##### 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 September 30, 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 StatementsConsolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009
    
    
    3Consolidated Statements of Operations for the three and nine month periods ended September 30, 2010 and 2009 (unaudited)
    
    
    4Consolidated Statement of Changes in Shareholders Equity (Deficit) for the nine month period ended September 30, 2010 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the nine month periods ended September 30, 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
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATION
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. [Removed and Reserved]
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  2




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##### Table of Contents



Item 1. Financial Statements
 CONVERTED ORGANICS INC.
 
 CONSOLIDATED BALANCE SHEETS
 September 30, 2010(Unaudited)
    
    
    December 31, 2009ASSETSCURRENT ASSETSCash
    
    $
    483,068
    
    
    $
    10,708,807Restricted cash
    
    
    613,295
    
    
    
    613,162Accounts receivable, net
    
    
    414,824
    
    
    
    80,911Inventories
    
    
    110,915
    
    
    
    176,351Other prepaid expenses
    
    
    53,406
    
    
    
    73,194Assets of discontinued operations
    
    
    2,598,230
    
    
    
    962,075Total current assets
    
    
    4,273,738
    
    
    
    12,614,500Deposits
    
    
    336,357
    
    
    
    336,357Other assets
    
    
    500,000
    
    
    
    Property and equipment, net
    
    
    676,260
    
    
    
    691,694Construction-in-progress
    
    
    357,118
    
    
    
    311,015Intangible assets, net
    
    
    1,779,613
    
    
    
    1,995,619Non-current assets of discontinued operations
    
    
    1,271,158
    
    
    
    19,193,886Total assets
    
    $
    9,194,244
    
    
    $
    35,143,071LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIESAccounts payable
    
    $
    1,294,798
    
    
    $
    552,057Accrued compensation, officers, directors and consultants
    
    
    513,745
    
    
    
    697,602Accrued legal and other expenses
    
    
    216,914
    
    
    
    136,153Accrued interest
    
    
    
    
    
    
    9,448Convertible note payable
    
    
    
    
    
    
    355,164Liabilities of discontinued operations
    
    
    6,047,844
    
    
    
    4,475,303Total current liabilities
    
    
    8,073,301
    
    
    
    6,225,727Derivative liabilities
    
    
    1,434,127
    
    
    
    1,626,742Convertible note payable, net of current portion
    
    
    
    
    
    
    17,767Non-current liabilities of discontinued operations
    
    
    17,531,311
    
    
    
    18,501,081Total liabilities
    
    
    27,038,739
    
    
    
    26,371,317COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY (DEFICIT)Preferred stock, $.0001 par value, authorized
10,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.0001 par value, authorized 250,000,000 shares
at September 30, 2010 and 75,000,000 shares at December 31, 2009
    
    
    4,414
    
    
    
    3,777Additional paid-in capital
    
    
    63,662,679
    
    
    
    58,660,042Accumulated deficit
    
    
    (81,511,588
    )
    
    
    (49,892,065
    )Total shareholders equity (deficit)
    
    
    (17,844,495
    )
    
    
    8,771,754Total liabilities and shareholders equity (deficit)
    
    $
    9,194,244
    
    
    $
    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 ended
    
    
    Nine month periods endedSeptember 30, 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    September 30, 2009Revenues
    
    $
    808,582
    
    
    $
    694,123
    
    
    $
    2,765,641
    
    
    $
    1,801,046Cost of goods sold
    
    
    583,703
    
    
    
    608,882
    
    
    
    2,020,752
    
    
    
    1,773,785Gross income
    
    
    224,879
    
    
    
    85,241
    
    
    
    744,889
    
    
    
    27,261Operating expensesGeneral and administrative expenses
    
    
    4,011,974
    
    
    
    1,514,739
    
    
    
    10,413,049
    
    
    
    5,061,205Research and development
    
    
    35,000
    
    
    
    87,500
    
    
    
    176,650
    
    
    
    267,000Amortization of capitalized costs
    
    
    72,001
    
    
    
    72,002
    
    
    
    216,006
    
    
    
    228,7094,118,975
    
    
    
    1,674,241
    
    
    
    10,805,705
    
    
    
    5,556,914Loss from continuing operations
    
    
    (3,894,096
    )
    
    
    (1,589,000
    )
    
    
    (10,060,816
    )
    
    
    (5,529,653
    )Other income/(expenses)Other income
    
    
    7,339
    
    
    
    
    
    
    
    7,871
    
    
    
    21,785Derivative gain/(loss)
    
    
    661,982
    
    
    
    (241,448
    )
    
    
    1,160,711
    
    
    
    4,056,997Interest expense
    
    
    (4,627
    )
    
    
    (726,227
    )
    
    
    (15,883
    )
    
    
    (4,029,446
    )664,694
    
    
    
    (967,675
    )
    
    
    1,152,699
    
    
    
    49,336Loss from continuing operations before
provision for income taxes
    
    
    (3,229,402
    )
    
    
    (2,556,675
    )
    
    
    (8,908,117
    )
    
    
    (5,480,317
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (3,229,402
    )
    
    
    (2,556,675
    )
    
    
    (8,908,117
    )
    
    
    (5,480,317
    )Loss from discontinued operations
    
    
    (18,685,007
    )
    
    
    (2,253,613
    )
    
    
    (22,711,406
    )
    
    
    (6,443,121
    )Net loss
    
    $
    (21,914,409
    )
    
    $
    (4,810,288
    )
    
    $
    (31,619,523
    )
    
    $
    (11,923,438
    )Net loss per share, basic and dilutedContinuing operations
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.22
    )
    
    $
    (0.37
    )Discontinued operations
    
    
    (0.43
    )
    
    
    (0.11
    )
    
    
    (0.56
    )
    
    
    (0.44
    )$
    (0.50
    )
    
    $
    (0.24
    )
    
    $
    (0.78
    )
    
    $
    (0.81
    )Weighted average common shares outstanding
    
    
    43,187,437
    
    
    
    20,065,306
    
    
    
    40,354,562
    
    
    
    14,708,633
 The accompanying notes are an integral part of these consolidated financial statements.
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CONVERTED ORGANICS INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT)
 FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010
 (UNAUDITED)
 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
    
    
    
    
    
    
    
    
    
    
    1,305,812
    
    
    
    
    
    
    
    1,305,812Common stock issued upon conversion of
convertible notes payable and accrued
interest
    
    
    645,500
    
    
    
    65
    
    
    
    413,894
    
    
    
    
    
    
    
    413,959Common stock issued as compensation
    
    
    485,830
    
    
    
    49
    
    
    
    349,590
    
    
    
    
    
    
    
    349,639Issuance of common stock and warrants, net of
fair value of derivatives issued of $968,096
    
    
    2,400,000
    
    
    
    240
    
    
    
    1,398,024
    
    
    
    
    
    
    
    1,398,264Issuance of common stock and warrants as
payment of accounts payable
    
    
    2,780,740
    
    
    
    278
    
    
    
    1,501,322
    
    
    
    
    
    
    
    1,501,600Common stock issued upon exercise of
employee stock options
    
    
    50,000
    
    
    
    5
    
    
    
    33,995
    
    
    
    
    
    
    
    34,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,619,523
    )
    
    
    (31,619,523
    )Balance, September 30, 2010
    
    
    44,136,278
    
    
    $
    4,414
    
    
    $
    63,662,679
    
    
    $
    (81,511,588
    )
    
    $
    (17,844,495
    )
 The accompanying notes are an integral part of these consolidated financial statements.
 5




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##### Table of Contents



CONVERTED ORGANICS INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine month periods endedSeptember 30, 2010
    
    
    September 30, 2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (31,619,523
    )
    
    $
    (11,923,438
    )Adjustments to reconcile net loss to net cash
used in operating activities:Deconsolidation of variable interest entity
    
    
    
    
    
    
    (596,170
    )Amortization of intangible assets  license
    
    
    25,645
    
    
    
    12,375Amortization of capitalized bond costs
    
    
    35,751
    
    
    
    35,752Amortization of deferred financing fees
    
    
    
    
    
    
    22,042Amortization of intangible assets
    
    
    190,361
    
    
    
    206,667Depreciation of fixed assets
    
    
    1,394,249
    
    
    
    1,559,960Beneficial conversion feature
    
    
    
    
    
    
    230,492Amortization of discounts attributable to warrants on private financing
    
    
    
    
    
    
    1,458,647Non-cash interest expense  private financing
    
    
    
    
    
    
    1,245,186Common stock issued for extension of convertible note payable
    
    
    
    
    
    
    562,000Common stock issued as compensation
    
    
    349,639
    
    
    
    120,313Stock option compensation expense
    
    
    1,305,812
    
    
    
    190,022Warrants issued in connection with private financing and equity transactions
    
    
    
    
    
    
    662,479Loss on impairment of long-term assets
    
    
    15,430,685
    
    
    
    Derivative gain
    
    
    (1,160,711
    )
    
    
    (4,056,997
    )Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (567,244
    )
    
    
    (61,659
    )Inventories
    
    
    337,833
    
    
    
    (174,554
    )Prepaid expenses and other current assets
    
    
    (129,024
    )
    
    
    (217,605
    )Other assets
    
    
    
    
    
    
    94,250Deposits
    
    
    (48,240
    )
    
    
    165,122Increase (decrease) in:Accounts payable and other accrued expenses
    
    
    4,217,011
    
    
    
    3,157,897Accrued compensation  officers, directors and consultants
    
    
    (255,311
    )
    
    
    (86,802
    )Accrued interest
    
    
    362,658
    
    
    
    (181,018
    )Other
    
    
    
    
    
    
    (53,955
    )Net cash used in operating activities
    
    
    (10,130,409
    )
    
    
    (7,628,994
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    (400,827
    )
    
    
    (3,623,823
    )Release of restricted cash
    
    
    
    
    
    
    2,578,338Construction costs
    
    
    (46,103
    )
    
    
    (54,081
    )Other assets
    
    
    (500,000
    )
    
    
    Net cash used in investing activities
    
    
    (946,930
    )
    
    
    (1,099,566
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of term notes
    
    
    (1,540,009
    )
    
    
    (243,956
    )Repayment of capital lease obligations
    
    
    (8,751
    )
    
    
    (9,614
    )Members contributions
    
    
    
    
    
    
    230,983Members distributions
    
    
    
    
    
    
    (201,630
    )Net proceeds from exercise of options
    
    
    34,000
    
    
    
    Net proceeds from stock offering
    
    
    2,366,360
    
    
    
    3,806,272Net proceeds from exercise of warrants
    
    
    
    
    
    
    1,965,000Net proceeds from nonconvertible short-term note
    
    
    
    
    
    
    1,182,500Net proceeds from convertible short-term note
    
    
    
    
    
    
    1,400,000Repayment of nonconvertible short-term note
    
    
    
    
    
    
    (1,330,313
    )Repayment of mortgage payable
    
    
    
    
    
    
    (943
    )Net cash provided by financing activities
    
    
    851,600
    
    
    
    6,798,299NET DECREASE IN CASH
    
    
    (10,225,739
    )
    
    
    (1,930,261
    )Cash, beginning of period
    
    
    10,708,807
    
    
    
    3,357,940Cash, end of period
    
    $
    483,068
    
    
    $
    1,427,679Supplemental cash flow information:Cash paid during the period for:Interest
    
    $
    808,679
    
    
    $
    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
    
    
    413,959
    
    
    
    6,323,095Fair value of derivative issued
    
    
    968,096
    
    
    
    3,827,686Common stock and warrants issued as payment for accounts payable
    
    
    1,501,600
    
    
    
    Discount on warrants issued in connection with financings
    
    
    
    
    
    
    2,870,313Members contribution of convertible note
    
    
    
    
    
    
    684,668Conversion of accounts payable into notes payable
    
    
    
    
    
    
    2,634,039
 The accompanying notes are an integral part of these consolidated financial statements.
 6




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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 1  BASIS OF PRESENTATION AND NATURE OF OPERATIONS
 NATURE OF OPERATIONS (Continued)
    SEGMENTS
  RECLASSIFICATION
  NOTE 2  MANAGEMENTS PLAN OF OPERATION
  8




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  MANAGEMENTS PLAN OF OPERATION (Continued)
     NOTE 3  NEWLY ADOPTED ACCOUNTING STANDARDS
  NOTE 4  DISCONTINUED OPERATIONS
   For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue from discontinued operations
    
    $
    105,714
    
    
    $
    53,123
    
    
    $
    834,089
    
    
    $
    430,403Loss from discontinued operations
    
    $
    (18,685,007
    )
    
    $
    (2,253,613
    )
    
    $
    (22,711,406
    )
    
    $
    (6,443,121
    )
 9




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 4  DISCONTINUED OPERATIONS (Continued)
   2010
    
    
    2009Accounts receivable
    
    $
    293,077
    
    
    $
    59,746Inventory
    
    
    
    
    
    
    272,396Prepaid expenses
    
    
    778,610
    
    
    
    629,933Property and equipment
    
    
    1,526,543
    
    
    
    17,935,216Other assets
    
    
    1,271,158
    
    
    
    1,258,670Assets of discontinued operations
    
    $
    3,869,388
    
    
    $
    20,155,961Term notes payable
    
    $
    1,707,743
    
    
    $
    3,247,752Accounts payable
    
    
    1,964,459
    
    
    
    1,237,275Accrued expenses
    
    
    2,375,129
    
    
    
    950,782Other liabilities
    
    
    31,824
    
    
    
    40,575Bonds payable
    
    
    17,500,000
    
    
    
    17,500,000Liabilities of discontinued operations
    
    $
    23,579,155
    
    
    $
    22,976,384
   NOTE 5  INVENTORIES
  2010
    
    
    2009Finished goods
    
    $
    69,041
    
    
    $
    137,027Raw materials
    
    
    41,874
    
    
    
    39,324Total inventories
    
    $
    110,915
    
    
    $
    176,351
 10




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT
 TERM NOTES
    CONVERTIBLE NOTE PAYABLE
  BOND FINANCING
  NOTE 7  DERIVATIVE INSTRUMENTS
  11




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 7  DERIVATIVE INSTRUMENTS (Continued)
   NOTE 8  OWNERS EQUITY (DEFICIT)
    12




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 8  OWNERS EQUITY (DEFICIT) (Continued)
     Class B Warrants
    
    
    Class C Warrants
    
    
    Class D Warrants
    
    
    Class E Warrants
    
    
    Class F Warrants
    
    
    Class G Warrants
    
    
    Class H Warrants
    
    
    Class I Warrants
    
    
    Class J Warrants
    
    
    Class K WarrantsExercise Price
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Exercise Price
    
    
    Exercise Price$11.00
    
    
    $1.00
    
    
    $1.02
    
    
    $1.63
    
    
    $1.25
    
    
    $1.25
    
    
    $1.30
    
    
    $1.06
    
    
    $0.54
    
    
    $0.54Outstanding at 12/31/09
    
    
    4,932,438
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    1,500,000
    
    
    
    585,000
    
    
    
    2,500,000
    
    
    
    17,250,000
    
    
    
    
    
    
    
    
    
    
    
    Issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,163,362
    
    
    
    1,623,333
    
    
    
    1,157,407Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at 09/30/10
    
    
    4,932,438
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    1,500,000
    
    
    
    585,000
    
    
    
    2,500,000
    
    
    
    17,250,000
    
    
    
    1,163,362
    
    
    
    1,623,333
    
    
    
    1,157,407Exercisable at 09/30/10
    
    
    4,932,438
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    1,500,000
    
    
    
    585,000
    
    
    
    2,500,000
    
    
    
    17,250,000
    
    
    
    1,163,362
    
    
    
    1,623,333
    
    
    
    1,157,407
  NOTE 9  FAIR VALUE MEASUREMENTS
   13




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 9  FAIR VALUE MEASUREMENTS (Continued)
   BalanceLevel of Hierarchy
    
    
    September 30, 2010
    
    
    December 31, 2009Derivative liabilities
    
    Level 3
    
    $
    1,434,127
    
    
    $
    1,626,742
  Three months ended
    
    
    Nine months endedBalance, beginning of period
    
    $
    2,096,109
    
    
    $
    1,626,742Fair value of derivatives issued
    
    
    
    
    
    
    968,096Derivative (gain) loss
    
    
    (661,982
    )
    
    
    (1,160,711
    )Balance, end of period
    
    $
    1,434,127
    
    
    $
    1,434,127
  NOTE 10  STOCK OPTION PLAN
  Options Outstanding
    
    
    Price Per ShareOutstanding at December 31, 2009
    
    
    1,230,295
    
    
    $
    3.54Granted
    
    
    2,508,500
    
    
    
    .68Exercised
    
    
    (50,000
    )
    
    
    .97Canceled
    
    
    
    
    
    
    Outstanding at September 30, 2010
    
    
    3,688,795
    
    
    $
    1.63Exercisable at September 30, 2010
    
    
    3,638,795
    
    
    $
    1.63
  14




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 11 COMMITMENTS AND CONTINGENCIES
 LEASE COMMITMENTS
  Years ending December 31,
2010 (October 1, 2010 through December 31, 2010)
    
    $
    85,4592011
    
    
    344,9882012
    
    
    338,7482013
    
    
    234,8982014
    
    
    238,6452015 and thereafter
    
    
    1,924,633$
    3,167,371
  LEGAL PROCEEDINGS
   Leeseberg
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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 11 COMMITMENTS AND CONTINGENCIES (Continued)
 LEGAL PROCEEDINGS (Continued)
  NOTE 12  SUBSEQUENT EVENTS
 WOODBRIDGE TRANSACTION


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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 12  SUBSEQUENT EVENTS (Continued)
 TERRASPHERE
SYSTEMS LLC ACQUISITION
   Milestone One Payment:
 Milestone Two Payment:
 Milestone Three Payment: pro rata
 Milestone Four Payment:
  17




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 12  SUBSEQUENT EVENTS (Continued)
 TERRASPHERE
SYSTEMS LLC ACQUISITION (Continued)
  For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue
    
    $
    817,765
    
    
    $
    703,306
    
    
    $
    7,268,190
    
    
    $
    1,828,595Net loss
    
    $
    (22,304,569
    )
    
    $
    (5,156,798
    )
    
    $
    (29,330,290
    )
    
    $
    (13,038,842
    )Net loss per
share, basic and diluted
    
    
    (0.36
    )
    
    
    (0.13
    )
    
    
    (0.50
    )
    
    
    (0.43
    )
 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
   Converted Organics of California, LLC  Gonzales Facility
   19




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##### Table of Contents



Converted Organics of Woodbridge, LLC  Woodbridge Facility
 s.
 Converted Organics of Mississippi, LLC
  TerraSphere Inc.
  Industrial Wastewater Resources Division
  20




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##### Table of Contents



Recent Financing Activities
  Future Development
     21




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##### Table of Contents



Trends and Uncertainties Affecting our Operations
  Liquidity and Capital Resources
  Woodbridge TransactionsSeptember 30, 2010
    
    
    and TerraSphere Acquisition
    
    
    TotalAssets
    
    $
    9,200,000
    
    
    $
    6,100,000
    
    
    $
    15,300,000Liabilities
    
    
    27,000,000
    
    
    
    (16,800,000
    )
    
    
    10,200,000Shareholders equity
(deficit)
    
    
    (17,800,000
    )
    
    
    22,900,000
    
    
    
    5,100,000
  $1,561,000
    
    to fund future revenue generating activities, including the
purchase of chicken litter-based fertilizer product
($615,000), a deposit for a license to treat Industrial
Wastewater ($500,000) and to fund capital equipment
purchases ($446,000).$1,100,000
    
    related to funding acquisition activities.$1,540,000
    
    to repay debt principal and interest on term notes related
to discontinued operations of the Woodbridge facility.$4,460,000
    
    to fund operations related to the discontinued operations of
the Woodbridge facility.$1,500,000
    
    to fund ongoing operations during the first nine months of
2010, including $600,000 of marketing costs to implement a
formal marketing program.
 s.
 22




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##### Table of Contents



Results of Continuing Operations
 Sales
    Cost of Sales
  23




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##### Table of Contents



General and Administrative Expenses
  Interest Expense
  Derivative gain (loss)
  Results of Discontinued Operations
   For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue from discontinued operations
    
    $
    105,714
    
    
    $
    53,123
    
    
    $
    834,089
    
    
    $
    430,403Loss from discontinued operations
    
    $
    (18,685,007
    )
    
    $
    (2,253,613
    )
    
    $
    (22,711,406
    )
    
    $
    (6,443,121
    )
 24




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##### Table of Contents



2010
    
    
    2009Accounts receivable
    
    $
    293,077
    
    
    $
    59,746Inventory
    
    
    
    
    
    
    272,396Prepaid expenses
    
    
    778,610
    
    
    
    629,933Property and equipment
    
    
    1,526,543
    
    
    
    17,935,216Other assets
    
    
    1,271,158
    
    
    
    1,258,670Assets of discontinued operations
    
    $
    3,869,388
    
    
    $
    20,155,961Term notes payable
    
    $
    1,707,743
    
    
    $
    3,247,752Accounts payable
    
    
    1,964,459
    
    
    
    1,237,275Accrued expenses
    
    
    2,375,129
    
    
    
    950,782Other liabilities
    
    
    31,824
    
    
    
    40,575Bonds payable
    
    
    17,500,000
    
    
    
    17,500,000Liabilities of discontinued operations
    
    $
    23,579,155
    
    
    $
    22,976,384
 Critical Accounting Policies
 Use of Estimates
  Accounts Receivables
  Inventories
  Intangible Assets
  Derivative Instruments
  Revenue Recognition
  25




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##### Table of Contents



Share Based Compensation
  Off-Balance Sheet Transactions
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   26




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##### Table of Contents



Leeseberg
  
 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 90699.1
    
    Unaudited pro forma consolidated
financial statements and consolidated financial statements of
TerraSphere Systems LLC as of September 30, 2010 and
December 31, 2009 and for the three and nine month periods ended
September 30, 2010 and 2009.
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##### Table of Contents



SIGNATURES
  Converted Organics Inc.Date: November 15, 2010
    /s/ Edward J. GildeaEdward J. GildeaPresident and Chief Executive OfficerDate: November 15, 2010
    /s/ David R. AllenDavid R. AllenChief Financial Officer and Executive Vice President of
Administration and Principal Accounting Officer 28