##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended: March 31, 2008
 o
    
    Transition Report under Section 13 or 15(d) of the Securities Exchange Act of
1934.
 For the transition period from:  to
 Commission file number: 333-120908
 Converted Organics Inc.
  Delaware
    
    20-4075963(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 7A Commercial Wharf W, Boston, MA 02110
 (617) 624-0111
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ 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, 2008 (unaudited) and December 31, 2007 (audited)
    
    
    3Consolidated Statements of Operations, for the three month periods ended March 31, 2008 and
2007 and cumulative from inception (May 3, 2003) to March 31, 2008 (unaudited)
    
    
    4Consolidated Statements of Changes in Owners Equity (Deficiency)  Cumulative from
Inception (May 3, 2003) to March 31, 2008 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the three month periods ended March 31, 2008 and
2007 and cumulative from inception (May 3, 2003) to March 31, 2008 (unaudited)
    
    
    6Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATION
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
  -2-




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##### Table of Contents



Item 1. Financial Statements
 CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
 
 CONSOLIDATED BALANCE SHEETS
 March 31, 2008
    
    
    December 31, 2007(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETSCash
    
    $
    7,632,585
    
    
    $
    287,867Restricted cash
    
    
    1,184,445
    
    
    
    2,590,053Accounts receivable
    
    
    103,988
    
    
    
    Inventories
    
    
    16,462
    
    
    
    Prepaid rent
    
    
    326,352
    
    
    
    190,600Other prepaid expenses
    
    
    133,716
    
    
    
    40,282Interest receivable
    
    
    30,178
    
    
    
    55,450Total current assets
    
    
    9,427,726
    
    
    
    3,164,252Deposits
    
    
    571,338
    
    
    
    554,978Restricted cash
    
    
    10,702,479
    
    
    
    12,006,359Property and equipment, net
    
    
    2,997,999
    
    
    
    Construction in progress
    
    
    7,562,378
    
    
    
    4,947,067Capitalized bond costs, net
    
    
    897,761
    
    
    
    909,679Intangible assets, net
    
    
    1,081,625
    
    
    
    585,750Deferred financing and issuance costs, net
    
    
    280,792
    
    
    
    8,642Total assets
    
    $
    33,522,098
    
    
    $
    22,176,727LIABILITIES AND OWNERS EQUITYCURRENT LIABILITIESTerm notes
payable  current
    
    $
    375,000
    
    
    $
    375,000Accounts payable
    
    
    1,988,831
    
    
    
    898,270Accrued compensation, officers, directors and consultants
    
    
    319,014
    
    
    
    397,781Accrued legal and other expenses
    
    
    373,773
    
    
    
    199,261Accrued interest
    
    
    346,686
    
    
    
    630,890Note payable
    
    
    2,320,813
    
    
    
    Convertible
note payable  current
    
    
    309,849
    
    
    
    Promissory note
    
    
    500,000
    
    
    
    Mortgage payable
    
    
    254,290
    
    
    
    Other
    
    
    44,600
    
    
    
    Total current liabilities
    
    
    6,832,856
    
    
    
    2,501,202Term note payable
    
    
    89,170
    
    
    
    89,170Convertible note payable, net of current portion
    
    
    630,745
    
    
    
    Bonds payable
    
    
    17,500,000
    
    
    
    17,500,000Total liabilities
    
    
    25,052,771
    
    
    
    20,090,372COMMITMENTS
AND CONTINGENCIES (Note 10)
    
    
    
    
    
    
    OWNERS EQUITYPreferred stock, $.0001 par value, authorized
25,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.0001 par value, authorized
75,000,000 shares
    
    
    552
    
    
    
    423Additional paid-in capital
    
    
    21,214,816
    
    
    
    12,460,357Members equity
    
    
    28,549
    
    
    
    Deficit accumulated during the development stage
    
    
    (12,774,590
    )
    
    
    (10,374,425
    )Total owners equity
    
    
    8,469,327
    
    
    
    2,086,355Total liabilities and owners equity
    
    $
    33,522,098
    
    
    $
    22,176,727
 The accompanying notes are an integral part of these consolidated financial statements.
 -3-




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##### Table of Contents



CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Cumulativefrom inception(May 2, 2003)Three months ended
    
    
    throughMarch 31, 2008
    
    
    March 31, 2007
    
    
    March 31, 2008Revenues
    
    $
    260,043
    
    
    $
    
    
    
    $
    260,043Cost of good sold
    
    
    221,996
    
    
    
    
    
    
    
    221,996Gross profit
    
    
    38,047
    
    
    
    
    
    
    
    38,047Operating expensesGeneral and administrative expenses
    
    
    1,587,222
    
    
    
    694,095
    
    
    
    8,056,162Research and development
    
    
    127,847
    
    
    
    26,725
    
    
    
    2,451,660Amortization of license
    
    
    4,125
    
    
    
    4,125
    
    
    
    78,375Loss from operations
    
    
    (1,681,147
    )
    
    
    (724,945
    )
    
    
    (10,548,150
    )Other income/(expenses)Interest income
    
    
    128,820
    
    
    
    115,915
    
    
    
    953,286Depreciation expense
    
    
    (3,838
    )
    
    
    
    
    
    
    (3,838
    )Amortization of capitalized costs
    
    
    (86,249
    )
    
    
    (7,945
    )
    
    
    (234,428
    )Interest expense
    
    
    (753,167
    )
    
    
    (263,644
    )
    
    
    (2,936,876
    )(714,434
    )
    
    
    (155,674
    )
    
    
    (2,221,856
    )Loss before provision for income taxes
    
    
    (2,395,581
    )
    
    
    (880,619
    )
    
    
    (12,770,006
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (2,395,581
    )
    
    $
    (880,619
    )
    
    $
    (12,770,006
    )Net loss per share, basic and diluted
    
    
    (0.51
    )
    
    
    (0.37
    )Weighted average common shares outstanding
    
    
    4,677,664
    
    
    
    2,405,317
 The accompanying notes are an integral part of these consolidated financial statements.
 -4-




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##### Table of Contents



CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
 
 CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS EQUITY
 Years ended December 31, 2007 and 2006 and cumulative from inception (May 2, 2003) to March 31, 2008
 DeficitCommon Stock
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    TotalShares Issued and
    
    
    
    
    
    
    Additional
    
    
    Members
    
    
    During the
    
    
    Owners EquityOutstanding
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Equity
    
    
    Development Stage
    
    
    (Deficiency)Balance at inception (May 2, 2003)
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,344,700
    
    
    
    
    
    
    
    2,344,700Members distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,460
    )
    
    
    
    
    
    
    (7,460
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,563,652
    )
    
    
    (2,563,652
    )Balance, December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,337,240
    
    
    
    (2,563,652
    )
    
    
    (226,412
    )Recapitalization of members equity
    
    
    600,000
    
    
    
    60
    
    
    
    2,337,180
    
    
    
    (2,337,240
    )
    
    
    
    
    
    
    Issuance of common stock to founders
    
    
    733,333
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73Issuance of stock options
    
    
    10,702,479
    
    
    
    
    
    
    
    1,018,705
    
    
    
    
    
    
    
    
    
    
    
    1,018,705Bridge loan rights
    
    
    
    
    
    
    
    
    
    
    757,500
    
    
    
    
    
    
    
    
    
    
    
    757,500Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,726,761
    )
    
    
    (3,726,761
    )Balance, December 31, 2006
    
    
    1,333,333
    
    
    
    133
    
    
    
    4,113,385
    
    
    
    
    
    
    
    (6,290,413
    )
    
    
    (2,176,895
    )Issuance of common stock and warrants in connection with the
Companys initial public offering, net of
issuance costs of $1,736,715
    
    
    1,800,000
    
    
    
    180
    
    
    
    8,163,105
    
    
    
    
    
    
    
    
    
    
    
    8,163,285Common stock and warrants issued in
connection with bridge units
    
    
    293,629
    
    
    
    29
    
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    Common stock issued in connection with extension of bridge financing
    
    
    55,640
    
    
    
    6
    
    
    
    178,042
    
    
    
    
    
    
    
    
    
    
    
    178,048Issuance of stock options
    
    
    
    
    
    
    
    
    
    
    5,929
    
    
    
    
    
    
    
    
    
    
    
    5,929Stock dividends
    
    
    747,296
    
    
    
    75
    
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,084,012
    )
    
    
    (4,084,012
    )Balance, December 31, 2007
    
    
    4,229,898
    
    
    $
    423
    
    
    $
    12,460,357
    
    
    $
    
    
    
    $
    (10,374,425
    )
    
    $
    2,086,355Consolidation of variable interest entity (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,965
    
    
    
    
    
    
    
    23,965Common stock issued upon exercise of warrants (Unaudited)
    
    
    894,873
    
    
    
    89
    
    
    
    5,994,863
    
    
    
    
    
    
    
    
    
    
    
    5,994,952Common stock issued upon exercise of options (Unaudited)
    
    
    140,000
    
    
    
    14
    
    
    
    524,896
    
    
    
    
    
    
    
    
    
    
    
    525,000Warrants issued in connection with financing (Unaudited)
    
    
    
    
    
    
    
    
    
    
    2,227,500
    
    
    
    
    
    
    
    
    
    
    
    2,227,500Beneficial
conversion feature  convertible note (Unaudited)
    
    
    
    
    
    
    
    
    
    
    7,136
    
    
    
    
    
    
    
    
    
    
    
    7,136Stock dividend (Unaudited)
    
    
    263,239
    
    
    
    26
    
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    Net income
(loss) (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,584
    
    
    
    (2,400,165
    )
    
    
    (2,395,581
    )Balance, March 31, 2008
    
    
    5,528,010
    
    
    $
    552
    
    
    $
    21,214,816
    
    
    $
    28,549
    
    
    $
    (12,774,590
    )
    
    $
    8,469,327
 The accompanying notes are an integral part of these consolidated financial statements.
 -5-




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##### Table of Contents



CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Cumulativefrom inception(May 2, 2003)Three Months Ended
    
    
    throughMarch 31, 2008
    
    
    March 31, 2007
    
    
    March 31, 2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (2,395,581
    )
    
    $
    (880,619
    )
    
    $
    (12,770,006
    )Adjustments to reconcile net loss to net cash
used in operating activities:Consolidation of variable interest entity
    
    
    6,164
    
    
    
    
    
    
    
    6,164Amortization of intangible asset  license
    
    
    4,125
    
    
    
    4,125
    
    
    
    78,375Amortization of capitalized bond costs
    
    
    11,918
    
    
    
    7,945
    
    
    
    55,614Amortization of deferred financing fees
    
    
    72,850
    
    
    
    
    
    
    
    177,333Amortization of discount on bridge loan
    
    
    
    
    
    
    
    
    
    
    757,500Depreciation
and amortization of fixed assets
    
    
    38,379
    
    
    
    
    
    
    
    38,379Amortization
of beneficial conversion feature
    
    
    2,658
    
    
    
    
    
    
    
    2,658Amortization of discounts on private financing
    
    
    498,313
    
    
    
    
    
    
    
    498,313Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    1,024,634Compensation expense pursuant to common stock
issued to founders at incorporation
    
    
    
    
    
    
    
    
    
    
    73Stock issued for extension of bridge financing
    
    
    
    
    
    
    
    
    
    
    178,048Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (75,286
    )
    
    
    
    
    
    
    (75,286
    )Inventories
    
    
    (5,348
    )
    
    
    
    
    
    
    (5,348
    )Prepaid expenses and other current assets
    
    
    (219,186
    )
    
    
    (17,006
    )
    
    
    (570,518
    )Other assets
    
    
    5,272
    
    
    
    
    
    
    
    5,272Deposits
    
    
    (25,360
    )
    
    
    (350,000
    )
    
    
    (375,360
    )Increase (decrease) in:Accounts payable and other accrued expenses
    
    
    1,040,160
    
    
    
    (557,466
    )
    
    
    1,719,233Accrued compensation  officers, directors and consultants
    
    
    (78,767
    )
    
    
    
    
    
    
    319,014Accrued interest
    
    
    (284,204
    )
    
    
    259,452
    
    
    
    346,686Net cash used
in operating activities
    
    
    (1,403,893
    )
    
    
    (1,533,569
    )
    
    
    (8,589,222
    )CASH FLOWS FROM INVESTING ACTIVITIESRelease of restricted cash
    
    
    2,709,488
    
    
    
    
    
    
    
    8,759,687Cash paid
for acquisitions
    
    
    (1,500,000
    )
    
    
    
    
    
    
    (1,500,000
    )Purchase of fixed assets
    
    
    (25,590
    )
    
    
    
    
    
    
    (25,590
    )Capitalized interest
    
    
    (184,481
    )
    
    
    
    
    
    
    (588,053
    )Construction costs
    
    
    (2,430,830
    )
    
    
    (254,875
    )
    
    
    (6,974,325
    )Restrictions of cash
    
    
    
    
    
    
    (20,646,611
    )
    
    
    (20,646,611
    )Purchase of license
    
    
    
    
    
    
    
    
    
    
    (660,000
    )Deposit on license
    
    
    
    
    
    
    
    
    
    
    (139,978
    )Net cash used
in investing activities
    
    
    (1,431,413
    )
    
    
    (20,901,486
    )
    
    
    (21,774,870
    )CASH FLOWS FROM FINANCING ACTIVITIESNet proceeds from bond financing
    
    
    
    
    
    
    16,546,625
    
    
    
    16,546,625Net proceeds from initial public offering of stock
    
    
    
    
    
    
    8,909,784
    
    
    
    8,859,784Net proceeds from exercise of warrants
    
    
    5,994,952
    
    
    
    
    
    
    
    5,994,952Net proceeds from exercise of options
    
    
    525,000
    
    
    
    
    
    
    
    525,000Proceeds from term notes
    
    
    
    
    
    
    
    
    
    
    589,170Members contributions
    
    
    
    
    
    
    
    
    
    
    2,344,700Proceeds from demand notes
    
    
    
    
    
    
    
    
    
    
    250,000Proceeds from bridge loan, net
    
    
    
    
    
    
    
    
    
    
    1,464,250Proceeds from private financing, net of original
issue discount and financing costs
    
    
    3,715,000
    
    
    
    
    
    
    
    3,715,000Members distributions
    
    
    
    
    
    
    
    
    
    
    (7,460
    )Payments made for deferred issuance costs
    
    
    
    
    
    
    (15,541
    )
    
    
    (340,416
    )Repayment of term notes
    
    
    
    
    
    
    (125,000
    )
    
    
    (125,000
    )Repayment of demand notes
    
    
    
    
    
    
    (100,000
    )
    
    
    (250,000
    )Repayment of bridge loan
    
    
    
    
    
    
    
    
    
    
    (1,515,000
    )Repayment of term notes issued for acquisition
    
    
    (54,928
    )
    
    
    
    
    
    
    (54,928
    )Net cash provided
by financing activities
    
    
    10,180,024
    
    
    
    25,215,868
    
    
    
    37,996,677NET INCREASE IN CASH
    
    
    7,344,718
    
    
    
    2,780,813
    
    
    
    7,632,585CASH, beginning of period
    
    
    287,867
    
    
    
    66,853
    
    
    
    CASH, end of period
    
    $
    7,632,585
    
    
    $
    2,847,666
    
    
    $
    7,632,585Supplemental cash flow information:Cash paid during the period in:Interest
    
    $
    714,077
    
    
    $
    4,192
    
    
    $
    837,193Non-cash financing activities:Financing costs paid from proceeds of private financing
    
    $
    335,000
    
    
    $
    
    
    
    $
    440,098Discount for the bridge equity units
    
    
    
    
    
    
    
    
    
    
    757,500Issuance costs paid from proceeds of initial public offering
    
    
    
    
    
    
    990,216
    
    
    
    Issuance costs paid from proceeds of bond financing
    
    
    
    
    
    
    953,375
    
    
    
    Beneficial
conversion discount on convertible note
    
    
    7,136
    
    
    
    
    
    
    
    7,136Warrants
issued in connection with financing
    
    
    2,227,500
    
    
    
    
    
    
    
    2,227,500
 The accompanying notes are an integral part of these consolidated financial statements.
 -6-




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##### Table of Contents



CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION
   NOTE 2  SIGNIFICANT ACCOUNTING POLICIES
 NATURE OF OPERATIONS
    CONSOLIDATION
  -7-




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##### Table of Contents



CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 VARIABLE INTEREST ENTITY
  DEVELOPMENT STAGE COMPANY
  USE OF ESTIMATES
  CASH AND CASH EQUIVALENTS
  RESTRICTED CASH
  ACCOUNTS RECEIVABLE
  -8-




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##### Table of Contents



CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 INVENTORIES
  PREPAID RENT
  DEPOSITS
  PROPERTY AND EQUIPMENT
  CONSTRUCTION IN PROGRESS
  CAPITALIZED BOND COSTS
  DEFERRED FINANCING AND ISSUANCE COSTS
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
   INTANGIBLE ASSETS
    REVENUE RECOGNITION
  
    
    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.
  RESEARCH AND DEVELOPMENT COSTS
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 SHARE BASED COMPENSATION
  INCOME TAXES
 Accounting for Income
Taxes
 RECENT ACCOUNTING PRONOUNCEMENTS
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 EARNINGS (LOSS) PER SHARE
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 RECLASSIFICATIONS
  NOTE 3  ACQUISITIONS
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  ACQUISITIONS  CONTINUED
   Inventories  United Organic Products, LLC
    
    $
    11,114Accounts receivable  United Organic Products, LLC
    
    
    28,702Intellectual property  Waste Recovery Industries, LLC
    
    
    500,000Building  United Organic Products, LLC
    
    
    668,325Equipment and machinery  United Organic Products, LLC
    
    
    2,016,772Assumption of liabilities  United Organic Products, LLC
    
    
    (224,913
    )Total allocation of purchase price
    
    $
    3,000,000
   2008
    
    2007Revenues (in thousands)
    
    $
    285
    
    
    $
    356Net loss (in thousands)
    
    
    (2,424
    )
    
    
    (1,134
    )Net loss per share  basic and diluted
    
    
    (.52
    )
    
    
    (.33
    )Current assets (in thousands)
    
    
    9,428
    
    
    
    5,252Total assets (in thousands)
    
    
    33,522
    
    
    
    31,968Current liabilities (in thousands)
    
    
    (6,832
    )
    
    
    (7,077
    )Total liabilities (in thousands)
    
    
    (25,053
    )
    
    
    (24,577
    )Total equity (deficit) (in thousands)
    
    
    8,469
    
    
    
    7,391
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
 NOTE 4  FIXED ASSETS
  Land and improvements
    
    $
    325,691Building and improvements
    
    
    668,325Machinery and equipment
    
    
    1,993,554Vehicles
    
    
    34,000Office equipment and furniture
    
    
    14,8083,036,378Less: Accumulated depreciation and amortization
    
    
    (38,379
    )Total fixed assets
    
    $
    2,997,999
 NOTE 5  DEBT
 TERM NOTES
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 5  DEBT  CONTINUED
  2008
    
    
    2007Term note dated August 27, 2004
    
    $
    250,000
    
    
    $
    250,000Term note dated September 6, 2005
    
    
    125,000
    
    
    
    125,000Term note dated April 30, 2007
    
    
    89,170
    
    
    
    89,170464,170
    
    
    
    464,170Less: current portion
    
    
    (375,000
    )
    
    
    (375,000
    )$
    89,170
    
    
    $
    89,170
  BOND FINANCING
  CONVERTIBLE NOTE PAYABLE
  PROMISSORY NOTE
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 5  DEBT  CONTINUED
 MORTGAGE NOTE PAYABLE
  PRIVATE FINANCING
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 5  DEBT  CONTINUED
  NOTE 6  CAPITALIZATION OF INTEREST COSTS
  NOTE 7  OWNERS EQUITY
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 7  OWNERS EQUITY  CONTINUED
  WARRANT EXERCISE
  NOTE 8  STOCK OPTION PLAN
     2008Weighted AverageShares
    
    
    Price per ShareOutstanding at December 31, 2007
    
    
    653,000
    
    
    $
    3.75Granted
    
    
    -0-
    
    
    
    -0-Exercised
    
    
    (140,000
    )
    
    
    3.75Canceled
    
    
    -0-
    
    
    
    -0-Outstanding and exercisable at March 31, 2008
    
    
    513,000
    
    
    $
    3.75
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 9  RELATED PARTY TRANSACTIONS
 ACCRUED COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS
  NOTES PAYABLE
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE
10  COMMITMENTS AND CONTINGENCIES
  For years ended December 31,2008
    
    $
    934,8202009
    
    
    934,8202010
    
    
    934,8202011
    
    
    946,2002012
    
    
    959,1002013 and thereafter
    
    
    8,378,022$
    13,087,782
 REGISTRATION
RIGHTS AGREEMENT
   LEGAL PROCEEDINGS
  NOTE 11  SUBSEQUENT EVENTS
 ISSUANCE OF NOTES
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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 12   MANAGEMENTS PLAN OF OPERATION
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
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Construction and Start-up Period
    Full-scale Operations
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Pro Forma Financial Information
   2008
    
    2007Revenues (in thousands)
    
    $
    285
    
    
    $
    356Net loss (in thousands)
    
    
    (2,424
    )
    
    
    (1,134
    )Net loss per share  basic and diluted
    
    
    (.52
    )
    
    
    (.33
    )Current assets (in thousands)
    
    
    9,428
    
    
    
    5,252Total assets (in thousands)
    
    
    33,522
    
    
    
    31,968Current liabilities (in thousands)
    
    
    (6,832
    )
    
    
    (7,077
    )Total liabilities (in thousands)
    
    
    (25,053
    )
    
    
    (24,577
    )Total equity (in thousands)
    
    $
    8,469
    
    
    $
    7,391
 Future Development
   -27-




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Trends and Uncertainties Affecting our Operations
  Liquidity and Capital Resources
   -28-




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-29-




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Results of Operations
      -30-




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Off-Balance Sheet Transactions
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 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
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SIGNATURES
  Converted Organics Inc.Date: May 15, 2008
    
    /s/ Edward J. GildeaEdward J. GildeaPresident and Chief Executive OfficerDate: May 15, 2008
    
    /s/ David R. AllenDavid R. AllenChief Financial Officer and ExecutiveVice President of AdministrationDate: May 15, 2008
    
    /s/ Ellen P. GeoffreyEllen P. GeoffreyVice President of Finance &
Accounting
 -33-