##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2010
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number:001-33304
 Converted Organics Inc.
  Delaware
    
    20-4075963(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 137A Lewis Wharf, Boston, MA 02110
 (617) 624-0111
  þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009 (audited)
    
    
    3Consolidated Statements of Operations for the three month periods ended March 31, 2010 and 2009 (unaudited)
    
    
    4Consolidated Statement of Changes in Owners Equity (Deficit) for the three month period ended March 31,
2010 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the three month periods ended March 31, 2010 and 2009 (unaudited)
    
    
    6Notes to Consolidated Interim Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4(T). Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. [Removed and Reserved]
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



Item 1. Financial Statements
 CONVERTED ORGANICS INC.
 
 CONSOLIDATED BALANCE SHEETS
 March 31, 2010
    
    
    December 31, 2009(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETSCash
    
    $
    4,113,359
    
    
    $
    10,708,807Restricted cash
    
    
    233,316
    
    
    
    583,393Accounts receivable, net
    
    
    495,450
    
    
    
    140,657Inventories
    
    
    371,301
    
    
    
    448,748Prepaid rent
    
    
    641,781
    
    
    
    600,684Other prepaid expenses
    
    
    624,319
    
    
    
    102,442Total current assets
    
    
    6,479,526
    
    
    
    12,584,731Deposits
    
    
    800,419
    
    
    
    780,686Restricted cash
    
    
    29,769
    
    
    
    29,769Other assets
    
    
    166,667
    
    
    
    Property and equipment, net
    
    
    18,382,828
    
    
    
    18,626,910Construction-in-progress
    
    
    328,637
    
    
    
    311,015Capitalized bond costs, net
    
    
    802,424
    
    
    
    814,341Intangible assets, net
    
    
    1,923,617
    
    
    
    1,995,619Total assets
    
    $
    28,913,887
    
    
    $
    35,143,071LIABILITIES AND OWNERS EQUITY (DEFICIT)CURRENT LIABILITIESTerm notes payable  current
    
    $
    1,812,764
    
    
    $
    2,274,413Accounts payable
    
    
    1,150,770
    
    
    
    1,789,332Accrued compensation, officers, directors and consultants
    
    
    455,218
    
    
    
    769,056Accrued legal and other expenses
    
    
    708,095
    
    
    
    406,403Accrued interest
    
    
    249,191
    
    
    
    618,526Convertible note payable
    
    
    286,450
    
    
    
    355,164Capital lease obligations  current
    
    
    12,069
    
    
    
    12,833Total current liabilities
    
    
    4,674,557
    
    
    
    6,225,727Capital lease obligation, net of current portion
    
    
    25,654
    
    
    
    27,742Term notes payable, net of current portion
    
    
    509,833
    
    
    
    973,339Derivative liabilities
    
    
    2,261,897
    
    
    
    1,626,742Convertible note payable, net of current portion
    
    
    
    
    
    
    17,767Bonds payable
    
    
    17,500,000
    
    
    
    17,500,000Total liabilities
    
    
    24,971,941
    
    
    
    26,371,317COMMITMENTS 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 at March 31, 2010 and December 31, 2009
    
    
    3,802
    
    
    
    3,777Additional paid-in capital
    
    
    60,209,902
    
    
    
    58,660,042Accumulated deficit
    
    
    (56,271,758
    )
    
    
    (49,892,065
    )Total owners equity
    
    
    3,941,946
    
    
    
    8,771,754Total liabilities and owners equity
    
    $
    28,913,887
    
    
    $
    35,143,071
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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CONVERTED ORGANICS INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three month periods endedMarch 31, 2010
    
    
    March 31, 2009Revenues
    
    $
    859,826
    
    
    $
    491,839Cost of goods sold
    
    
    1,966,101
    
    
    
    1,644,190Gross loss
    
    
    (1,106,275
    )
    
    
    (1,152,351
    )Operating expensesGeneral and administrative expenses
    
    
    4,089,501
    
    
    
    1,990,129Research and development
    
    
    64,059
    
    
    
    167,384Depreciation expense
    
    
    2,819
    
    
    
    3,069Amortization of capitalized costs
    
    
    75,371
    
    
    
    101,291Amortization of license
    
    
    8,548
    
    
    
    4,125Loss from operations
    
    
    (5,346,573
    )
    
    
    (3,418,349
    )Other income/(expenses)Interest income
    
    
    281
    
    
    
    10,295Derivative gain/(loss)
    
    
    (635,155
    )
    
    
    1,411,985Interest expense
    
    
    (398,246
    )
    
    
    (1,906,752
    )(1,033,120
    )
    
    
    (484,472
    )Loss before provision for income taxes
    
    
    (6,379,693
    )
    
    
    (3,902,821
    )Provision for income taxes
    
    
    
    
    
    
    Net loss
    
    $
    (6,379,693
    )
    
    $
    (3,902,821
    )Net loss per share, basic and diluted
    
    $
    (0.17
    )
    
    $
    (0.49
    )Weighted average common shares outstanding
    
    
    37,864,169
    
    
    
    7,990,575
 The accompanying notes are an integral part of these consolidated financial statements.
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CONVERTED ORGANICS INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN OWNERS EQUITY (DEFICIT)
 FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2010
 Common Stock
    
    
    
    
    
    
    
    
    
    
    TotalShares Issued and
    
    
    
    
    
    
    Additional
    
    
    Accumulated
    
    
    Owners EquityOutstanding
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Deficit
    
    
    (Deficit)Balance, December 31, 2009
    
    
    37,774,208
    
    
    $
    3,777
    
    
    $
    58,660,042
    
    
    $
    (49,892,065
    )
    
    $
    8,771,754Stock options
    
    
    
    
    
    
    
    
    
    
    1,292,492
    
    
    
    
    
    
    
    1,292,492Common stock issued upon
conversion of
convertible notes payable
and accrued interest
    
    
    81,500
    
    
    
    8
    
    
    
    97,335
    
    
    
    
    
    
    
    97,343Common stock issued as
compensation
    
    
    165,000
    
    
    
    17
    
    
    
    160,033
    
    
    
    
    
    
    
    160,050Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,379,693
    )
    
    
    (6,379,693
    )Balance, March 31, 2010
    
    
    38,020,708
    
    
    $
    3,802
    
    
    $
    60,209,902
    
    
    $
    (56,271,758
    )
    
    $
    3,941,946
 The accompanying notes are an integral part of these consolidated financial statements.
 5




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CONVERTED ORGANICS INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three month periods endedMarch 31, 2010
    
    
    March 31, 2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (6,379,693
    )
    
    $
    (3,902,821
    )Adjustments to reconcile net loss to net cash
used in operating activities:Amortization of capitalized bond costs
    
    
    11,917
    
    
    
    11,917Amortization of deferred financing fees
    
    
    
    
    
    
    22,042Amortization of intangible assets
    
    
    72,002
    
    
    
    220,873Depreciation of fixed assets
    
    
    462,358
    
    
    
    498,566Amortization of discounts attributable to warrants on private financing
    
    
    
    
    
    
    230,492Common stock issued for extension of convertible note payable
    
    
    
    
    
    
    562,000Common stock issued as compensation
    
    
    160,050
    
    
    
    120,313Stock option compensation expense
    
    
    1,292,492
    
    
    
    Warrants issued in connection with private financing and equity transactions
    
    
    
    
    
    
    662,479Derivative loss (gain)
    
    
    635,155
    
    
    
    (1,411,985
    )Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (354,793
    )
    
    
    (166,848
    )Inventory
    
    
    77,447
    
    
    
    (125,794
    )Prepaid expenses and other current assets
    
    
    (562,974
    )
    
    
    (174,877
    )Other assets
    
    
    
    
    
    
    3,000Deposits
    
    
    (19,733
    )
    
    
    602Increase (decrease) in:Accounts payable and other accrued expenses
    
    
    (336,870
    )
    
    
    1,709,462Accrued compensation  officers, directors and consultants
    
    
    (313,838
    )
    
    
    (56,092
    )Accrued interest
    
    
    (358,473
    )
    
    
    (281,337
    )Net cash used in operating activities
    
    
    (5,614,953
    )
    
    
    (2,078,008
    )CASH FLOWS FROM INVESTING ACTIVITIESOther assets
    
    
    (166,667
    )
    
    
    Release of restricted cash
    
    
    350,077
    
    
    
    1,708,104Purchase of fixed assets
    
    
    (218,276
    )
    
    
    (1,928,746
    )Construction costs
    
    
    (17,622
    )
    
    
    Net cash used in investing activities
    
    
    (52,488
    )
    
    
    (220,642
    )CASH FLOWS FROM FINANCING ACTIVITIESRepayment of term notes
    
    
    (925,155
    )
    
    
    Repayment of capital lease obligations
    
    
    (2,852
    )
    
    
    (22,516
    )Members contributions
    
    
    
    
    
    
    230,983Members distributions
    
    
    
    
    
    
    (201,630
    )Repayment of mortgage payable
    
    
    
    
    
    
    (943
    )Net cash provided by (used in) financing activities
    
    
    (928,007
    )
    
    
    5,894NET DECREASE IN CASH
    
    
    (6,595,448
    )
    
    
    (2,292,756
    )Cash, beginning of period
    
    
    10,708,807
    
    
    
    3,357,940Cash, end of period
    
    $
    4,113,359
    
    
    $
    1,065,184Supplemental cash flow information:Cash paid during the period in:Interest
    
    $
    756,719
    
    
    $
    1,587,253Non-cash financing activities:Equipment acquired through assumption of capital lease
    
    $
    
    
    
    $
    52,979Equipment acquired through assumption of term note
    
    
    
    
    
    
    118,250Common stock issued upon conversion of convertible notes payable and accrued interest
    
    
    97,343
    
    
    
    6,323,095Fair value of derivatives issued
    
    
    
    
    
    
    3,827,686Discount on warrants issued in connection with financings
    
    
    
    
    
    
    2,870,313Members contribution of convertible note
    
    
    
    
    
    
    684,668
 The
accompanying notes are an integral part of these consolidated
financial statements.
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##### Table of Contents



CONVERTED ORGANICS INC.
 
 NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 (UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION AND NATURE OF OPERATIONS
   NATURE OF OPERATIONS
       7




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
 CONSOLIDATION
   USE OF ESTIMATES
  RESTRICTED CASH
  ACCOUNTS RECEIVABLE
  INVENTORIES
  PREPAID RENT
  DEFERRED FINANCING COSTS
  8




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 INTANGIBLE ASSETS  LICENSE AND OTHER INTANGIBLES
  LONG-LIVED ASSETS
  PROPERTY AND EQUIPMENT
  CAPITALIZED BOND COSTS
  DERIVATIVE INSTRUMENTS
  REVENUE RECOGNITION
  
 
 
 
  9




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 SHARE BASED COMPENSATION
  SHIPPING AND HANDLING COSTS
  FAIR VALUE MEASUREMENTS
    EARNINGS (LOSS) PER SHARE
  SEGMENT REPORTING
  NEWLY ADOPTED ACCOUNTING STANDARDS
  10




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  FAIR VALUE MEASUREMENTS
  BalanceObservable Inputs
    
    
    March 31, 2010
    
    
    December 31, 2009Derivative liabilities
    
    Level 3
    
    $
    (2,261,897
    )
    
    $
    (1,626,742
    )
  Balance as of December 31, 2009
    
    $
    (1,626,742
    )Net losses
    
    
    (635,155
    )Balance as of March 31, 2010
    
    $
    (2,261,897
    )
  NOTE 4  INVENTORIES
  2010
    
    
    2009Finished goods
    
    $
    259,681
    
    
    $
    252,860Raw materials
    
    
    76,952
    
    
    
    151,701Packaging materials
    
    
    34,668
    
    
    
    44,187Total inventories
    
    $
    371,301
    
    
    $
    448,748
 NOTE 5  DEBT
 TERM NOTES
     11




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 5  DEBT  Continued
 BOND FINANCING
  CONVERTIBLE NOTE PAYABLE
  NOTE 6  DERIVATIVE INSTRUMENTS
   12




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 7  OWNERS EQUITY (DEFICIT)
   WARRANTS
        13




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 7  OWNERS EQUITY (DEFICIT)  Continued
 WARRANTS  Continued
   Class B
    
    
    Class C
    
    
    Class D
    
    
    Class E
    
    
    Class F
    
    
    Class G
    
    
    Class HWarrants
    
    
    Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    Warrants
    
    
    WarrantsExercise
    
    
    Exercise
    
    
    Exercise
    
    
    Exercise
    
    
    Exercise
    
    
    Exercise
    
    
    ExercisePrice $11.00
    
    
    Price $1.00
    
    
    Price $1.02
    
    
    Price $1.63
    
    
    Price $1.25
    
    
    Price $1.25
    
    
    Price $1.30Outstanding at
December 31, 2009
    
    
    4,932,438
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    1,500,000
    
    
    
    585,000
    
    
    
    2,500,000
    
    
    
    17,250,000Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
March 31, 2010
    
    
    4,932,438
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    1,500,000
    
    
    
    585,000
    
    
    
    2,500,000
    
    
    
    17,250,000
 NOTE 8  STOCK OPTION PLAN
  OptionsOutstanding
    
    
    Price Per ShareOutstanding at December 31, 2009
    
    
    1,230,295
    
    
    $
    3.54Granted
    
    
    2,508,500
    
    
    
    .68Exercised
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    Outstanding at March 31, 2010
    
    
    3,738,795
    
    
    $
    1.63Exercisable at March 31, 2010
    
    
    3,688,795
    
    
    $
    1.63
  NOTE 9  RELATED PARTY TRANSACTIONS
 ACCRUED COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS
  CONVERTED ORGANICS OF RHODE ISLAND, LLC
  14




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 10 COMMITMENTS AND CONTINGENCIES
 LEASE COMMITMENT
  For years ended December 31,2010 (April 1, 2010 through December 31, 2010)
    
    $
    957,2842011
    
    
    1,291,1822012
    
    
    1,297,8452013
    
    
    1,202,2812014
    
    
    1,214,4792015 and thereafter
    
    
    8,359,440$
    14,322,511
 LOAN COMMITMENT
  PURCHASE COMMITMENT
  LEGAL PROCEEDINGS
   15




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 10 COMMITMENTS AND CONTINGENCIES  CONTINUED
 LEGAL PROCEEDINGS - Continued
   NOTE 11  SUBSEQUENT EVENTS
    16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
  Woodbridge Facility
   17




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UOP Acquisition; WRI Acquisition; Gonzales Facility
    18




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Converted Organics of Mississippi, LLC
  Industrial Wastewater Resources Division
  19




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Recent Financing Activities
  Future Development
    Trends and Uncertainties Affecting our Operations
  Liquidity and Capital Resources
  20




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##### Table of Contents



$
    995,000
    
    
    to fund future revenue generating activities, including the purchase of chicken litter-based fertilizer product
($560,000), a deposit for a license to treat Industrial Wastewater ($210,000) and to fund capital equipment
purchases ($225,000).$
    925,000
    
    
    to repay debt principal on notes owed to construction vendors for our New Jersey Facility.$
    1,300,000
    
    
    to reduce accounts payable and accruals at December 31, 2009.$
    3,400,000
    
    
    to fund ongoing operations during the first quarter of 2010, including $600,000 of marketing costs to implement a
formal marketing program.
     21




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Results of Operations
           22




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##### Table of Contents



Off-Balance Sheet Transactions
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4 (T). Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   23




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information.
  
 Item 6. Exhibits
 Exhibit No.
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to Section 90632.2
    
    Certification of Chief Financial Officer pursuant to Section 906
 24




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SIGNATURES
  Converted Organics Inc.Date: May 14, 2010
    /s/ Edward J. GildeaEdward J. GildeaPresident and Chief Executive OfficerDate: May 14, 2010
    /s/ David R. AllenDavid R. AllenChief Financial Officer and Executive Vice President of
AdministrationDate: May 14, 2010
    /s/ Ellen P. ONeilEllen P. ONeilVice President of Finance & Accounting 25