##### 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 June 30, 2009
 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.)
 7A Commercial Wharf W, 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




---



##### 



INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008 (audited)
    
    
    3Consolidated Statements of Operations for the three and six month periods ended June 30, 2009 and 2008
    
    
    4Consolidated Statement of Changes in Owners Equity (Deficit) for the six month period ended June 30, 2009
    
    
    5Consolidated Statements of Cash Flows for the six month periods ended June 30, 2009 and 2008
    
    
    6Notes to Consolidated Interim Financial Statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31EX-10.14 Secured Convertible Promissory Note in favor of SNC-Lavalin Project Services, Inc., dated June 16, 2009EX-10.15 Secured Convertible Promissory Note in favor of Hatzel & Buehler, Inc.EX-10.16 Secured Convertible Promissory Note in favor of Recycling Technology Development, LLC dated March 31, 2009EX-31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002EX-31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002EX-32.1 Certification of Chief Executive Officer pursuant to Section 906EX-32.2 Certification of Chief Financial Officer pursuant to Section 906
  2




---



##### Table of Contents



Item 1.
    
    Financial Statements
 CONVERTED ORGANICS INC.
 CONSOLIDATED BALANCE SHEETS
 June 30, 2009
    
    
    December 31, 2008(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,808,156
    
    
    $
    3,357,940Restricted cash
    
    
    50,941
    
    
    
    2,547,557Accounts receivable, net
    
    
    503,998
    
    
    
    313,650Inventories
    
    
    407,973
    
    
    
    289,730Prepaid rent
    
    
    490,286
    
    
    
    389,930Other prepaid expenses
    
    
    128,399
    
    
    
    73,937Deposits
    
    
    92,520
    
    
    
    141,423Other receivables
    
    
    
    
    
    
    94,250Deferred financing and issuance costs, net
    
    
    
    
    
    
    22,042Total current assets
    
    
    3,482,273
    
    
    
    7,230,459Deposits
    
    
    861,244
    
    
    
    912,054Restricted cash
    
    
    29,716
    
    
    
    60,563Property and equipment, net
    
    
    22,825,134
    
    
    
    19,725,146Construction-in-progress
    
    
    217,564
    
    
    
    974,900Capitalized bond costs, net
    
    
    838,175
    
    
    
    862,010Intangible assets, net
    
    
    2,709,961
    
    
    
    2,852,876Total assets
    
    $
    30,964,067
    
    
    $
    32,618,008LIABILITIES AND OWNERS EQUITY (DEFICIT)CURRENT LIABILITIESTerm notes payable  current
    
    $
    1,261,089
    
    
    $
    89,170Accounts payable
    
    
    4,279,836
    
    
    
    3,583,030Accrued compensation, officers, directors and consultants
    
    
    389,849
    
    
    
    430,748Accrued legal and other expenses
    
    
    363,545
    
    
    
    164,620Accrued interest
    
    
    616,249
    
    
    
    601,166Convertible notes payable, net of unamortized discount
    
    
    342,984
    
    
    
    4,602,660Capital lease obligations  current
    
    
    11,284
    
    
    
    Mortgage payable
    
    
    
    
    
    
    3,006Total current liabilities
    
    
    7,264,836
    
    
    
    9,474,400Capital lease obligation, net of current portion
    
    
    34,806
    
    
    
    Term notes payable, net of current portion
    
    
    1,008,094
    
    
    
    Mortgage payable, net of current portion
    
    
    
    
    
    
    245,160Convertible note payable, net of current portion
    
    
    198,466
    
    
    
    351,516Bonds payable
    
    
    17,500,000
    
    
    
    17,500,000Total liabilities
    
    
    26,006,202
    
    
    
    27,571,076COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    OWNERS EQUITY (DEFICIT)Preferred stock, $.0001 par value, authorized
10,000,000 shares; no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.0001 par value, authorized
40,000,000 shares at December 31, 2008 and
75,000,000 at June 30, 2009
    
    
    1,835
    
    
    
    743Additional paid-in capital
    
    
    40,668,709
    
    
    
    31,031,647Members equity
    
    
    
    
    
    
    619,657Accumulated deficit
    
    
    (35,712,679
    )
    
    
    (26,605,115
    )Total owners equity
    
    
    4,957,865
    
    
    
    5,046,932Total liabilities and owners equity
    
    $
    30,964,067
    
    
    $
    32,618,008
 The accompanying notes are an integral part of these consolidated financial statements.
 3




---



##### Table of Contents



CONVERTED ORGANICS INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months ended
    
    
    Six months endedJune 30, 2009
    
    
    June 30, 2008
    
    
    June 30, 2009
    
    
    June 30, 2008Revenues
    
    $
    992,364
    
    
    $
    492,864
    
    
    $
    1,484,203
    
    
    $
    752,907Cost of good sold
    
    
    2,113,074
    
    
    
    402,552
    
    
    
    3,757,264
    
    
    
    624,548Gross (loss) profit
    
    
    (1,120,710
    )
    
    
    90,312
    
    
    
    (2,273,061
    )
    
    
    128,359Operating expensesGeneral and administrative expenses
    
    
    2,502,643
    
    
    
    3,759,197
    
    
    
    4,175,661
    
    
    
    5,346,419Research and development
    
    
    12,116
    
    
    
    70,540
    
    
    
    179,500
    
    
    
    198,387Depreciation expense
    
    
    306,036
    
    
    
    3,051
    
    
    
    626,216
    
    
    
    6,889Amortization of capitalized costs
    
    
    79,251
    
    
    
    99,834
    
    
    
    180,542
    
    
    
    186,083Amortization of license
    
    
    4,125
    
    
    
    4,125
    
    
    
    8,250
    
    
    
    8,250Loss from operations
    
    
    (4,024,881
    )
    
    
    (3,846,435
    )
    
    
    (7,443,230
    )
    
    
    (5,617,669
    )Other income/(expenses)Interest income
    
    
    11,952
    
    
    
    77,807
    
    
    
    22,247
    
    
    
    206,627Derivative gain
    
    
    2,153,106
    
    
    
    
    
    
    
    3,565,091
    
    
    
    Other income
    
    
    39,201
    
    
    
    
    
    
    
    39,201
    
    
    
    Interest expense
    
    
    (1,202,959
    )
    
    
    (2,374,165
    )
    
    
    (3,109,711
    )
    
    
    (3,127,332
    )1,001,300
    
    
    
    (2,296,358
    )
    
    
    516,828
    
    
    
    (2,920,705
    )Loss before provision for income taxes
    
    
    (3,023,581
    )
    
    
    (6,142,793
    )
    
    
    (6,926,402
    )
    
    
    (8,538,374
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (3,023,581
    )
    
    $
    (6,142,793
    )
    
    $
    (6,926,402
    )
    
    $
    (8,538,374
    )Net loss per share, basic and diluted
    
    
    (0.19
    )
    
    
    (1.02
    )
    
    
    (0.58
    )
    
    
    (1.49
    )Weighted average common shares outstanding
    
    
    15,937,329
    
    
    
    6,009,919
    
    
    
    11,985,904
    
    
    
    5,747,616
 The accompanying notes are an integral part of these consolidated financial statements.
 4




---



##### Table of Contents



CONVERTED ORGANICS INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN OWNERS EQUITY (DEFICIT)
 Six months ended June 30, 2009
 (Unaudited)
 Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares Issued and
    
    
    
    
    
    
    Additional
    
    
    Members
    
    
    Accumulated
    
    
    Owners EquityOutstanding
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Equity
    
    
    Deficit
    
    
    (Deficit)Balance, January 1, 2009, before cumulative effect of change in accounting principle
    
    
    7,431,436
    
    
    $
    743
    
    
    $
    31,031,647
    
    
    $
    619,657
    
    
    $
    (26,605,115
    )
    
    $
    5,046,932Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (2,936,250
    )
    
    
    
    
    
    
    (2,146,858
    )
    
    
    (5,083,108
    )Balance, January 1, 2009, after cumulative effect of change in accounting principle
    
    
    7,431,436
    
    
    
    743
    
    
    
    28,095,397
    
    
    
    619,657
    
    
    
    (28,751,973
    )
    
    
    (36,176
    )Members contributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    915,651
    
    
    
    
    
    
    
    915,651Members distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (201,630
    )
    
    
    
    
    
    
    (201,630
    )Deconsolidation of former variable interest entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,367,982
    )
    
    
    
    
    
    
    (1,367,982
    )Common stock issued to holders of convertible notes payable in connection with
extension
    
    
    200,000
    
    
    
    20
    
    
    
    561,980
    
    
    
    
    
    
    
    
    
    
    
    562,000Common stock issued upon conversion of convertible notes payable
    
    
    7,600,644
    
    
    
    760
    
    
    
    6,224,835
    
    
    
    
    
    
    
    
    
    
    
    6,225,595Common stock issued as compensation
    
    
    121,528
    
    
    
    12
    
    
    
    120,301
    
    
    
    
    
    
    
    
    
    
    
    120,313Warrants issued in connection with release of restricted cash
    
    
    
    
    
    
    
    
    
    
    662,479
    
    
    
    
    
    
    
    
    
    
    
    662,479Warrants issued in connection with financing short-term non-convertible note
    
    
    
    
    
    
    
    
    
    
    920,995
    
    
    
    
    
    
    
    
    
    
    
    920,995Issuance of stock options
    
    
    
    
    
    
    
    
    
    
    190,022
    
    
    
    
    
    
    
    
    
    
    
    190,022Common stock issued upon exercise of warrants
    
    
    1,500,000
    
    
    
    150
    
    
    
    1,964,850
    
    
    
    
    
    
    
    
    
    
    
    1,965,000Issuance of common stock
    
    
    1,500,000
    
    
    
    150
    
    
    
    1,927,850
    
    
    
    
    
    
    
    
    
    
    
    1,928,000Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,304
    
    
    
    (6,960,706
    )
    
    
    (6,926,402
    )Balance, June 30, 2009
    
    
    18,353,608
    
    
    $
    1,835
    
    
    $
    40,668,709
    
    
    $
    
    
    
    $
    (35,712,679
    )
    
    $
    4,957,865
 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)
 Six months endedJune 30, 2009
    
    
    June 30, 2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (6,926,402
    )
    
    $
    (8,538,374
    )Adjustments to reconcile net loss to net cash
used in operating activities:Consolidation of variable interest entity
    
    
    
    
    
    
    6,164Deconsolidation of variable interest entity
    
    
    (596,170
    )
    
    
    Amortization of intangible asset  license
    
    
    8,250
    
    
    
    8,250Amortization of capitalized bond costs
    
    
    23,835
    
    
    
    23,835Amortization of deferred financing fees
    
    
    22,042
    
    
    
    159,100Amortization of intangible assets
    
    
    134,665
    
    
    
    Depreciation of fixed assets
    
    
    1,015,444
    
    
    
    98,194Beneficial conversion feature
    
    
    230,492
    
    
    
    858,064Amortization of discounts on private financing
    
    
    147,813
    
    
    
    1,563,750Common stock issued for extension of convertible note payable
    
    
    562,000
    
    
    
    Common stock issued as compensation
    
    
    120,313
    
    
    
    Stock option compensation expense
    
    
    190,022
    
    
    
    2,329,951Warrants issued in connection with private financing and equity transactions
    
    
    1,583,474
    
    
    
    Derivative gain
    
    
    (3,565,091
    )
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (262,558
    )
    
    
    (238,340
    )Inventory
    
    
    (118,243
    )
    
    
    (265,187
    )Prepaid expenses and other current assets
    
    
    (154,818
    )
    
    
    (576,152
    )Other assets
    
    
    94,250
    
    
    
    9,115Deposits
    
    
    108,713
    
    
    
    (147,397
    )Increase (decrease) in:Accounts payable and other accrued expenses
    
    
    3,195,195
    
    
    
    598,309Accrued compensation  officers, directors and consultants
    
    
    (40,899
    )
    
    
    (38,423
    )Accrued interest
    
    
    133,467
    
    
    
    29,729Other
    
    
    (39,201
    )
    
    
    25,000Net cash used in operating activities
    
    
    (4,133,407
    )
    
    
    (4,094,412
    )CASH FLOWS FROM INVESTING ACTIVITIESRelease of restricted cash
    
    
    2,527,463
    
    
    
    6,194,617Cash paid for acquisitions
    
    
    
    
    
    
    (1,500,000
    )Purchase of fixed assets
    
    
    (3,512,559
    )
    
    
    (131,222
    )Capitalized interest
    
    
    
    
    
    
    (398,570
    )Construction costs
    
    
    
    
    
    
    (5,329,283
    )Net cash used in investing activities
    
    
    (985,096
    )
    
    
    (1,164,458
    )CASH FLOWS FROM FINANCING ACTIVITIESMembers contributions
    
    
    230,983
    
    
    
    425,000Members distributions
    
    
    (201,630
    )
    
    
    Net proceeds from exercise of options
    
    
    
    
    
    
    536,250Net proceeds from exercise of warrants
    
    
    1,965,000
    
    
    
    6,159,580Net proceeds from stock offering
    
    
    1,928,000
    
    
    
    Net proceeds from nonconvertible short-term note
    
    
    1,183,500
    
    
    
    Repayment of nonconvertible short-term note
    
    
    (1,331,313
    )
    
    
    Proceeds from private financing, net of original issue discount
    
    
    
    
    
    
    3,715,000Repayment of capital lease obligations
    
    
    (6,888
    )
    
    
    Repayment of term notes
    
    
    (197,990
    )
    
    
    (657,276
    )Repayment of mortgage payable
    
    
    (943
    )
    
    
    (4,833
    )Net cash provided by financing activities
    
    
    3,568,719
    
    
    
    10,173,721NET (DECREASE) INCREASE IN CASH
    
    
    (1,549,784
    )
    
    
    4,914,851Cash and cash equivalents, beginning of period
    
    
    3,357,940
    
    
    
    287,867Cash and cash equivalents, end of period
    
    $
    1,808,156
    
    
    $
    5,202,718Supplemental cash flow information:Cash paid during the period in:Interest
    
    $
    1,031,973
    
    
    $
    893,571Non-cash financing activities:Financing costs paid from proceeds of private financing
    
    $
    
    
    
    $
    335,000Equipment acquired through assumption of capital lease
    
    
    52,979
    
    
    
    Equipment acquired through assumption of term note
    
    
    118,250
    
    
    
    Common stock issued upon conversion of convertible notes payable
    
    
    6,225,595
    
    
    
    Beneficial conversion discount on convertible note
    
    
    
    
    
    
    2,943,386Discount on warrants issued in connection with financing
    
    
    
    
    
    
    1,113,750
 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
(UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION AND NATURE OF OPERATIONS
   NATURE OF OPERATIONS
     NOTE 2  GOING CONCERN   MANAGEMENTS PLAN OF OPERATION
   7




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 2  GOING CONCERN  MANAGEMENTS PLAN OF OPERATION  CONTINUED
   NOTE 3  SIGNIFICANT ACCOUNTING POLICIES
 CONSOLIDATION
   USE OF ESTIMATES
  CASH AND CASH EQUIVALENTS
  8




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 RESTRICTED CASH
  ACCOUNTS RECEIVABLE
  INVENTORIES
  PREPAID RENT
  DEFERRED FINANCING COSTS
  INTANGIBLE ASSETS
 Goodwill and
Other Intangible Assets.
 LONG-LIVED ASSETS
 Accounting for the Impairment or Disposal of Long-Lived
Assets,
 9




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 PROPERTY AND EQUIPMENT
  CAPITALIZED BOND COSTS
  REVENUE RECOGNITION
 Revenue Recognition in Financial Statements,
 
    
    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.
  SHIPPING AND HANDLING COSTS
  FAIR VALUE MEASUREMENTS
 Fair Value Measurements
 NEWLY ADOPTED ACCOUNTING STANDARDS
 Disclosures about Derivative Instruments and Hedging Activities Accounting
for Derivative Instruments and Hedging Activities
 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock
 10




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
   Interim
Disclosures about Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments Interim Financial Reporting.
 Subsequent Events
 EARNINGS (LOSS) PER SHARE
  SEGMENT REPORTING
 Disclosure about Segments
of an Enterprise and Related Information
 11




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 4  INVENTORIES
  2009
    
    
    2008Finished goods
    
    $
    114,580
    
    
    $
    214,053Raw materials
    
    
    152,016
    
    
    
    18,785Packaging materials
    
    
    141,377
    
    
    
    56,892Total inventories
    
    $
    407,973
    
    
    $
    289,730
 NOTE 5  FAIR VALUE MEASUREMENTS
 Fair Value Measurements
 
    
    Level 1  Quoted prices in active markets that are unadjusted and accessible at the
measurement date for identical, unrestricted assets or liabilities;
    
    Level 2  Quoted prices for identical assets and liabilities in markets that are not
active, quoted prices for similar assets and liabilities in active markets or financial
instruments for which significant observable inputs are available, either directly or
indirectly such as interest rates and yield curves that are observable at commonly quoted
intervals; and
    
    Level 3  prices or valuations that require inputs that are unobservable.
   BalanceObservable Inputs
    
    June 30, 2009
    
    December 31, 2008AssetsCertificate of
Deposit
    
    Level 2
    
    $
    0
    
    
    $
    534,821
  NOTE 6  DEBT
 TERM NOTES
  12




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT  CONTINUED
      BOND FINANCING
   CONVERTIBLE NOTE PAYABLE
  13




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT  CONTINUED
  MORTGAGE NOTE PAYABLE
  PRIVATE FINANCING
    Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants
 Accounting for
Convertible Securities with Beneficial
 14




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT  CONTINUED
 Conversion Features or Contingently Adjustable Conversion Ratios
  Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants
  DERIVATIVE INSTRUMENTS
   NOTE 7  CAPITALIZATION OF INTEREST COSTS
 Capitalization of Interest Cost in Situations Involving Certain Tax-Exempt Borrowings
and Certain Gifts and Grants
 15




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 7  CAPITALIZATION OF INTEREST COSTS  CONTINUED
  NOTE 8  OWNERS EQUITY (DEFICIT)
           16




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 8  OWNERS EQUITY (DEFICIT)  CONTINUED
 WARRANTS
   WARRANT EXERCISE
   WARRANT REDEMPTION
   17




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 8  OWNERS EQUITY (DEFICIT)  CONTINUED
  Class B Warrants
    
    Warrants
    
    Warrants
    
    Warrants
    
    WarrantsExercise Price
    
    Exercise
    
    Exercise Price
    
    Exercise Price
    
    Exercise Price$11.00
    
    Price $1.00
    
    $1.50
    
    $1.40
    
    $1.63Outstanding at
January 1, 2009
    
    
    2,648,029
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issued in
connection with
agreement with bond
holders on March 6,
2009
    
    
    2,284,409
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issued in
connection with
securing debt on
May 5, 2009
    
    
    
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    
    
    
    
    Issued in
connection with
issuance of shares
on May 19, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    Warrants exercised
May 26, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500,000
    )
    
    
    Issued in
connection with May
26 warrants
exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000Outstanding at June
30, 2009
    
    
    4,932,438
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    
    
    
    
    1,500,000
 NOTE 9  STOCK OPTION PLAN
  Weighted AverageShares
    
    
    Price per ShareOutstanding at January 1, 2009
    
    
    1,246,735
    
    
    $
    4.50Granted
    
    
    233,500
    
    
    
    1.10Exercised
    
    
    
    
    
    
    Canceled
    
    
    (231,340
    )
    
    
    4.75Outstanding and exercisable at June 30, 2009
    
    
    1,248,895
    
    
    $
    3.82
  18




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 10  ACQUISITIONS
   Business Combinations
  Inventories
    
    $
    11,114Accounts receivable
    
    
    28,702Technological know-how
    
    
    271,812Trade name
    
    
    228,188Existing customer relationships
    
    
    2,030,513Building
    
    
    111,584Equipment and machinery
    
    
    543,000Assumption of liabilities
    
    
    (224,913
    )Total purchase price
    
    $
    3,000,000
   Six months ended June 30,2009
    
    2008Revenues (in thousands)
    
    $
    1,484
    
    
    $
    753Net loss (in thousands)
    
    
    (6,926
    )
    
    
    (8,592
    )Net loss per share  basic and diluted
    
    
    (.58
    )
    
    
    (1.56
    )
 NOTE 11  RELATED PARTY TRANSACTIONS
 ACCRUED COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS
  CONVERTED ORGANICS OF RHODE ISLAND, LLC
  19




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 11  RELATED PARTY TRANSACTIONS  CONTINUED
 PACKAGING VENDOR
  NOTES PAYABLE
  NOTE 12 COMMITMENTS AND CONTINGENCIES
  For years ended December 31, 2009 (July 1, 2009 through December 31, 2009)
    
    
    522,4002010
    
    
    1,044,8002011
    
    
    1,056,2002012
    
    
    1,069,1002013
    
    
    1,077,4002014 and thereafter
    
    
    9,024,000$
    13,793,900
 LEGAL PROCEEDINGS
   20




---



##### Table of Contents



CONVERTED ORGANICS INC.  NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 12 COMMITMENTS AND CONTINGENCIES  CONTINUED
  OTHER
    NOTE 13  SUBSEQUENT EVENTS
   21




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
  Woodbridge Facility
  22




---



##### Table of Contents



UOP Acquisition; Gonzales Facility
    WRI Acquisition
  Pro Forma Financial Information
  23




---



##### Table of Contents



Six months ended June 30,2009
    
    2008Revenues (in thousands)
    
    $
    1,484
    
    
    $
    753Net loss (in thousands)
    
    
    (6,926
    )
    
    
    (8,592
    )Net loss per share  basic and diluted
    
    
    (.58
    )
    
    
    (1.56
    )
 Rhode Island Facility
  Recent Financing Activities
 January 2008, March 2009, May 2009 and July 2009 Financings
   Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants
 24




---



##### Table of Contents



Construction and Start-up Period
    25




---



##### Table of Contents



Full-scale Operations
   Future Development
    Trends and Uncertainties Affecting our Operations
  Liquidity and Capital Resources
  26




---



##### Table of Contents



27




---



##### Table of Contents



Results of Operations
           28




---



##### Table of Contents



Off-Balance Sheet Transactions
  
 Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4.
    
    Controls and Procedures
   29




---



##### Table of Contents



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
   30




---



##### Table of Contents



For
    
    WithheldProposal 1
    
    
    11,041,940
    
    
    
    1,161,757
 For
    
    Against
    
    AbstainProposal 2
    
    
    11,943,178
    
    
    
    154,664
    
    
    
    105,855Proposal 3
    
    
    10,441,940
    
    
    
    1,471,360
    
    
    
    290,397
 
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits
 Exhibit No.
    
    Description of Exhibit10.14
    
    Secured Convertible Promissory Note in favor of SNC-Lavalin Project Services, Inc., dated June 16, 200910.15
    
    Secured Convertible Promissory Note in favor of Hatzel & Buehler, Inc.10.16
    
    Secured Convertible Promissory Note in favor of Recycling Technology Development, LLC dated March 31, 200931.1
    
    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
 31




---



##### Table of Contents



SIGNATURES
  Converted Organics Inc.Date: August 14, 2009
    /s/ Edward J. GildeaEdward J. GildeaPresident and Chief Executive OfficerDate: August 14, 2009
    /s/ David R. AllenDavid R. AllenChief Financial Officer and Executive Vice President of

AdministrationDate: August 14, 2009
    /s/ Ellen P. ONeilEllen P. ONeilVice President of Finance & Accounting 32