##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2011
 OR
 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
(State or other jurisdiction of incorporation or organization)
    
    20-4075963
(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(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




---



##### 



INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010
    
    
    3Consolidated Statements of Operations for the three month periods ended March 31,
2011 and 2010 (unaudited)
    
    
    4Consolidated Statement of Changes in Stockholders Equity for the three month
period ended March 31, 2011 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the three month periods ended March 31,
2011 and 2010 (unaudited)
    
    
    6Notes to Consolidated Interim Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATION
    
    
    33Item 1. Legal Proceedings
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. [Removed and Reserved]
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    35EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



Item 1. Financial Statements
 
 CONVERTED ORGANICS INC.
CONSOLIDATED BALANCE SHEETS
 March 31, 2011(Unaudited)
    
    
    December 31, 2010ASSETSCURRENT ASSETSCash
    
    $
    823,768
    
    
    $
    3,039,941Accounts receivable, net
    
    
    606,702
    
    
    
    579,946Inventories
    
    
    343,655
    
    
    
    126,406Prepaid expenses and other assets
    
    
    402,589
    
    
    
    251,589Deferred financing costs, net
    
    
    210,188
    
    
    
    276,667Current assets of discontinued operations
    
    
    
    
    
    
    14,500Total current assets
    
    
    2,386,902
    
    
    
    4,289,049Deposits and other non-current assets
    
    
    566,909
    
    
    
    575,596Property and equipment, net
    
    
    3,157,580
    
    
    
    1,477,589Goodwill
    
    
    1,667,957
    
    
    
    1,667,957Intangible assets, net
    
    
    11,419,548
    
    
    
    11,629,265Total assets
    
    $
    19,198,896
    
    
    $
    19,639,456LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESTerm note payable
    
    $
    
    
    
    $
    350,000Notes payable  related party
    
    
    72,351
    
    
    
    72,351Accounts payable
    
    
    2,796,512
    
    
    
    2,393,388Accrued expenses
    
    
    626,199
    
    
    
    656,412Convertible notes payable, net of unamortized discount
    
    
    247,717
    
    
    
    306,404Obligation to issue shares
    
    
    1,396,429
    
    
    
    1,560,715Derivative liabilities  current
    
    
    3,915,520
    
    
    
    5,199,572Liabilities of discontinued operations
    
    
    935,359
    
    
    
    2,438,253Total current liabilities
    
    
    9,990,087
    
    
    
    12,977,095Derivative liabilities
    
    
    3,038,233
    
    
    
    3,476,047Total liabilities
    
    
    13,028,320
    
    
    
    16,453,142COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYPreferred stock, $.0001 par value ($1,000 stated value)
authorized 10,000,000 shares
    
    
    17,500,000
    
    
    
    17,500,000Common stock, $.0001 par value, authorized 250,000,000 shares
    
    
    9,784
    
    
    
    8,547Additional paid-in capital
    
    
    90,349,983
    
    
    
    85,555,990Accumulated deficit
    
    
    (102,192,769
    )
    
    
    (100,453,292
    )Accumulated other comprehensive loss
    
    
    (9,585
    )
    
    
    (1,109
    )5,657,413
    
    
    
    2,610,136Noncontrolling interests
    
    
    513,163
    
    
    
    576,178Total stockholders equity
    
    
    6,170,576
    
    
    
    3,186,314Total liabilities and stockholders equity
    
    $
    19,198,896
    
    
    $
    19,639,456
 The accompanying notes are an integral part of these consolidated financial statements.
 3




---



##### Table of Contents



CONVERTED ORGANICS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
 Three month periods endedMarch 31, 2011
    
    
    March 31, 2010Revenues
    
    $
    739,176
    
    
    $
    711,876Cost of goods sold
    
    
    504,467
    
    
    
    565,476Gross profit
    
    
    234,709
    
    
    
    146,400Operating expensesSelling, general and administrative expenses
    
    
    2,317,174
    
    
    
    3,843,704Research and development
    
    
    15,871
    
    
    
    61,850Amortization of intangible assets
    
    
    221,267
    
    
    
    72,0022,554,312
    
    
    
    3,977,556Loss from continuing operations
    
    
    (2,319,603
    )
    
    
    (3,831,156
    )Other income/(expenses)Other income
    
    
    171,309
    
    
    
    281Gain on settlement of debt
    
    
    225,000
    
    
    
    Derivative gain (loss)
    
    
    2,397,783
    
    
    
    (635,155
    )Interest expense
    
    
    (2,274,462
    )
    
    
    (4,373
    )519,630
    
    
    
    (639,247
    )Loss from continuing operations before
provision for income taxes
    
    
    (1,799,973
    )
    
    
    (4,470,403
    )Provision for income taxes
    
    
    
    
    
    
    Net loss from continuing operations
    
    
    (1,799,973
    )
    
    
    (4,470,403
    )Loss from discontinued operations
    
    
    (499
    )
    
    
    (1,909,290
    )Net loss
    
    
    (1,800,472
    )
    
    
    (6,379,693
    )Net loss attributable to noncontrolling interests
    
    
    (60,995
    )
    
    
    Net loss attributable to Converted Organics Inc.
before other comprehensive loss
    
    
    (1,739,477
    )
    
    
    (6,379,693
    )Other comprehensive loss:Foreign currency translation adjustment
    
    
    (10,496
    )
    
    
    Comprehensive loss
    
    
    (1,749,973
    )
    
    
    (6,379,693
    )Comprehensive loss attributable to noncontrolling interests
    
    
    (2,020
    )
    
    
    Comprehensive loss attributable to Converted Organics Inc.
    
    $
    (1,747,953
    )
    
    $
    (6,379,693
    )Net loss per share, basic and dilutedContinuing operations
    
    $
    (0.02
    )
    
    $
    (0.12
    )Discontinued operations
    
    
    (0.00
    )
    
    
    (0.05
    )$
    (0.02
    )
    
    $
    (0.17
    )Weighted average common shares outstanding
    
    
    92,804,595
    
    
    
    37,864,169
 The accompanying notes are an integral part of these consolidated financial statements.
 4




---



##### Table of Contents



CONVERTED ORGANICS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2011
 (UNAUDITED)
 Preferred Stock Series A
    
    
    Common Stock
    
    
    
    
    
    
    
    
    
    
    AccumulatedShares Issued
    
    
    
    
    
    
    Shares Issued
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Totaland
    
    
    
    
    
    
    and
    
    
    
    
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    
    
    
    
    Non-Controlling
    
    
    StockholdersOutstanding
    
    
    Amount
    
    
    Outstanding
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Total
    
    
    Interests
    
    
    EquityBalance, December 31, 2010
    
    
    17,500
    
    
    $
    17,500,000
    
    
    
    85,468,127
    
    
    $
    8,547
    
    
    $
    85,555,990
    
    
    $
    (100,453,292
    )
    
    $
    (1,109
    )
    
    $
    2,610,136
    
    
    $
    576,178
    
    
    $
    3,186,314Common stock issued to settle convertible note obligations
    
    
    
    
    
    
    
    
    
    
    7,006,000
    
    
    
    701
    
    
    
    2,649,479
    
    
    
    
    
    
    
    
    
    
    
    2,650,180
    
    
    
    
    
    
    
    2,650,180Common stock issued as compensation
    
    
    
    
    
    
    
    
    
    
    2,165,000
    
    
    
    216
    
    
    
    800,834
    
    
    
    
    
    
    
    
    
    
    
    801,050
    
    
    
    
    
    
    
    801,050Issuance of common stock as payment to settle
obligations of discontinued operations
    
    
    
    
    
    
    
    
    
    
    3,200,000
    
    
    
    320
    
    
    
    1,343,680
    
    
    
    
    
    
    
    
    
    
    
    1,344,000
    
    
    
    
    
    
    
    1,344,000Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,476
    )
    
    
    (8,476
    )
    
    
    (2,020
    )
    
    
    (10,496
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,739,477
    )
    
    
    
    
    
    
    (1,739,477
    )
    
    
    (60,995
    )
    
    
    (1,800,472
    )Balance, March 31, 2011
    
    
    17,500
    
    
    $
    17,500,000
    
    
    
    97,839,127
    
    
    $
    9,784
    
    
    $
    90,349,983
    
    
    $
    (102,192,769
    )
    
    $
    (9,585
    )
    
    $
    5,657,413
    
    
    $
    513,163
    
    
    $
    6,170,576
 The accompanying notes are an integral part of these consolidated financial statements.
 5




---



##### Table of Contents



CONVERTED ORGANICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three month periods endedMarch 31, 2011
    
    
    March 31, 2010CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (1,800,472
    )
    
    $
    (6,379,693
    )Adjustments to reconcile net loss to net cash
used in operating activities:Amortization of intangibles and other assets
    
    
    370,377
    
    
    
    83,919Depreciation and amortization of property and equipment
    
    
    50,674
    
    
    
    462,358(Reduction) provision for losses on accounts receivable
    
    
    (75,875
    )
    
    
    174,478Amortization of discounts attributable on notes payable
    
    
    1,998,924
    
    
    
    Interest expense in connection with issuance of convertible debt
    
    
    268,486
    
    
    
    Common stock issued as compensation
    
    
    801,050
    
    
    
    160,050Stock option compensation expense
    
    
    
    
    
    
    1,292,492Obligations to issue shares revaluation
    
    
    (164,286
    )
    
    
    Gain on settlement of debt
    
    
    (225,000
    )
    
    
    Derivative (gain) loss
    
    
    (2,397,783
    )
    
    
    635,155Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    63,619
    
    
    
    (529,271
    )Inventories
    
    
    (217,249
    )
    
    
    77,447Prepaid expenses and other current assets
    
    
    (148,037
    )
    
    
    (562,974
    )Deposits and other non-current assets
    
    
    9,195
    
    
    
    (19,733
    )Increase (decrease) in:Accounts payable
    
    
    (612,382
    )
    
    
    (336,870
    )Accrued expenses
    
    
    (180,250
    )
    
    
    (672,311
    )Net cash used in operating activities
    
    
    (2,259,009
    )
    
    
    (5,614,953
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (725,819
    )
    
    
    (235,898
    )Release of restricted cash
    
    
    
    
    
    
    350,077Patent costs
    
    
    (11,551
    )
    
    
    Purchase of other assets
    
    
    
    
    
    
    (166,667
    )Net cash used in investing activities
    
    
    (737,370
    )
    
    
    (52,488
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (125,000
    )
    
    
    (925,155
    )Repayment of capital lease obligations
    
    
    
    
    
    
    (2,852
    )Net proceeds from short-term notes
    
    
    920,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    795,000
    
    
    
    (928,007
    )Net effect of exchange rate changes on cash
    
    
    (14,794
    )
    
    
    NET DECREASE IN CASH
    
    
    (2,216,173
    )
    
    
    (6,595,448
    )Cash, beginning of period
    
    
    3,039,941
    
    
    
    10,708,807Cash, end of period
    
    $
    823,768
    
    
    $
    4,113,359Supplemental cash flow information:Cash paid during the period for:Interest
    
    $
    4,378
    
    
    $
    756,719Non-cash financing activities:Equipment acquired through assumption of accounts payable
    
    $
    1,000,000
    
    
    $
    Common stock issued to settle convertible note obligations
    
    
    2,650,180
    
    
    
    97,343Fair value of derivatives issued in conjuction with debt and equity financing
    
    
    1,268,486
    
    
    
    Common stock issued as settlement of obligations of discontinued operations
    
    
    1,344,000
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements.
 6




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION AND NATURE OF OPERATIONS
   NATURE OF OPERATIONS
  Organic Fertilizer:
 Industrial Wastewater Treatment:
 Vertical Farming:
     7




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION AND NATURE OF OPERATIONS (Continued)
 NATURE OF OPERATIONS (Continued)
    PRINCIPLES OF CONSOLIDATION
  RECLASSIFICATIONS
  8




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 2  MANAGEMENTS PLAN OF OPERATIONS
    NOTE 3  NEW ACCOUNTING STANDARDS
 When to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts
 9




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 3  NEWLY ACCOUNTING STANDARDS (Continued)
 Business
Combinations (Topic 805)
 NOTE 4  ACQUISITIONS
 TERRASPHERE SYSTEMS LLC
  GoLocalProduceRI, LLC
   For the Three MonthsEnded March 31, 2010Revenue
    
    $
    2,544,009Net loss
    
    $
    (6,000,008
    )Net loss per share, basic and diluted
    
    $
    (0.11
    )Weighted-average shares
    
    
    56,389,068
 10




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 5  DISCONTINUED OPERATIONS
  For the Three Months Ended March 31,2011
    
    
    2010Revenue from discontinued operations
    
    $
    
    
    
    $
    147,949Loss from discontinued operations
    
    $
    (499
    )
    
    $
    (1,909,291
    )
   March 31, 2011
    
    
    December 31, 2010Accounts receivable, net
    
    $
    
    
    
    $
    14,500Assets of discontinued operations
    
    $
    
    
    
    $
    14,500Accounts payable
    
    $
    828,712
    
    
    $
    837,606Accrued expenses
    
    
    77,874
    
    
    
    1,571,874Other liabilities
    
    
    28,773
    
    
    
    28,773Liabilities of discontinued operations
    
    $
    935,359
    
    
    $
    2,438,253
  NOTE 6  FAIR VALUE MEASUREMENTS
 ASC 820 Fair Value Measurements and Disclosures
  11




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 6  FAIR VALUE MEASUREMENTS (Continued)
   BalanceLevel of Hierarchy
    
    March 31, 2011
    
    December 31, 2010Derivative
warrants and
anti-dilution
provision
liabilities
    
    Level 3
    
    $
    6,953,753
    
    
    $
    8,675,619
  Balance, beginning of period
    
    $
    (8,675,619
    )Settlements
    
    
    592,569Issuances
    
    
    (1,268,486
    )Net gains
    
    
    2,397,783Balance, end of period
    
    $
    (6,953,753
    )
  NOTE 7  INVENTORIES
  March 31, 2011
    
    
    December 31, 2010Finished goods
    
    $
    301,068
    
    
    $
    104,690Raw materials
    
    
    42,587
    
    
    
    21,716Total inventories
    
    $
    343,655
    
    
    $
    126,406
 12




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 8  DEBT
 TERM NOTES
  NOTE PAYABLES  RELATED PARTY
  CONVERTIBLE NOTES PAYABLE
    13




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 8  DEBT (Continued)
 CONVERTIBLE NOTES PAYABLE (Continued)
    NOTE 9  DERIVATIVE INSTRUMENTS
   14




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 9  DERIVATIVE INSTRUMENTS (Continued)
    Outstanding atClass/
    
    
    
    
    
    December 31,
    
    
    
    
    
    Excercised
    
    Outstanding at
    
    Excercisable at
    
    Fair Value atIssue Date
    
    Series
    
    Price
    
    2010
    
    Issued
    
    or Canceled
    
    March 31, 2011
    
    March 31, 2011
    
    March 31, 2011May 7, 2009
    
    Class C
    
    $
    1.00
    
    
    
    885,000
    
    
    
    
    
    
    
    
    
    
    
    885,000
    
    
    
    885,000
    
    
    $
    157,718May 7, 2009
    
    Class D
    
    $
    1.02
    
    
    
    415,000
    
    
    
    
    
    
    
    
    
    
    
    415,000
    
    
    
    415,000
    
    
    $
    73,552September 8, 2009
    
    Class G
    
    $
    1.25
    
    
    
    2,500,000
    
    
    
    
    
    
    
    
    
    
    
    2,500,000
    
    
    
    2,500,000
    
    
    $
    488,841April 22, 2010
    
    Class I
    
    $
    1.06
    
    
    
    1,163,362
    
    
    
    
    
    
    
    
    
    
    
    1,163,362
    
    
    
    
    
    
    $
    251,118December 17, 2010 *
    
    Series A
    
    $
    1.00
    
    
    
    1,969,737
    
    
    
    525,263
    
    
    
    
    
    
    
    2,495,000
    
    
    
    2,495,000
    
    
    $
    686,702December 17, 2010 *
    
    Series B
    
    $
    1.00
    
    
    
    3,939,474
    
    
    
    10,524,296
    
    
    
    
    
    
    
    14,463,770
    
    
    
    14,463,770
    
    
    $
    1,866,559December 17, 2010 *
    
    Series C
    
    $
    1.00
    
    
    
    1,969,737
    
    
    
    525,263
    
    
    
    
    
    
    
    2,495,000
    
    
    
    2,495,000
    
    
    $
    686,702
 
 *
    
    Includes warrants issued on March 7, 2011  Outstanding atDecember 31,
    
    
    
    
    
    Excercised
    
    Outstanding at
    
    Excercisable at
    
    Fair Value atIssue Date
    
    Price
    
    2010
    
    Issued
    
    or Canceled
    
    March 31, 2011
    
    March 31, 2011
    
    March 31, 2011December 17, 2010
    
    $
    1.00
    
    
    
    14,283,980
    
    
    
    
    
    
    
    6,426,174
    
    
    
    7,857,806
    
    
    
    7,857,806
    
    
    $
    1,437,262March 7, 2011
    
    $
    1.00
    
    
    
    
    
    
    
    3,344,281
    
    
    
    
    
    
    
    3,344,281
    
    
    
    3,344,281
    
    
    $
    611,699
  Risk free interest rate
    
    
    0.16% - 2.55
    %Dividend yield
    
    
    -0-Average Volatility
    
    
    113.20
    %Expected term
    
    3 months to 5 years
 15




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 9  DERIVATIVE INSTRUMENTS (Continued)
   NOTE 10  STOCKHOLDERS EQUITY
 STOCK ISSUANCES
    WARRANTS
   Outstanding at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
    
    Excercisable atWarrants
    
    Price
    
    December 31, 2010
    
    Issued
    
    Excercised
    
    Canceled
    
    March 31, 2011
    
    March 31, 2011Class B
    
    $
    11.00
    
    
    
    2,648,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,648,029
    
    
    
    2,648,029Class E
    
    $
    1.63
    
    
    
    1,500,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    1,500,000Class F
    
    $
    1.25
    
    
    
    585,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585,000
    
    
    
    585,000Class H
    
    $
    1.30
    
    
    
    17,250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,250,000
    
    
    
    17,250,000Class J
    
    $
    0.54
    
    
    
    1,623,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,623,333
    
    
    
    1,623,333Class K
    
    $
    0.54
    
    
    
    1,157,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,157,407
    
    
    
    1,157,407
  16




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 10  STOCKHOLDERS EQUITY (Continued)
 STOCK OPTIONS
  NOTE 11  SEGMENT REPORTING
   Industrial
    
    Corporate andOrganic Fertilizer
    
    Vertical Farming
    
    Wastewater
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    644,000
    
    
    $
    
    
    
    $
    95,176
    
    
    $
    
    
    
    $
    739,176Operating loss (1)
    
    
    (82,001
    )
    
    
    (599,441
    )
    
    
    (2,823
    )
    
    
    (1,635,338
    )
    
    
    (2,319,603
    )Depreciation and
amortization(2)
    
    
    105,089
    
    
    
    161,297
    
    
    
    5,556
    
    
    
    149,109
    
    
    
    421,051Interest expense(3)
    
    
    
    
    
    
    6,642
    
    
    
    
    
    
    
    2,267,820
    
    
    
    2,274,462Net loss
    
    
    (82,001
    )
    
    
    (381,080
    )
    
    
    (2,823
    )
    
    
    (1,334,568
    )
    
    
    (1,800,472
    )Total assets (4)
    
    
    3,744,506
    
    
    
    12,354,315
    
    
    
    2,108,468
    
    
    
    991,607
    
    
    
    19,198,896Goodwill
    
    
    
    
    
    
    1,667,957
    
    
    
    
    
    
    
    
    
    
    
    1,667,957Property and
equipment additions
    
    
    123,564
    
    
    
    2,255
    
    
    
    1,600,000
    
    
    
    
    
    
    
    1,725,819
 
 (1)
    
    Operating loss of the principal businesses exclude
corporate compensation, marketing expense, professional
fees and other unallocated expenses.(2)
    
    Depreciation and amortization expense associated
with property and equipment, intangibles and deferred
financing fees. Corporate amortization expense relates
to deferred financing fees.(3)
    
    Corporate interest expense is primarily related to
amortization of discounts on convertible notes payable.(4)
    
    Total business assets are the owned or allocated
assets used by each business. Corporate assets consist
of cash, prepaid expenses, certain other assets and
deferred financing costs.As of March 31, 2010, the Company was a single reportable segment. 17




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 12  LEGAL PROCEEDINGS
     18




---



##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 NOTE 13  SUBSEQUENT EVENTS
    19




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
   Organic
    
    
    Vertical
    
    
    Industrial
    
    
    Corporate andFertilizer
    
    
    Farming
    
    
    Wastewater
    
    
    Eliminations
    
    
    ConsolidatedRevenues
    
    $
    644,000
    
    
    $
    
    
    
    $
    95,176
    
    
    $
    
    
    
    $
    739,176Operating loss (1)
    
    
    (82,001
    )
    
    
    (599,441
    )
    
    
    (2,823
    )
    
    
    (1,635,338
    )
    
    
    (2,319,603
    )Depreciation and
amortization(2)
    
    
    105,089
    
    
    
    161,297
    
    
    
    5,556
    
    
    
    149,109
    
    
    
    421,051Interest expense(3)
    
    
    
    
    
    
    6,642
    
    
    
    
    
    
    
    2,267,820
    
    
    
    2,274,462Net loss
    
    
    (82,001
    )
    
    
    (381,080
    )
    
    
    (2,823
    )
    
    
    (1,334,568
    )
    
    
    (1,800,472
    )Total assets (4)
    
    
    3,744,506
    
    
    
    12,354,315
    
    
    
    2,108,468
    
    
    
    991,607
    
    
    
    19,198,896Goodwill
    
    
    
    
    
    
    1,667,957
    
    
    
    
    
    
    
    
    
    
    
    1,667,957Property and equipment
additions
    
    
    123,564
    
    
    
    2,255
    
    
    
    1,600,000
    
    
    
    
    
    
    
    1,725,819
 
 (1)
    
    Operating loss of the principal businesses exclude corporate compensation, marketing expense, professional fees and other unallocated expenses.(2)
    
    Depreciation and amortization expense associated with property and equipment, intangibles and deferred financing fees. Corporate amortization expense relates to intangible
asset technological know-how.(3)
    
    Corporate interest expense is primarily related to amortization of discounts on convertible notes payable. 20




---



##### Table of Contents



(4)
    
    Total business assets are the owned or allocated assets used by each business. Corporate assets consist of cash, prepaid expenses, certain other assets, and deferred
financing costs.    
    
    Converted Organics of California, LLC, a wholly-owned subsidiary of
COIN, which includes the operation of our Gonzales, California
facility.
    
    Converted Organics of Woodbridge, LLC, a wholly-owned subsidiary of
COIN, which includes the discontinued operation of our Woodbridge, New
Jersey facility.
    
    Converted Organics of Mississippi, LLC, a wholly-owned subsidiary of
COIN, established for the purpose of adding a poultry litter-based
fertilizer product to the Companys existing product lines.
    
    Converted Organics of Rhode Island, LLC, a 92.5% owned subsidiary of
COIN , which currently has no operating activity and which was
originally established to include the operation of a previously
planned fertilizer facility in Rhode Island. On February 25, 2010, we
signed a letter of intent with the non-controlling member in Converted
Organics of RI to sell substantially all of the assets and assign a
limited select amount of liabilities of Converted Organics of RI. This
entity is currently inactive.
    
    TerraSphere Inc. (TerraSphere Inc), a Delaware C corporation and
wholly owned subsidiary of COIN, was established to hold COINs
investment in TerraSphere Systems LLC (Systems LLC) in which COIN
acquired a 95% interest on November 12, 2010. Systems LLC owns 85% of
TerraSphere Canada, LLC and 100% of Pharmasphere LLC, which in turn
owns 100% of PharmaSphere Worcester, LLC. COINs acquisition of its
interest in Systems LLC was approved by our shareholders at a special
meeting held on September 16, 2010.
    
    GoLocalProduceRI, LLC, a 83.34% owned subsidiary of COIN, which we
acquired on December 30, 2010 for the purpose of building and
operating a TerraSphere facility.
 Organic Fertilizer Business
  21




---



##### Table of Contents



Converted Organics of California, LLC  Gonzales Facility
 ®
   Industrial Wastewater Treatment Business
 ® ® ®
 ® ®
 22




---



##### Table of Contents



Vertical Farming Business
    23




---



##### Table of Contents



For the Quarter EndedMarch 31,2010Revenue
    
    $
    2,544,009Net loss
    
    $
    (6,000,008
    )Net loss per share, basic and diluted
    
    $
    (0.11
    )Weighted average common shares outstanding
    
    
    56,389,068
 Recent Financing Activities
 December 17, 2010 and March 7, 2011 Notes and Warrants
     24




---



##### Table of Contents



April 1, 2011 Notes and Warrants
        25




---



##### Table of Contents



Future Development
    26




---



##### Table of Contents



Trends and Uncertainties Affecting our Operations
  Liquidity and Capital Resources
    27




---



##### Table of Contents



Results of Continuing Operations
 Revenue
      Cost of Goods Sold
   28




---



##### Table of Contents



General and Administrative Expenses
  Interest Expense
  Derivative gain (loss)
  Results of Discontinued Operations
   For the Three Months Ended March 31,2011
    
    
    2010Revenue from discontinued operations
    
    $
    
    
    
    $
    147,949Loss from discontinued operations
    
    $
    (499
    )
    
    $
    (1,909,291
    )
 29




---



##### Table of Contents



March 31, 2011
    
    
    December 31, 2010Accounts receivable, net
    
    $
    
    
    
    $
    14,500Assets of discontinued operations
    
    $
    
    
    
    $
    14,500Accounts payable
    
    $
    828,712
    
    
    $
    837,606Accrued expenses
    
    
    77,874
    
    
    
    1,571,874Other liabilities
    
    
    28,773
    
    
    
    28,773Liabilities of discontinued operations
    
    $
    935,359
    
    
    $
    2,438,253
  Critical Accounting policies
  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.
  30




---



##### Table of Contents



Share-Based Compensation
 Compensation 
Stock Compensation
 Long-Lived Assets
 Property,
Plant and Equipment
 Goodwill
  Intangible Assets
 Intangibles  Goodwill and Other
 31




---



##### Table of Contents



Derivative Instruments
 Derivatives and Hedging
 Discontinued Operations
  Fair Value Measurements
  
    
    Level 1 inputs utilize quoted prices (unadjusted) in active markets
for identical assets or liabilities that we have 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 entitys own assumptions, as there is
little, if any, related market activity.
  Income Taxes
 Income Taxes
 32




---



##### Table of Contents



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
  33




---



##### 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.
  34




---



##### Table of Contents



Item 6. Exhibits
 Exhibit No.
    
    Description of Exhibit10.1
    
    Agreement between the Registrant and South Canyon Waste Systems, LLC, dated January 10, 201131.1
    
    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
 SIGNATURES
  Converted Organics Inc.Date: May 16, 2011
    /s/ Edward J. GildeaEdward J. GildeaPresident and Chief Executive Officer , Principal
Executive OfficerDate: May 16, 2011
    /s/ David R. AllenDavid R. AllenChief Financial Officer and Executive Vice
President of
Administration and Principal Accounting Officer 35