Case Study: Converted Organics

Business Description

Converted Organics produces organic fertilizer and agricultural supplements using a proprietary process that rapidly converts biodegradable food waste into soil enriching material. Headquartered in Boston, the company has production facilities in New Jersey and California.

Situation

Chardan was first introduced to Converted Organics in December of 2008. Facing insufficient capital and the rapidly approaching due date of a $4.5 million convertible debt payment, the company was in financial distress.

While it faced significant challenges, Converted Organics also possessed a number of key strengths. The company’s business model was well supported by the underlying macro trend toward social responsibility and it had successfully forged relationships with high profile clients, including Whole Foods and Home Depot. Additionally, despite a low stock price and lack of name recognition, the company’s management had been able to consistently generate liquidity for its investor base.

Chardan agreed to partner with Converted Organics and, over the course of 17 months, proceeded to repair its capital structure and execute five different financing solutions.

3/2009 Restructuring: $6.5 million

Chardan negotiated with Converted Organics’ lenders to exchange $6.5 million in convertible debt for shares of common stock, which we then helped sell in the marketplace. The solution enabled the company to avoid default and reduce its outstanding debt, while allowing the lenders to recover their principal.

5/2009 Bridge: $5.43 million, Warrant Exchange: $2.1 million, 7/2009 Registered Direct: $2 million

Having significantly reduced its debt, the company was better positioned to pursue equity capital. Given the NASDAQ’s restrictions on the sale of the company’s stock, we chose to pursue a registered direct offering, in the form of common stock plus warrants. Immediately after filing the registration, we arranged both a bridge loan and warrant exchange to provide the company with the capital to continue operations until the offering was complete. The company used the proceeds from the sale of the common stock to pay back the bridge loan and kept the remaining capital.

9/2009 Convertible Debenture: $1.4 million, 10/2009 Secondary Offering: $18.3 million

A few months later, the company returned, seeking an additional $18 million – an ambitious goal for a relatively small company. Based on its size, we felt a secondary offering was the only viable solution. We structured the offering as units consisting of one share of common stock and one warrant. After filing registration, we arranged a convertible debenture to provide the capital to continue operations until the secondary offering was completed.

Well received from the outset, the secondary offering raised gross proceeds of approximately $18.3 million. The company used the funds to pay off the May and September 2009 bridge financing and convertible debenture and kept the remaining capital.

4/2010 Registered Direct: $2.54 million

In 2010 Converted Organics was looking to expand production and fund further development. We structured a registered direct offering of common stock and warrants that resulted in gross proceeds of approximately $2.54 million.

Outcome

Since Chardan’s initial engagement in 2008, we have executed a debt restructuring, two bridge financings, and four equity financings on behalf of Converted Organics, and continue to serve in an advisory capacity. Our deep understanding of the company and close relationship with its management team has enabled us to clearly articulate its value to investors. Additionally, our sense of the market has facilitated accurate pricing, while our relationships with the applicable investor base have allowed us to quickly arrive at pricing terms. The company continues to perform well and provide investors with strong returns.