depreciation expense
|
|
|
723,846
|
|
|
|
|
|
|
|
|
|
|
|
723,846
|
|
Amortization of capitalized costs
|
|
|
357,718
|
|
|
|
673,050
|
|
|
|
(2),(3)
|
|
|
|
1,030,768
|
|
Amortization of license
|
|
|
16,500
|
|
|
|
|
|
|
|
|
|
|
|
16,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,066,111
|
)
|
|
|
(1,928,517
|
)
|
|
|
|
|
|
|
(17,994,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
24,097
|
|
|
|
|
|
|
|
|
|
|
|
24,097
|
|
Loss on impairment of long-term assets
|
|
|
(3,928,129
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,928,129
|
)
|
Derivative gain/(loss)
|
|
|
5,766,035
|
|
|
|
|
|
|
|
|
|
|
|
5,766,035
|
|
Other income
|
|
|
68,995
|
|
|
|
55,114
|
|
|
|
(2)
|
|
|
|
124,109
|
|
Interest expense
|
|
|
(6,970,675
|
)
|
|
|
(9,218
|
)
|
|
|
(2)
|
|
|
|
(6,979,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,039,677
|
)
|
|
|
45,896
|
|
|
|
|
|
|
|
(4,993,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(21,105,788
|
)
|
|
|
(1,882,621
|
)
|
|
|
|
|
|
|
(22,988,409
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(21,105,788
|
)
|
|
|
(1,882,621
|
)
|
|
|
|
|
|
|
(22,988,409
|
)
|
Net income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
|
74,934
|
|
|
|
(2)
|
|
|
|
74,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Converted Organics Inc. before
other comprehensive income (loss)
|
|
|
(21,105,788
|
)
|
|
|
(1,957,555
|
)
|
|
|
|
|
|
|
(23,063,343
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
(57,491
|
)
|
|
|
(2)
|
|
|
|
(57,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(21,105,788
|
)
|
|
|
(2,015,046
|
)
|
|
|
|
|
|
|
(23,120,834
|
)
|
Comprehensive income (loss) attributable to noncontrolling
interest
|
|
|
|
|
|
|
(8,623
|
)
|
|
|
(2)
|
|
|
|
(8,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Converted Organics
Inc.
|
|
$
|
(21,105,788
|
)
|
|
$
|
(2,006,423
|
)
|
|
|
|
|
|
$
|
(23,112,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(1.08
|
)
|
|
|
|
|
|
|
(4)
|
|
|
$
|
(0.61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
19,569,853
|
|
|
|
|
|
|
|
(4)
|
|
|
|
38,114,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
pro forma consolidated financial statements.
F-33
CONVERTED
ORGANICS INC.
The following numbered notes are referenced on the Unaudited
Pro Forma Consolidated Balance Sheet and Statements of
Operations and Comprehensive Income (Loss).
|
|
(1) |
The Company purchased 100% of the membership interests in
TerraSphere Systems, LLC, for consideration and contingent
consideration with an estimated fair value of $21,794,000 all
consideration is to be paid in the Companys common stock.
|
The estimated purchase price has been allocated to the assets
and liabilities on a preliminary basis using estimated fair
value information currently available. The allocation of the
purchase price to the assets and liabilities will be finalized
within a year as the Company obtains more information regarding
asset valuations, liabilities assumed, contingent consideration
and revisions of preliminary estimates of fair value made as the
date of purchase. The preliminary purchase price allocation is
as follows:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
106,830
|
|
Accounts receivable
|
|
|
950,000
|
|
Other assets
|
|
|
112,407
|
|
Leasehold improvements
|
|
|
158,819
|
|
Construction-in-process
|
|
|
81,017
|
|
Goodwill
|
|
|
12,370,000
|
|
Patents and patent related costs
|
|
|
10,000,000
|
|
Assumption of liabilities
|
|
|
(1,985,073
|
)
|
|
|
|
|
|
Total allocation of purchase price(*)
|
|
$
|
21,794,000
|
|
|
|
|
|
|
|
|
|
|
|
The Company plans to amortize the leasehold improvements over
their estimated service lives or the remaining terms of the
related leases, whichever are shorter. Patents and patent
related costs will be amortized over the 15 year remaining
life of the patents. |
|
(*) |
|
The purchase price of $21,794,000 is an estimate based on the
assumptions listed in the Unaudited Pro Forma Condensed
Combined Financial Statements section of this document.
Actual results could vary significantly from this estimate. Any
adjustments within one year would adjust the purchase price.
Adjustments after one year of the acquisition date are
remeasured to fair value at each reporting date until the
contingency is resolved and the changes in fair value are
recognized in earnings in accordance with ASC 805
Business Combinations. |
|
(2) |
|
The operations of TerraSphere Systems, LLC are consolidated with
the operations of Converted Organics Inc. assuming that the
transaction was completed on January 1, 2009. |
|
(3) |
|
Amortization expense related to the fair value assigned to the
patent and patent related costs. |
|
(4) |
|
Earnings per share has been recalculated to reflect the number
of common stock shares issued in acquiring TerraSphere. |
F-34
Annex A
MEMBERSHIP INTEREST PURCHASE
AGREEMENT
by and among
CONVERTED ORGANICS
INC.
a Delaware corporation,
TERRASPHERE INC.
a Delaware corporation,
TERRASPHERE SYSTEMS
LLC
a Massachusetts limited liability company
and
The individuals set forth on Exhibit A
Dated: July 6, 2010
MEMBERSHIP
INTEREST PURCHASE AGREEMENT
THIS MEMBERSHIP INTEREST PURCHASE AGREEMENT (this
Agreement) is entered into on this
6th day of July, 2010, by and among CONVERTED ORGANICS
INC., a Delaware corporation (Parent),
TERRASPHERE INC., a Delaware corporation
(Buyer), TERRASPHERE SYSTEMS LLC, a
Massachusetts limited liability company (the
Company) and the individuals owners of the
Company set forth on Exhibit A hereto (each a
Seller and collectively, the
Sellers). For purposes of Articles II
and XII, the Sellers listed on Schedule A are
referred to as Controlling Sellers.
W I T
N E S S E T
H:
WHEREAS, Sellers collectively own one hundred percent
(100%) of the outstanding membership interests of the Company
(the Units);
WHEREAS, Buyer is a newly formed entity which is
wholly-owned by Parent;
WHEREAS, Buyer desires to purchase all of the Units from
Sellers, and Sellers and the Company desire to sell all of the
Units, all on the terms and subject to the conditions set forth
in this Agreement (the Purchase Transaction);
WHEREAS, Parent, Buyer and Company desire to adopt a plan
of reorganization within the meaning of Section 368(a) of
the Code, as set forth hereinafter, and intend that the Purchase
Transaction described hereinafter constitutes a B Reorganization
within the meaning of Section 368 (a)(1)(b) of the Code.
NOW, THEREFORE, in consideration of the foregoing and the
mutual promises and covenants hereinafter set forth, the parties
hereto, intending to be legally bound, hereby agree as follows:
Article I
THE
TRANSACTION
Section 1.1 The
Closing. Subject to the terms and conditions
of this Agreement, at the Closing (as hereinafter defined):
(a) The Sellers shall collectively convey, assign, transfer
and deliver to Buyer one hundred percent (100%) of the Units,
and Buyer shall purchase from Sellers, all of Sellers
right, title and interest in and to the Units, free and clear of
all Liens.
(b) The Units shall be made up of all of the Units owned by
each Seller.
(c) The purchase price for the Units (the Purchase
Price) shall be, at the option of each Seller, in the
form of either:
(i) on the Closing Date, such Sellers pro rata
portion of $21,000,000 worth of the common stock of Parent
(Parent Common Stock), valued at the price
which is the average closing price for Parent Common Stock over
the fifteen (15) Trading Day period preceding the date of
the execution of this Agreement (the Closing Price Per
Share) (the Parent Common Stock to be issued pursuant
to this Section 1.1(c)(i) are referred to as the
Option One Shares); or
(ii) such Sellers pro rata portion of Parent
Common Stock, valued at the Closing Price Per Share, in
accordance with the following schedule (the Parent Common Stock
to be issued pursuant to this Section 1.1(c)(ii), including
the Milestone Payments, are referred to as the Option
Two Shares):
(1) on the Closing Date, $12,000,000 of Parent Common Stock;
(2) $5,000,000 of Parent Common Stock (Milestone
One Payment), if, and only if, between the date hereof
and the earlier of the 90th day following the Closing Date
or the