##### 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, 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(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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INDEX
 Page No.PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008 (audited)
    
    
    4Consolidated Statements of Operations for the three and nine month periods ended September 30, 2009 and 2008
    
    
    5Consolidated Statement of Changes in Owners Equity (Deficit) for the nine month period ended September 30, 2009
    
    
    6Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2009 and 2008
    
    
    7Notes to Consolidated Interim Financial Statements (unaudited)
    
    
    25Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    34Item 4(T). Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36EX-4.1EX-4.2EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



Item 1. Financial Statements
 
 CONVERTED ORGANICS INC.
CONSOLIDATED BALANCE SHEETS
 September 30, 2009
    
    
    December 31, 2008(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,427,679
    
    
    $
    3,357,940Restricted cash
    
    
    
    
    
    
    2,547,557Accounts receivable, net
    
    
    303,099
    
    
    
    313,650Inventories
    
    
    464,284
    
    
    
    289,730Prepaid rent
    
    
    540,599
    
    
    
    389,930Other prepaid expenses
    
    
    140,873
    
    
    
    73,937Deposits
    
    
    29,329
    
    
    
    141,423Other receivables
    
    
    
    
    
    
    94,250Deferred financing and issuance costs, net
    
    
    
    
    
    
    22,042Total current assets
    
    
    2,905,863
    
    
    
    7,230,459Deposits
    
    
    868,026
    
    
    
    912,054Restricted cash
    
    
    29,782
    
    
    
    60,563Property and equipment, net
    
    
    22,391,883
    
    
    
    19,725,146Construction-in-progress
    
    
    271,645
    
    
    
    974,900Capitalized bond costs, net
    
    
    826,258
    
    
    
    862,010Intangible assets, net
    
    
    2,633,834
    
    
    
    2,852,876Total assets
    
    $
    29,927,291
    
    
    $
    32,618,008LIABILITIES AND OWNERS EQUITY (DEFICIT)CURRENT LIABILITIESTerm notes payable  current
    
    $
    1,608,759
    
    
    $
    89,170Accounts payable
    
    
    3,628,805
    
    
    
    3,583,030Accrued compensation, officers, directors and consultants
    
    
    343,946
    
    
    
    430,748Accrued legal and other expenses
    
    
    642,193
    
    
    
    164,620Accrued interest
    
    
    287,800
    
    
    
    601,166Convertible notes payable, net of unamortized discount
    
    
    477,355
    
    
    
    4,602,660Derivative
liabilities
    
    
    3,335,780
    
    
    
    Capital lease obligations  current
    
    
    11,540
    
    
    
    Mortgage payable
    
    
    
    
    
    
    3,006Total current liabilities
    
    
    10,336,178
    
    
    
    9,474,400Capital lease obligation, net of current portion
    
    
    31,824
    
    
    
    Term notes payable, net of current portion
    
    
    934,788
    
    
    
    Mortgage payable, net of current portion
    
    
    
    
    
    
    245,160Convertible note payable, net of current portion
    
    
    108,895
    
    
    
    351,516Bonds payable
    
    
    17,500,000
    
    
    
    17,500,000Total liabilities
    
    
    28,911,685
    
    
    
    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 September 30, 2009
    
    
    2,041
    
    
    
    743Additional paid-in capital
    
    
    41,723,280
    
    
    
    31,031,647Members equity
    
    
    
    
    
    
    619,657Accumulated deficit
    
    
    (40,709,715
    )
    
    
    (26,605,115
    )Total owners equity
    
    
    1,015,606
    
    
    
    5,046,932Total liabilities and owners equity
    
    $
    29,927,291
    
    
    $
    32,618,008
 The accompanying notes are an integral part of these consolidated financial statements.
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CONVERTED ORGANICS INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
 Three months ended
    
    
    Nine months endedSeptember 30, 2009
    
    
    September 30, 2008
    
    
    September 30, 2009
    
    
    September 30, 2008Revenues
    
    $
    747,246
    
    
    $
    428,516
    
    
    $
    2,231,449
    
    
    $
    1,181,423Cost of good sold
    
    
    1,798,759
    
    
    
    647,817
    
    
    
    5,556,023
    
    
    
    1,272,365Gross loss
    
    
    (1,051,513
    )
    
    
    (219,301
    )
    
    
    (3,324,574
    )
    
    
    (90,942
    )Operating expensesGeneral and administrative expenses
    
    
    1,897,899
    
    
    
    1,469,988
    
    
    
    6,073,560
    
    
    
    6,816,407Research and development
    
    
    87,500
    
    
    
    102,528
    
    
    
    267,000
    
    
    
    300,915Depreciation expense
    
    
    338,978
    
    
    
    61,542
    
    
    
    965,194
    
    
    
    68,431Amortization of capitalized costs
    
    
    83,919
    
    
    
    99,834
    
    
    
    264,461
    
    
    
    285,917Amortization of license
    
    
    4,125
    
    
    
    4,125
    
    
    
    12,375
    
    
    
    12,375Loss from operations
    
    
    (3,463,934
    )
    
    
    (1,957,318
    )
    
    
    (10,907,164
    )
    
    
    (7,574,987
    )Other income/(expenses)Interest income
    
    
    73
    
    
    
    59,692
    
    
    
    22,320
    
    
    
    266,319Derivative
gain (loss)
    
    
    (241,448
    )
    
    
    
    
    
    
    4,056,997
    
    
    
    Other income
    
    
    14,754
    
    
    
    
    
    
    
    53,955
    
    
    
    Interest expense
    
    
    (1,119,733
    )
    
    
    (1,156,739
    )
    
    
    (5,149,546
    )
    
    
    (4,284,071
    )(1,346,354
    )
    
    
    (1,097,047
    )
    
    
    (1,016,274
    )
    
    
    (4,017,752
    )Loss before provision for income taxes
    
    
    (4,810,288
    )
    
    
    (3,054,365
    )
    
    
    (11,923,438
    )
    
    
    (11,592,739
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (4,810,288
    )
    
    $
    (3,054,365
    )
    
    $
    (11,923,438
    )
    
    $
    (11,592,739
    )Net loss per share, basic and diluted
    
    $
    (0.24
    )
    
    $
    (0.51
    )
    
    $
    (0.81
    )
    
    $
    (1.99
    )Weighted average common shares outstanding
    
    
    20,065,306
    
    
    
    6,017,942
    
    
    
    14,708,633
    
    
    
    5,838,371
 The accompanying notes are an integral part of these consolidated financial statements.
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CONVERTED ORGANICS INC.
 CONSOLIDATED STATEMENT OF CHANGES IN OWNERS EQUITY (DEFICIT)
 Nine months ended September 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
    
    
    7,698,144
    
    
    
    770
    
    
    
    6,322,325
    
    
    
    
    
    
    
    
    
    
    
    6,323,095Common stock issued as compensation
    
    
    121,528
    
    
    
    12
    
    
    
    120,301
    
    
    
    
    
    
    
    
    
    
    
    120,313Warrants issued in connection with release of restricted cash
    
    
    
    
    
    
    
    
    
    
    662,479
    
    
    
    
    
    
    
    
    
    
    
    662,479Issuance 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
    
    
    3,461,600
    
    
    
    346
    
    
    
    3,805,926
    
    
    
    
    
    
    
    
    
    
    
    3,806,272Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,304
    
    
    
    (11,957,742
    )
    
    
    (11,923,438
    )Balance, September 30, 2009
    
    
    20,412,708
    
    
    $
    2,041
    
    
    $
    41,723,280
    
    
    $
    
    
    
    $
    (40,709,715
    )
    
    $
    1,015,606
 The accompanying notes are an integral part of these consolidated financial statements.
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CONVERTED ORGANICS INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine months endedSeptember 30, 2009
    
    
    September 30, 2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (11,923,438
    )
    
    $
    (11,592,739
    )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
    
    
    12,375
    
    
    
    12,375Amortization of capitalized bond costs
    
    
    35,752
    
    
    
    35,752Amortization of deferred financing fees
    
    
    22,042
    
    
    
    245,350Amortization of intangible assets
    
    
    206,667
    
    
    
    Depreciation of fixed assets
    
    
    1,559,960
    
    
    
    213,323Beneficial conversion feature
    
    
    230,492
    
    
    
    1,780,026Amortization
of discounts attributable to warrants on private financing
    
    
    1,458,647
    
    
    
    1,563,750Non-cash
interest expense  private financings
    
    
    1,245,186
    
    
    
    Common 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
    
    
    662,479
    
    
    
    Derivative gain
    
    
    (4,056,997
    )
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (61,659
    )
    
    
    (203,311
    )Inventory
    
    
    (174,554
    )
    
    
    (343,264
    )Prepaid expenses and other current assets
    
    
    (217,605
    )
    
    
    (260,280
    )Other assets
    
    
    94,250
    
    
    
    34,476Deposits
    
    
    165,122
    
    
    
    (486,517
    )Increase (decrease) in:Accounts payable and other accrued expenses
    
    
    3,157,897
    
    
    
    2,631,391Accrued compensation  officers, directors and consultants
    
    
    (86,802
    )
    
    
    (46,265
    )Accrued interest
    
    
    (181,018
    )
    
    
    (305,409
    )Other
    
    
    (53,955
    )
    
    
    25,000Net cash used in operating activities
    
    
    (7,628,994
    )
    
    
    (4,360,227
    )CASH FLOWS FROM INVESTING ACTIVITIESRelease of restricted cash
    
    
    2,578,338
    
    
    
    9,758,765Cash paid for acquisitions
    
    
    
    
    
    
    (1,500,000
    )Purchase of fixed assets
    
    
    (3,623,823
    )
    
    
    (7,025,121
    )Capitalized interest
    
    
    
    
    
    
    (638,368
    )Construction costs
    
    
    (54,081
    )
    
    
    (3,830,683
    )Net cash used in investing activities
    
    
    (1,099,566
    )
    
    
    (3,235,407
    )CASH FLOWS FROM FINANCING ACTIVITIESMembers contributions
    
    
    230,983
    
    
    
    541,600Members distributions
    
    
    (201,630
    )
    
    
    Net proceeds from exercise of options
    
    
    
    
    
    
    536,250Net proceeds from exercise of warrants
    
    
    1,965,000
    
    
    
    6,169,554Net proceeds from stock offering
    
    
    3,806,272
    
    
    
    Net proceeds from nonconvertible short-term note
    
    
    1,182,500
    
    
    
    Net proceeds from convertible short-term note
    
    
    1,400,000Repayment of nonconvertible short-term note
    
    
    (1,330,313
    )
    
    
    Proceeds from private financing, net of original issue discount
    
    
    
    
    
    
    3,715,000Repayment of demand notes
    
    
    
    
    
    
    (69,600
    )Repayment of capital lease obligations
    
    
    (9,614
    )
    
    
    Repayment of term notes
    
    
    (243,956
    )
    
    
    (734,729
    )Repayment of mortgage payable
    
    
    (943
    )
    
    
    (5,912
    )Net cash provided by financing activities
    
    
    6,798,299
    
    
    
    10,152,163NET (DECREASE) INCREASE IN CASH
    
    
    (1,930,261
    )
    
    
    2,556,529Cash and cash equivalents, beginning of period
    
    
    3,357,940
    
    
    
    287,867Cash and cash equivalents, end of period
    
    $
    1,427,679
    
    
    $
    2,844,396Supplemental cash flow information:Cash paid during the period in:Interest
    
    $
    1,587,253
    
    
    $
    1,722,863Non-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
    
    
    6,323,095
    
    
    
    Beneficial conversion discount on convertible note
    
    
    
    
    
    
    2,943,386Fair value
of derivatives issued
    
    
    3,827,686
    
    
    
    Discount on
warrants issued in connection with financings
    
    
    2,870,313
    
    
    
    1,113,750Members contribution of convertible note
    
    
    684,668
    
    
    
    Conversion of accounts payable into notes payable
    
    
    2,634,039
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements.
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##### Table of Contents



CONVERTED ORGANICS INC.
 
 NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  (UNAUDITED)
 NOTE 1  BASIS OF PRESENTATION AND NATURE OF OPERATIONS
   NATURE OF OPERATIONS
     NOTE 2  GOING CONCERN   MANAGEMENTS PLAN OF OPERATION
   7




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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
 The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles The Hierarchy of Generally Accepted Accounting Principles
 8




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 CONSOLIDATION
   USE OF ESTIMATES
  CASH AND CASH EQUIVALENTS
  RESTRICTED CASH
  ACCOUNTS RECEIVABLE
  INVENTORIES
  9




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 PREPAID RENT
  DEFERRED FINANCING COSTS
  INTANGIBLE ASSETS
  LONG-LIVED ASSETS
  PROPERTY AND EQUIPMENT
  CAPITALIZED BOND COSTS
  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.
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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
  SHIPPING AND HANDLING COSTS
  FAIR VALUE MEASUREMENTS
  EARNINGS (LOSS) PER SHARE
  SEGMENT REPORTING
  NEWLY ADOPTED ACCOUNTING STANDARDS
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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
    NOTE 4  INVENTORIES
  2009
    
    
    2008Finished goods
    
    $
    67,867
    
    
    $
    214,053Raw materials
    
    
    109,340
    
    
    
    18,785Packaging materials
    
    
    287,077
    
    
    
    56,892Total inventories
    
    $
    464,284
    
    
    $
    289,730
 NOTE 5  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.
  12




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 5  FAIR VALUE MEASUREMENTS  CONTINUED
  BalanceSeptember 30,Observable Inputs
    
    2009
    
    December 31, 2008AssetsCertificate of
Deposit
    
    Level 2
    
    $
    
    
    
    $
    534,821Derivative
liabilities
    
    Level 3
    
    
    (3,335,780
    )
    
    
    
  Balance as
of December 31, 2008
    
    $
    Cumulative effect of change in accounting principle
    
    
    (5,083,108
    )Purchases, issuances and settlements, net
    
    
    (2,309,669
    )Net gains
    
    
    4,056,997Balance as
of September 30, 2009
    
    $
    (3,335,780
    )
  NOTE 6  DEBT
 TERM NOTES
      13




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT  CONTINUED
    BOND FINANCING
   CONVERTIBLE NOTE PAYABLE
   MORTGAGE NOTE PAYABLE
  14




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT  CONTINUED
 PRIVATE FINANCING
       15




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT  CONTINUED
    16




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 6  DEBT  CONTINUED
 DERIVATIVE INSTRUMENTS
    NOTE 7  CAPITALIZATION OF INTEREST COSTS
  NOTE 8  OWNERS EQUITY (DEFICIT)
   17




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 8  OWNERS EQUITY (DEFICIT)  CONTINUED
      WARRANTS
    WARRANT EXERCISE
   18




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 8  OWNERS EQUITY (DEFICIT)  CONTINUED
 WARRANT REDEMPTION
    Class E
    
    Class F
    
    Class GClass B
    
    Class C
    
    Class D
    
    Warrants
    
    Warrants
    
    Warrants
    
    WarrantsWarrants
    
    Warrants
    
    Warrants
    
    Exercise
    
    Exercise
    
    Exercise
    
    ExerciseExercise
    
    Exercise
    
    Exercise
    
    Price
    
    Price
    
    Price
    
    PricePrice $11.00
    
    Price $1.00
    

    Price $1.02
    
    $1.40
    
    $1.63
    
    $1.25
    
    $1.25Outstanding 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 7, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    
    
    
    
    Issued in
connection with
issuance of shares
on July 15, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585,000
    
    
    
    Issued in
connection with
issuance of
convertible debt on
September 8, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500,000Outstanding at
September 30, 2009
    
    
    4,932,438
    
    
    
    885,000
    
    
    
    415,000
    
    
    
    
    
    
    
    1,500,000
    
    
    
    585,000
    
    
    
    2,500,000
 19




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 9  STOCK OPTION PLAN
  Weighted AverageShares
    
    
    Price per ShareOutstanding at January 1, 2009
    
    
    1,246,735
    
    
    $
    4.50Granted
    
    
    233,500
    
    
    
    1.10Exercised
    
    
    
    
    
    
    Canceled
    
    
    (241,340
    )
    
    
    4.75Outstanding and exercisable at September 30, 2009
    
    
    1,238,895
    
    
    $
    3.81
  NOTE 10  ACQUISITIONS
     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
  20




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 10  ACQUISITIONS  CONTINUED
  Nine months ended September 30,2009
    
    2008Revenues (in thousands)
    
    $
    2,231
    
    
    $
    1,181Net loss (in thousands)
    
    
    (11,923
    )
    
    
    (11,646
    )Net loss per share  basic and diluted
    
    
    (0.81
    )
    
    
    (1.99
    )
 NOTE 11  RELATED PARTY TRANSACTIONS
 ACCRUED COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS
  CONVERTED ORGANICS OF RHODE ISLAND, LLC
  PACKAGING VENDOR
  NOTES PAYABLE
  NOTE 12 COMMITMENTS AND CONTINGENCIES
  For years ended December 31,2009 (October 1, 2009 through December 31, 2009)
    
    
    266,5002010
    
    
    1,044,8002011
    
    
    1,056,2002012
    
    
    1,069,1002013
    
    
    1,077,4002014 and thereafter
    
    
    9,024,000$
    13,538,000
 21




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 12 COMMITMENTS AND CONTINGENCIES  CONTINUED
 LEGAL PROCEEDINGS
     OTHER
  22




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CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 12  COMMITMENTS AND CONTINGENCIES  CONTINUED
    NOTE 13  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS AND CHANGES TO PRIOR PERIOD
PRESENTATION
  Condensed Consolidated Statement of Operations
 Three months ended June 30, 2009
    
    Six months ended June 30, 2009Previously
    
    
    
    
    
    
    
    
    
    PreviouslyReported
    
    Adjustment
    
    Restated
    
    Reported
    
    Adjustment
    
    RestatedRevenues
    
    $
    992,364
    
    
    $
    
    
    
    $
    992,364
    
    
    $
    1,484,203
    
    
    $
    
    
    
    $
    1,484,203Gross (loss) profit
    
    
    (1,120,710
    )
    
    
    
    
    
    
    (1,120,710
    )
    
    
    (2,273,061
    )
    
    
    
    
    
    
    (2,273,061
    )Loss from operations
    
    
    (4,024,881
    )
    
    
    
    
    
    
    (4,024,881
    )
    
    
    (7,443,230
    )
    
    
    
    
    
    
    (7,443,230
    )Derivative gain
    
    
    2,153,106
    
    
    
    733,354
    
    
    
    2,886,460
    
    
    
    3,565,091
    
    
    
    733,354
    
    
    
    4,298,445Interest expense
    
    
    (1,202,959
    )
    
    
    (920,102
    )
    
    
    (2,123,061
    )
    
    
    (3,109,711
    )
    
    
    (920,102
    )
    
    
    (4,029,813
    )Net loss
    
    $
    (3,023,581
    )
    
    $
    (186,748
    )
    
    $
    (3,210,329
    )
    
    $
    (6,926,402
    )
    
    $
    (186,748
    )
    
    $
    (7,113,150
    )
 23




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##### Table of Contents



CONVERTED ORGANICS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS  CONTINUED  (UNAUDITED)
 NOTE 13  RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS AND CHANGES TO PRIOR PERIOD
PRESENTATION  CONTINUED
 Condensed Consolidated Balance Sheet
 As of June 30, 2009Previously Reported
    
    Adjustment
    
    RestatedTotal assets
    
    $
    30,964,067
    
    
    $
    
    
    
    $
    30,964,067Derivative liability
    
    
    
    
    
    
    1,107,743
    
    
    
    1,107,743Total liabilities
    
    
    26,006,202
    
    
    
    1,107,743
    
    
    
    27,113,945Additional paid-in capital
    
    
    40,668,709
    
    
    
    (920,995
    )
    
    
    39,747,714Accumulated deficit
    
    
    (35,712,679
    )
    
    
    (186,748
    )
    
    
    (35,899,427
    )Total owners equity
    
    
    4,957,865
    
    
    
    (1,107,743
    )
    
    
    3,850,122Total liabilities and owners equity
    
    $
    30,964,067
    
    
    $
    
    
    
    $
    30,964,067
 NOTE 14  SUBSEQUENT EVENTS
    24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
  Significant Recent Developments/Results of the Secondary Public Offering
  
    
    general corporate purposes and working capital requirements;
    
    further development and execution of our sales, marketing and distribution plan;
    
    further expansion at our Gonzales facility;
    
    continued development of our smaller capacity operating unit line of business
(including patent and intellectual property development);
    
    potential investment and development in new facilities;
    
    additional alliances and acquisitions; and
    
    continued development of our licensing program.
  25




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##### Table of Contents



Woodbridge Facility
    UOP Acquisition; Gonzales Facility
   26




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##### Table of Contents



WRI Acquisition
  Pro Forma Financial Information
   Nine months ended September 30,2009
    
    2008Revenues (in thousands)
    
    $
    2,231
    
    
    $
    1,181Net loss (in thousands)
    
    
    (11,923
    )
    
    
    (11,646
    )Net loss per share  basic and diluted
    
    
    (0.81
    )
    
    
    (1.99
    )
 Rhode Island Facility
 27




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##### Table of Contents



Recent Financing Activities
 January 2008, March 2009, May 2009, July 2009, September 2009 and October 2009 Financings
     28




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th
 29




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Construction and Start-up Period
    Full-scale Operations
   30




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##### Table of Contents



Future Development
   
    
    Engaged a local businessperson well-acquainted with the community to
assist us in the permitting process and development of support from
community groups;
    
    Participated in numerous meetings with state, county and local
regulatory bodies as well as environmental and economic development
authorities; and
    
    Identified potential facility sites.
   
    
    The Rhode Island Industrial Facilities Corporation gave initial
approval to our Revenue Bond Financing Application for up to $15.0
million for the construction of our proposed Rhode Island facility. In
addition, the Rhode Island Resource Recovery Corporation gave us final
approval to lease nine acres of land in the newly created Lakeside
Commerce Industrial Park in Johnston, Rhode Island. We previously
filed an application with the Rhode Island Department of Environmental
Management for the operation of a Putrescible Waste Recycling Center
at that site. As part of our efforts to establish a Rhode Island
facility, we have established Converted Organics of Rhode Island, LLC,
of which we are 92.5% owners. The minority share is owned by a local
businessman who has assisted us with the process of developing a Rhode
Island facility.
    
    In Massachusetts, we have performed initial development work in
connection with construction of three manufacturing facilities to
serve the eastern Massachusetts market. Our proposals to develop these
facilities are currently under review by the property owners. The
Massachusetts Strategic Envirotechnology Partnership Program has
completed a review of our technology.
    
    We are actively pursuing the development of a licensing program and
the production of a smaller capacity operating unit to be used by us
or sold to third parties. We have begun the development of smaller
capacity operating units, namely the Scalable Modular AeRobic
Technology (SMART) units that are suitable for processing 5 to 50 tons
of waste per day, depending on owner/user preference. The
semi-portable units will be capable of operating indoors or outdoors,
depending on certain criteria, and may be as sophisticated or as basic
in design and function as the owner/user requires. The SMART system
will be delivered to each jobsite in a number of pre-assembled,
pre-tested components, and will include a license to use the HTLC
technology. Our target market is users who seek to address waste
problems on a smaller scale than would be addressed by a large
processing facility. Our plan contemplates that purchasers of the
SMART units would receive tip fees for accepting waste and would sell
fertilizer and soil amendment products in the markets where their
units operate. We plan to market and sell the SMART units in both the
United States and abroad.
 Trends and Uncertainties Affecting our Operations
  31




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Liquidity and Capital Resources
      32




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Results of Operations
        33




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Off-Balance Sheet Transactions
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4 (T). Controls and Procedures
   34




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
     35




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 
 Item 5. Other Information.
  
 Item 6. Exhibits
 Exhibit No.
    
    Description of Exhibit4.1
    
    
    Form of Class H Warrant4.2
    
    
    Form of Unit Certificate31.1
    
    
    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
 36




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SIGNATURES
  Converted Organics Inc.Date: November 16, 2009
    /s/ Edward J. GildeaEdward J. GildeaPresident and Chief Executive OfficerDate: November 16, 2009
    /s/ David R. AllenDavid R. AllenChief Financial Officer and Executive Vice President of
AdministrationDate: November 16, 2009
    /s/ Ellen P. ONeilEllen P. ONeilVice President of Finance & Accounting 37