e10qsb
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
     
þ   Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended: September 30, 2007
     
o   Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from:                      to                     
Commission file number: 333-120908
Converted Organics Inc.
(Exact name of small business issuer as specified in its charter)
     
Delaware   20-4075963
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
7A Commercial Wharf W, Boston, MA 02110
(Address of principal executive offices)
(617) 624-0111
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES þ NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 12, 2007, there were 4,028,472 shares of our common stock outstanding.
Transitional Small Business Disclosure Format. YES o NO þ
 
 

 


 

INDEX
                 
    Page No.        
PART I. FINANCIAL INFORMATION
               
 
               
    3          
 
               
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    22          
 
               
    22          
 EX-31.1 Section 302 Certification of CEO
 EX-31.2 Section 302 Certification of CFO
 EX-32.1 Section 906 Certification ofCEO
 EX-32.2 Section 906 Certificatio of CFO

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Item 1. Financial Statements
CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
                 
    September 30, 2007     December 31, 2006  
    (Unaudited)     (Audited)  
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 343,433     $ 66,853  
Prepaid rent
    216,805       67,585  
Other prepaid expenses
    40,483       58,685  
Other current assets
    79,050       15,733  
Capitalized bond costs
    47,669        
Deferred financing and issuance costs, net
    16,340       680,958  
 
           
Total current assets
    743,780       889,814  
 
           
 
               
Deposits
    554,978       65,000  
Restricted cash
    15,698,598        
Construction in progress
    3,645,216        
Capitalized bond costs, net of $31,779 accumulated amortization
    873,927        
License, net of $70,125 and $57,750 accumulated amortization
    589,875       602,250  
 
           
Total assets
  $ 22,106,374     $ 1,557,064  
 
           
 
               
LIABILITIES AND OWNERS’ EQUITY (DEFICIENCY)
               
LIABILITIES
               
Accounts payable
  $ 366,178     $ 657,107  
Accrued compensation - officers, directors and consultants
    300,000       300,000  
Accrued legal and other
    71,320       369,233  
Accrued interest
    266,027       142,619  
Demand notes payable
          250,000  
Term notes payable
          500,000  
Bridge loan payable
          1,515,000  
 
           
Total current liabilities
    1,003,525       3,733,959  
 
           
 
               
Term notes payable
    464,170        
BONDS PAYABLE
    17,500,000        
 
           
Total liabilities
    18,967,695       3,733,959  
 
           
 
               
COMMITMENTS AND CONTINGENCIES (Note 9)
           
 
               
OWNERS’ EQUITY (DEFICIENCY)
               
Preferred stock, $.0001 par value, authorized 25,000,000 shares; no shares issued and outstanding
           
Common stock, $.0001 par value, authorized 75,000,000 shares
    402       133  
Additional paid-in capital
    12,454,449       4,113,385  
Deficit accumulated during the development stage
    (9,316,172 )     (6,290,413 )
 
           
Total owners’ equity (deficiency)
    3,138,679       (2,176,895 )
 
           
Total liabilities and owners’ equity (deficiency)
  $ 22,106,374     $ 1,557,064  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
                                         
                                    Cumulative  
                                    from inception  
                                    (May 2, 2003)  
    Three months ended     Nine months ended     through  
    September 30, 2007     September 30, 2006     September 30, 2007     September 30, 2006     September 30, 2007  
Revenues
  $     $     $     $     $  
Selling, General and Administrative expenses
    940,145       1,038,472       3,127,806       3,064,399       7,599,570  
Research and Development
    178,592       38,533       493,243       170,337       2,168,392  
Amortization
    24,167       47,028       55,190       85,974       198,690  
 
                             
 
                                       
Loss from operations
    (1,142,904 )     (1,124,033 )     (3,676,239 )     (3,320,710 )     (9,966,652 )
 
                             
 
                                       
Other Income/(Expenses)
    229,778             650,480             650,480  
 
                             
 
    (913,126 )     (1,124,033 )     (3,025,759 )     (3,320,710 )     (9,316,172 )
 
                             
 
                                       
Loss before provision for income taxes
    (913,126 )     (1,124,033 )     (3,025,759 )     (3,320,710 )     (9,316,172 )
 
                                       
Provision for Income Taxes
                             
 
                             
 
                                       
Net loss
  $ (913,126 )   $ (1,124,033 )   $ (3,025,759 )   $ (3,320,710 )   $ (9,316,172 )
 
                             
 
                                       
Net loss per share, basic and diluted
  $ (0.24 )   $ (0.84 )   $ (0.92 )   $ (2.79 )        
 
                               
Weighted average common shares outstanding
    3,838,754       1,333,333       3,292,455       1,188,480          
 
                               
The accompanying notes are an integral part of these consolidated financial statements.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS’ EQUITY (DEFICIENCY)
Cumulative from Inception (May 2, 2003) to September 30, 2007
                                                 
                  Deficit                
    Common Stock             Accumulated             Total  
    Shares Issued and             Additional     During the     Members’     Owners’ Equity  
    Outstanding     Amount     Paid-in Capital     Development Stage     Equity     (Deficiency)  
Balance at inception (May 2, 2003)
        $     $     $     $     $  
Members’ contributions from inception to December 31, 2004
                            2,172,700       2,172,700  
Members’ distributions from inception to December 31, 2004
                            (7,460 )     (7,460 )
Net loss - 2004
                      (1,934,971 )           (1,934,971 )
Members’ contributions
                            172,000       172,000  
Net loss - 2005
                      (628,681 )           (628,681 )
Recapitalization of members’ equity
    600,000       60       2,337,180             (2,337,240 )      
Issuance of common stock to founders
    733,333       73                         73  
Issuance of stock options
                1,018,705                   1,018,705  
Bridge loan rights
                757,500                   757,500  
Net loss
                      (3,726,761 )           (3,726,761 )
 
                                   
 
                                               
Balance, December 31, 2006
    1,333,333       133       4,113,385       (6,290,413 )           (2,176,895 )
 
                                               
Issuance of common stock and warrants in connection with the Company’s initial public offering (Note 5), net of issuance costs of $1,736,715 (unaudited)
    1,800,000       180       8,163,105                   8,163,285  
Common shares and warrants issued in connection with bridge units (unaudited) (Note 5)
    293,629       29       (29 )                  
Common shares issued in connection with extension of bridge financing (unaudited) (Note 5)
    55,640       6       178,042                   178,048  
Stock dividends (unaudited)
    545,870       54       (54 )                  
Net loss (unaudited)
                      (3,025,759 )           (3,025,759 )
 
                                   
 
                                               
Balance, September 30, 2007 (unaudited)
    4,028,472     $ 402     $ 12,454,449     $ (9,316,172 )   $     $ 3,138,679  
 
                                   
The accompanying notes are an integral part of these consolidated financial statements.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
                         
                    Cumulative  
                    from inception  
                    (May 2, 2003)  
    Nine months ended September 30,     through  
    2007     2006     September 30, 2007  
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net loss
  $ (3,025,759 )   $ (3,320,710 )   $ (9,316,172 )
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Amortization of intangible asset — license
    12,375       12,375       70,125  
Amortization of capitalized bond costs
    31,779             31,779  
Amortization of deferred financing fees
    11,036       73,599       96,786  
Amortization of discount on bridge loan
          683,858       757,500  
Stock option compensation expense
          1,018,705       1,018,705  
Compensation expense pursuant to common stock issued to founders at incorporation
          73       73  
Stock issued for extension of bridge financing
    178,048             178,048  
Changes in operating assets and liabilities:
                       
(Increase) decrease in:
                       
Prepaid expenses and other current assets
    (194,335 )     (120,625 )     (401,338 )
Deposits
    (350,000 )           (350,000 )
Increase (decrease) in:
                       
Accounts payable and other accrued expenses
    (588,843 )     176,159       19,039  
Accrued compensation expense — officers, directors and consultants
          300,000       300,000  
Accrued interest
    123,408       14,918       266,027  
 
                 
Net cash used in operating activities
    (3,802,291 )     (1,161,648 )     (7,329,428 )
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchase of license
    (139,978 )           (799,978 )
Construction costs
    (3,345,709 )           (3,345,709 )
Capitalized interest
    (299,507 )      —       (299,507 )
Restrictions of cash
    (20,646,611 )           (20,646,611 )
Release of restricted cash
    4,948,013             4,948,013  
 
                 
Net cash used in investing activities
    (19,483,792 )           (20,143,792 )
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Members’ contributions
                2,344,700  
Proceeds from term notes
    89,170             589,170  
Repayment of term notes
    (275,000 )           (275,000 )
Proceeds from demand notes
                250,000  
Repayment of demand notes
    (100,000 )           (100,000 )
Proceeds from bridge loan, net
          1,434,250       1,464,250  
Repayment of bridge loan
    (1,515,000 )           (1,515,000 )
Net proceeds from bond financing (Note 3)
    16,546,625             16,546,625  
Members’ distributions
                (7,460 )
Payments made for deferred issuance costs
    (42,916 )     (245,033 )     (340,416 )
Net proceeds from initial public offering of stock (Note 5)
    8,859,784             8,859,784  
 
                 
Net cash provided by financing activities
    23,562,663       1,189,217       27,816,653  
 
                 
NET INCREASE IN CASH
    276,580       27,569       343,433  
CASH, beginning of period
    66,853       371        
 
                 
CASH, end of period
  $ 343,433     $ 27,940     $ 343,433  
 
                 
Supplemental cash flow information:
                       
Cash paid during the period in:
                       
Interest
  $ 908,456     $     $ 908,456  
Non-cash financing activities:
                       
Deferred financing and issuance costs
  $ 207,158     $ 245,033     $ 676,366  
Discount for the bridge equity units
          757,500       757,500  
Issuance costs paid from proceeds of initial public offering
    990,000             990,000  
Issuance costs paid from proceeds of bond financing
    953,375             953,375  
The accompanying notes are an integral part of these consolidated financial statements.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION
     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. In the Company’s opinion, the unaudited interim financial statements and accompanying notes reflect all adjustments, consisting of normal and recurring adjustments that are necessary for a fair presentation of its financial position and operating results as of and for the interim periods ended September 30, 2007 and 2006 and cumulative from inception (May 3, 2003) to September 30, 2007.
     The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. This Form 10-QSB should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-KSB as of and for the year ended December 31, 2006 and for the period commencing from inception (May 3, 2003) to December 31, 2006.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
     Converted Organics Inc. (a development stage company) (the “Company”) is planning to use food waste as a feedstock to manufacture, sell and distribute all-natural soil amendment products combining disease suppression and nutrition characteristics. Converted Organics of Woodbridge, LLC (“Woodbridge”), a New Jersey limited liability company and wholly-owned subsidiary of the Company, was formed for the purpose of owning, constructing and operating the Woodbridge, New Jersey facility. The Company’s revenues are expected to come from two sources: tip fees and product sales. Waste haulers will pay the Company “tip” fees for accepting food waste generated by food distributors such as grocery stores, produce docks and fish markets, food processors, and hospitality venues such as hotels, restaurants, convention centers and airports. Revenue will also come from the sale of the Company’s fertilizer products. The Company’s products will possess a combination of nutritional, disease suppression and soil amendment characteristics. The Company’s initial facility is designed to service the New York-Northern New Jersey metropolitan area. The Company has begun construction of this facility and expects it to be operational in the second quarter of 2008.
CONSOLIDATION
     The accompanying consolidated financial statements include the transactions and balances of Converted Organics Inc. and its wholly-owned subsidiary, Converted Organics of Woodbridge, LLC. All intercompany transactions and balances have been eliminated in consolidation.
DEVELOPMENT STAGE COMPANY
     The Company is considered a development stage company as defined by Statement of Financial Accounting Standards (SFAS) No. 7, as it has no principal operations or revenue from any source. Operations from the Company’s inception have been devoted primarily to strategic planning, raising capital, developing revenue-generating opportunities and construction of an operating facility.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
CONTINUED
(UNAUDITED)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES — CONTINUED
USE OF ESTIMATES
     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
     The Company considers financial instruments with a maturity date of three months or less from the date of purchase to be cash equivalents. The Company had no cash equivalents at September 30, 2007 and December 31, 2006.
     As of September 30, 2007 the Company had remaining approximately $15,699,000 of restricted cash as required by the bond agreement (Note 3). This cash was raised by the Company in its initial public offering and bond financing on February 16, 2007 and is set aside in three separate accounts consisting of $10,963,000 for the construction of the Woodbridge operating facility, $1,750,000 for the working capital requirements of the Woodbridge subsidiary while the facility is under construction and $2,986,000 in reserve for bond principal and interest payments along with a reserve for lease payments. The Company has classified this restricted cash as non-current as third party trustee approval is required for disbursement of funds.
RESEARCH AND DEVELOPMENT COSTS
     Research and development costs include the costs of engineering, design, feasibility studies, outside services, personnel and other costs incurred in development of the Company’s manufacturing facilities. All such costs are charged to expense as incurred.
INCOME TAXES
     The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Differences between the financial statement and tax bases of assets, liabilities, and other transactions did not result in a provision for current or deferred income taxes for the periods from January 1, 2007 to September 30, 2007 and January 4, 2006 (date of incorporation of Converted Organics Inc.) to September 30, 2007.
     The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 9” (“FIN No. 48”), on January 1, 2007. FIN No. 48 requires that the impact of tax positions be recognized in the financial statements if they are more likely than not of being sustained upon examination, based on the technical merits of the position. As discussed in the consolidated financial statements in the 2006 Form 10-KSB, the Company has a valuation allowance against the full amount of its net deferred tax assets.   The Company currently provides a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. There was no significant impact to the Company upon the adoption of FIN No. 48.
     The Company is subject to U.S. federal income tax as well as income tax of certain state jurisdictions. The Company has not been audited by the I.R.S. or any states in connection with income taxes. The periods from inception through 2006 remain open to examination by the I.R.S. and state authorities.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
CONTINUED
(UNAUDITED)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES — CONTINUED
     The Company recognizes interest accrued related to unrecognized tax benefits in interest expense. Penalties, if incurred, are recognized as a component of income tax expense.
     RECENT ACCOUNTING PRONOUNCEMENTS
     In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently evaluating the potential impact of this statement.
          EARNINGS (LOSS) PER SHARE
     Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted income (loss) per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock, such as stock options and warrants (using the “treasury stock” method), and convertible preferred stock and debt (using the “if-converted” method), unless their effect on net income (loss) per share is antidilutive. Under the “if-converted” method, convertible instruments are assumed to have been converted as of the beginning of the period or when issued, if later. The effect of computing the diluted income (loss) per share is antidilutive and, as such, basic and diluted earnings (loss) per share are the same for the three months and the nine months ended September 30, 2007 and 2006.
     DEFERRED FINANCING AND ISSUANCE COSTS AND CAPITAL COSTS – BOND ISSUANCE
     In connection with its $17.5 million bond financing on February 16, 2007 (Note 3), the Company has capitalized bond issuance costs of approximately $953,000 and is amortizing those costs over the life of the bond.
     In connection with its initial public offering (IPO) on February 16, 2007 (Note 5), the Company had issuance costs totaling approximately $1,687,000, of which approximately $697,000 had been paid by the Company in 2006 ($681,000) and 2007 ($16,000), and were recorded as deferred issuance costs at that time, and approximately $990,000 of which was netted against total proceeds received on February 16, 2007. The total issuance costs of approximately $1,687,000 have been netted against the $9.9 million gross proceeds of the IPO in the statements of changes in owners’ equity (deficiency).
     In connection with its repayment of the bridge notes (Note 3), the Company paid to the bridge lender a Letter of Credit fee of $27,375. The fee has been recorded as a deferred financing fee and is being amortized over the life of the Letter of Credit. Accordingly deferred financing costs are $16,340 at September 30, 2007.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
CONTINUED
(UNAUDITED)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES — CONTINUED
INTANGIBLE ASSET — LICENSE
     Pursuant to a license agreement with an effective date of July 15, 2003 and amended effective date of February 9, 2006, the Company entered into an exclusive license to use its enhanced Autogenous Thermophylic Aerobic Digestion process (EATAD) technology for the design, construction and operation of facilities for the conversion of food waste into solid and liquid organic material. The license is stated at cost. Amortization is provided using the straight-line method over the life of the license. Amortization expense for the nine month periods ended September 30, 2007 and 2006, and cumulative from inception (May 2, 2003) to September 30, 2007, was $12,375, $12,375 and $70,125, respectively. The Company expects the license’s annual amortization expense to be $16,500 until fully amortized at the end of the 40 year license period.
     In June 2007, the Company placed a deposit of $139,978 on a second plant license with the licensor. When received, the second license will be capitalized and amortized over its future life.
SEGMENT REPORTING
     As of September 30, 2007 the Company has no reportable segments as defined by Statement of Financial Accounting Standard (SFAS) No. 131.
NOTE 3 — DEBT
     DEMAND NOTES
     The Company had three demand notes payable which accrued interest at 10%. These notes were repaid in May, 2007.
     A schedule of outstanding principal amounts of the demand notes as of September 30, 2007 and December 31, 2006 is as follows:
                 
    2007     2006  
Demand note dated October 30, 2006
  $     $ 200,000  
Demand note dated December 29, 2006
          50,000  
 
           
 
          250,000  
Less: current portion
          (250,000 )
 
           
 
  $     $  
 
           
     TERM NOTES
     The Company has three term notes payable: (1) $250,000 unsecured term note dated August 27, 2004, with an original maturity date of September 30, 2006, which has been extended to December 31, 2008, with interest at 12%, (2) $250,000 unsecured term note dated September 6, 2005, with an original maturity of September 15, 2006, which was extended to December 31, 2008, with interest at 15%, and (3) $89,170 unsecured term note dated May 2, 2007 with a maturity of May 2, 2009 and interest at 12%. During February 2007, $125,000 of principal was repaid on the unsecured term note dated September 6, 2005. On all notes, interest accrues without payment until maturity. As of September 30, 2007, the total of unpaid accrued interest on these notes is $33,000. The agreement on one of these loans required accrued interest of $89,170 to be paid immediately in order to refinance and extend the maturity. As the Company was precluded under the terms of the agreement with the bondholders of the New Jersey Economic Development Authority bonds from paying the accrued interest from available funds, the Company borrowed funds to repay this accrued interest by entering into an additional term loan

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
CONTINUED
(UNAUDITED)
NOTE 3 — DEBT — CONTINUED
in the amount of $89,170 with its CEO, Edward J. Gildea. This note is unsecured and subordinate to the bonds, and has a two-year term. This interest rate is equal to or less than interest paid on the Company’s other term loans. The Company obtained the necessary bondholder consents to enter into this agreement.
     A schedule of outstanding principal amounts of the term notes as of September 30, 2007 and December 31, 2006 is as follows:
                 
    2007     2006  
Term note dated August 27, 2004
  $ 250,000     $ 250,000  
Term note dated September 6, 2005
    125,000       250,000  
Term note dated May 2, 2007
    89,170        
 
           
 
    464,170       500,000  
Less: current portion
          (500,000 )
 
           
 
  $ 464,170     $  
 
           
     During 2007 the Company renegotiated the terms of these notes to extend the maturity dates to December 31, 2008 and beyond. Therefore, these loans are classified as current at December 31, 2006, and as long-term at September 30, 2007.
BRIDGE LOANS
     The Company had $1,515,000 of outstanding Bridge Loans that accrued interest at a rate of 18%, and under the terms of the loans, were to be repaid on the earlier of February 19, 2007 or the date of the Company’s initial public offering. Due to certain covenants relating to the offering of bonds on February 16, 2007, which prohibited the Company from repaying these bridge loans, the Company entered into an agreement whereby it could repay the loans if the bridge lenders agreed to obtain a letter of credit in favor of the Company. The Company reached agreements with the bridge lender and the demand note lender to repay the entire principal and accrued interest on these debts. The principal of the bridge loan of $1,515,000 plus accrued interest of approximately $160,000, along with principal of the demand loan of $150,000 plus accrued interest of approximately $7,000, was repaid by the Company on May 23, 2007 from unrestricted cash. In addition, for the various term extensions granted by the bridge lender, the Company issued approximately 56,000 shares of common stock, which represents 10% of the principal and interest repaid, divided by the five-day average share price prior to repayment of the debt. The statement of operations includes an expense of $178,048 related to the issuance of this stock.
     In order for the repayment of bridge and demand loans to comply with the terms of the covenants of the bondholders of the New Jersey Economic Development Authority bonds, the bridge lender has obtained a letter of credit in favor of the Company for $1,825,000. This letter of credit is due to expire on April 7, 2008, and allows for a one-time draw down during the thirty days prior to expiration. The letter of credit is supported by assets of the bridge lender, and the Company has paid the letter of credit fee of $27,375. In the event that the Company utilizes the funds available under the letter of credit, the Company is required to 1) repay principal and interest at 12% within one year, and 2) issue additional shares equal to 60% of the amount utilized, calculated by dividing 60% of the amount used by the then-current share price. If the total letter of credit is used, the total shares issued under this calculation would be approximately 375,000, based on the September 30, 2007 market price. The Company has no way to determine how many shares would actually be issued at the share price in the future, nor the amount that might be drawn on the letter of credit. The Company has agreed not to issue more than 20% of the then outstanding common shares without shareholder consent. If the term of the loan is extended beyond one year, the interest rate increases to 18% and the Company is required to issue additional extension shares equal to 8 1/3% of the

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
CONTINUED
(UNAUDITED)
NOTE 3 — DEBT — CONTINUED
outstanding balance of the note on a monthly basis. The Company has received the approval from the bondholders of the New Jersey Economic Development Authority Bonds to enter into this agreement.
BOND FINANCING
          On February 16, 2007, concurrent with its initial public offering, the Company’s wholly-owned subsidiary, Converted Organics of Woodbridge, LLC, (the “Subsidiary”) completed the sale of $17,500,000 of New Jersey Economic Development Authority Bonds. Direct financing costs related to this issuance totaled approximately $953,000, which have been capitalized and are being amortized over the life of the bonds. The bonds carry a stated interest rate of 8% and mature on August 1, 2027. The bonds are secured by a leasehold mortgage and a first lien on the equipment of the Subsidiary. In addition, the Subsidiary has agreed to, among other things, establish a fifteen month capitalized interest reserve and to comply with certain financial statement ratios. The Company has provided a guarantee to the bondholders on behalf of its wholly-owned Subsidiary for the entire bond offering.
NOTE 4 — CAPITALIZATION OF INTEREST COSTS
          The Company has capitalized interest costs, net of certain interest income, in accordance with Statement of Financial Accounting Standards No. 62, “Capitalization of Interest Cost in Situations Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants,” related to its New Jersey Economic Development Authority Bonds (Note 3) in the amount of $299,507 and $0 as of September 30, 2007 and December 31, 2006, respectively. Capitalized interest costs are included in construction in progress on the consolidated balance sheets.
NOTE 5 — OWNERS’ EQUITY (DEFICIENCY)
          The Company is authorized to issue 75,000,000 shares of $0.0001 par value common stock. Of the authorized shares, 733,333 were issued to the founders of the Company (“founders’ shares”) on January 13, 2006. The Company did not receive any consideration for the founders’ shares. Because the Company had a negative estimated value on January 13, 2006, the Company recognized compensation expense at par value totaling $73 in connection with the issuance of the founders’ shares as par value represents the statutory minimum share value in the state of Delaware.
          On February 21, 2006, the Company merged with Mining Organics Management (MOM) and Mining Organics Management — Harlem River Rail Yard (HRRY). At that time, MOM was a fifty-percent owner of HRRY. The mergers were accounted for as a recapitalization of the Company. As a result of the recapitalization, 600,000 shares were issued to the members of HRRY, with 300,000 shares distributed to Weston Solutions, Inc. and 300,000 shares distributed among the individual members of MOM, each of whom was a founder of the Company.
     On February 16, 2007 the Company successfully completed an initial public offering of 1,800,000 common shares and 3,600,000 warrants for a total offering of $9,900,000, before issuance costs. The Company’s initial public offering is presented net of issuance costs and expenses of approximately $1,687,000 in the statements of changes in owners’ equity (deficiency). The warrants consist of 1,800,000 redeemable Class A warrants and 1,800,000 non-redeemable Class B warrants, each warrant to purchase one share of common stock. The common stock and warrants traded as one unit until March 13, 2007 when they began to trade separately.
     On February 16, 2007, as part of its initial public offering and under the original terms of the bridge loan agreement (Note 3), the Company issued 293,629 Bridge Equity Units to the Bridge Noteholders. On May 23, 2007, as part of the repayment of the bridge loans, the Company issued 55,640 shares of common stock to the Bridge Noteholders, which represents 10% of the principal and interest repaid, divided by the five-day average share price prior to repayment of the debt. The statement of operations reflects an expense of $178,048 related to the issuance of these shares.
     On February 16, 2007, as part of its initial public offering, the Company agreed to pay a 5% quarterly stock dividend, commencing March 31, 2007, and every full quarter thereafter until the Woodbridge, NJ facility is operational. As of September 30, 2007, the Company has declared three such quarterly dividends amounting to 545,870 shares.

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
CONTINUED
(UNAUDITED)
NOTE 6— RELATED PARTY TRANSACTIONS
     The Company is located at 7A Commercial Wharf West, Boston, Massachusetts. The Company is renting the premises under a verbal agreement with ECAP, LLC. The managing member of ECAP, LLC is a director and shareholder of the Company and is also the brother of the Company’s President and CEO. The rental agreement provides for rent and support, as agreed between the Company and ECAP, LLC and for reimbursement of expenses by the Company for office and other expenses. These expenses totaled $19,425 and $11,000 for the quarters ended March 31, 2007 and 2006, respectively, and $315,350 for the period from inception (May 3, 2003) to March 31, 2007. As of March 31, 2007 that arrangement ended, and during the six month period ending September 30, 2007 the Company paid rent directly to its landlord, and not to any related parties.
     On April 4, 2007, The Company entered into an agreement with William A. Gildea, a director and a brother of the Company’s CEO Edward J. Gildea, whereby William A. Gildea will provide sales and marketing expertise to the Company. This agreement provides for an annual fee of $180,000 to Mr. Gildea for these services.
     The Company has entered into a services agreement dated May 29, 2003, as modified October 6, 2004, with one of its principal stockholders, Weston Solutions, Inc. (“Weston”). Weston has been engaged to provide engineering and design services in connection with the construction of the Woodbridge organic waste conversion facility. The total amounts recorded by the Company for services provided by Weston were $116,380 and $40,000 for the quarters ended September 30, 2007 and 2006, respectively and $798,212 for the period from inception (May 3, 2003) to September 30, 2007.
     The Company has accrued a total of $300,000 of compensation expense earned but not paid for the period April 1, 2006 to December 31, 2006, and expenses incurred but not reimbursed since April 1, 2006 to each of six officers, directors or contractors.
NOTE 7 — STOCK OPTION PLAN
     In June 2006, the Company’s Board of Directors and stockholders approved the 2006 Stock Option Plan (the “Option Plan”). The Option Plan authorizes the grant and issuance of options and other equity compensation to employees, officers and consultants. A total of 666,667 shares of common stock are reserved for issuance under the Option Plan. As of September 30, 2007, 643,000 options had been issued under this plan. The options were issued on June 15, 2006 and vested on the grant date. The options have an exercise price of $3.75 per share and expire five years from the grant date. The exercise price was based on an assumed public offering price of $5.00 per unit less the fair value for the two warrants included in the unit (Class A warrant fair value of $0.75, Class B warrant fair value of $0.50). The fair value of the Class A and B warrants was estimated on June 15, 2006 for purposes of valuing the individual components of the unit so that the options could be valued. The fair value of the options and warrants was estimated using a Black-Scholes pricing model with the following assumptions: risk-free interest rate of 5.07%; no dividend yield; volatility factor of 38.816%; and an expiration period of 5 years. The Company’s stock option compensation expense determined under the fair value based method totaled $1,018,705 and has been included in general and administrative expenses in the statement of operations for the quarter ended June 30, 2006.
NOTE 8 — LEASE
     In June 2006, the Company signed a lease for its New Jersey operations. The lease term is for ten years with an option to renew for an additional ten years. On January 18, 2007, the Company executed a lease amendment to compensate the Landlord for costs incurred in connection with a buildout of the leased space. The additional rent associated with the buildout of the facility is $4,600,000 and will be repaid over a ten-year period. Future minimum payments due under the original lease plus the amendment are approximately $234,000 in 2007; $935,000 in 2008, 2009 and 2010; $946,000 in 2011; $959,000 in 2012; $967,000 in 2013; $976,000 in 2014;

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CONVERTED ORGANICS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
CONTINUED
(UNAUDITED)
NOTE 8 — LEASE — CONTINUED
$905,000 in 2015; and $626,000 in 2016.
          For the three months and the nine months ended September 30, 2007, the Company has recorded rental expense of $185,528 and $560,105, respectively, in relation to this lease, and has recognized $216,805 as prepaid rent as of September 30, 2007.
NOTE 9 — COMMITMENTS AND CONTINGENCIES
     CONTRACTS
          The Company has entered into six contracts for various phases of the construction of its Woodbridge, New Jersey facility. All of these contracts were subject to the successful completion of the New Jersey Development Authority Bond Offering, which was completed on February 16, 2007. The total value of these contracts is approximately $9,000,000. The Company expects to expend approximately $14,600,000 on the construction of the facility not including certain expenses to be paid by the landlord and charged over future rental periods.
     LEGAL PROCEEDINGS
     The Company is not currently aware of any pending or threatened legal proceeding to which it is or would be a party, or any proceedings being contemplated by governmental authorities against it, or any of its executive officers or directors relative to the services provided on the Company’s behalf.
NOTE 10 — MANAGEMENT’S PLAN OF OPERATION
     The Company intends to use a substantial portion of the proceeds from the initial public offering and the entire net proceeds from the bond offering to construct and purchase equipment for its first operating facility in New Jersey and to establish a debt principal service fund (10% of the bond amount) and a fifteen month capitalized interest reserve. The Company expects the facility to be completed and operating in mid-2008 and expects to be generating operating revenues shortly thereafter. The Company intends for its wholly-owned subsidiary, Converted Organics of Woodbridge, LLC, to be the operating entity for all activity relating to the construction and revenue generation at this New Jersey facility.
     The Company has also made a deposit on an operating license for its second operating facility, which will be constructed in Rhode Island. The Company is in the preliminary stages of seeking additional financing to provide funds for construction of that facility. In addition, the Company will seek additional working capital sources in the future as the current general operating cash balance may not be enough to sustain the Company until the Woodbridge facility is operational and the Company may wish to explore alternatives to the additional equity distribution associated with the letter of credit drawdown. If sources of cash are not available in the future, the Company will draw down on the letter of credit to sustain operations, which will cause issuance of shares and repayment of the loan (Note 3). In order to ensure that the company has sufficient operating cash until the letter of credit is available, management has instituted a plan to reduce and defer costs, including management salaries.

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Item 2. Management’s Discussion and Analysis or Plan of Operation
     The following discussion of our plan of operation should be read in conjunction with the financial statements and related notes to the financial statements included elsewhere in this report. This report is for the quarter ended September 30, 2007. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Introduction
     Converted Organics Inc. is a development stage company that seeks to construct processing facilities that will use food waste as raw material to manufacture all-natural soil amendment products combining nutritional and disease suppression characteristics. We plan to sell and distribute our products in the agribusiness, turf management, and retail markets. We have obtained a long-term lease for a site in a portion of an industrial building in Woodbridge, New Jersey that the Landlord will modify and we will equip as our initial organic waste conversion facility. We currently have no operations and do not expect to generate any revenue until the facility is completely operational. When fully operational, the Woodbridge facility is initially expected to process approximately 68,000 tons of organic food waste and produce approximately 9,300 tons of dry product and 5,900 tons of liquid concentrate annually. We expect to complete construction and begin start-up operations in the second quarter of 2008.
     We were incorporated under the laws of the state of Delaware in January 2006. In February 2006, the company merged with its predecessor organizations, Mining Organics Management, LLC and Mining Organics Harlem River Rail Yard, LLC, in transactions accounted for as a recapitalization.
     Development Period
     Since the formation of one of our predecessors on May 2, 2003 through September 30, 2007, we and our predecessor organizations have spent approximately $13.7 million to accomplish the following:
  §   acquire the technology license;
 
  §   develop engineering plans;
 
  §   identify appropriate sites for development;
 
  §   enter into a lease for the site for our Woodbridge facility;
 
  §   prepare certain environmental permit applications;
 
  §   contract for third-party evaluation and validation of the technology;
 
  §   contract for two third-party studies analyzing the pricing and market demand for our products;
 
  §   pursue various environmental permits and licenses;
 
  §   negotiate a long-term supply contract for source-separated organic waste;
 
  §   garner public/ community support;
 
  §   develop markets for our products by meeting with distributors of organic products, wholesalers, and prior users of similar products;
 
  §   sponsor growth and efficacy trials for products produced by the licensor;
 
  §   complete engineering and mass balance for our Woodbridge facility;
 
  §   negotiate contracts for construction of the Woodbridge plant;
 
  §   place deposits on equipment; and
 
  §   continue to develop opportunities for future facilities.

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     In addition, we have commenced plant construction activities. Our process engineer has substantially completed the design, mass balance, energy balance, and process flow drawings for the Woodbridge facility. This work formed the basis for soliciting bids for guaranteed maximum price contracts for the construction of the Woodbridge facility; these contracts place responsibility on the contractors for delivering a turnkey project by the second quarter of 2008.
     These activities have been funded through a combination of contributions of capital by our founders, private sales of interests in our predecessor companies, borrowings and public offerings of equity and debt.
Plan of Operation
     Construction and Start-up Period
     Management will initially be focused primarily on constructing the Woodbridge facility, conducting start-up trials and bringing operations to full-scale production as quickly as practicable. We have budgeted approximately $14.6 million for the design, building, and testing of our facility, including related non-recurring engineering costs, according to the following development calendar. The capital outlays shown in the following table represent an estimated schedule of payments to be made in connection with the construction of the Woodbridge facility. The amounts shown below include the related portions of construction management, engineering and design, contingency, bonding and similar fees. The capital outlay of $14.6 million will come from the $25.4 million raised by the public offering of stocks and bonds on February 16, 2007 and does not include $4.6 million of lease financing provided by the New Jersey landlord.
Development Stage Milestone Estimated Cost
             
Development Stage   Milestone   Estimated Cost  
Award GMP (design & non-recurring engineering costs)- Completed
  By March 31, 2007   $ 415,000  
Order “long-lead time” equipment — completed
  By June 30, 2007     2,055,000  
General Construction — in process
  By June 30, 2007     1,157,000  
Install Equipment
  By September 30, 2007     4,452,000  
Install mechanical, electrical and piping
  By March 31, 2008     6,490,000  
 
         
Total
      $ 14,569,000  
     Of the estimated $8,079,000 costs which were to be incurred by September 30, 2007, $3,346,000 has been incurred with the remaining $4,733,000 to be incurred over the remaining construction period. The total cost is not expected to exceed the estimate. Payments have not been required according to the above schedule due to the timing of deposits and favorable payment terms negotiated with vendors and construction timing. The Company does not expect the future work schedule to vary from the above plan.
     The remaining net proceeds of the stock and bond offerings of $10.8 million (net proceeds of $25.4 million less $14.6 million set aside for construction) will be used to fund the Company’s marketing and administrative expenses during the construction period, fund specific principal and interest reserves specified in the bond offering and pay expenses relating to the offering of stock and bonds. The additional costs for the buildout of the New Jersey facility by the landlord are not included in these costs. We expect to negotiate and execute a plant management agreement prior to commencement of facility operations. We will continue to develop relationships and negotiate purchase agreements for our end products in the agribusiness, turf management, and retail markets during the construction and start up period.

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Table of Contents

     Operations
     Operations are expected to begin by processing 65 tons of waste per day, with the expectation that initial design capacity of 210 tons per day could be reached within four-to-six weeks. Upon commencement of operations, we expect two revenue streams: (i) tip fees that in our potential markets range from $50 to $100 per ton, and (ii) product sales. Tip fees will be paid to the Company to receive the waste stream from the waste hauler; the hauler will pay the Company, instead of a landfill, to take the waste. If the haulers source separate and pay in advance, they could be charged tip fees that are up to 20% below market. As of the date of the filing of this report, we have contracted to receive and accept waste for our initial capacity. In addition, we have received indications of interest for over 55% of the planned 2008 output from our New Jersey facility. We believe that, based on industry practice, these indications of interest will translate into purchase orders once the Woodbridge facility is operational.
     Future Development
     Subject to the availability of development capital, we intend to commence development and construction of other facilities while completing construction of our Woodbridge facility. The timing of our next facility is dependent on many factors, including locating property suited for our use, negotiating favorable terms for lease or purchase, obtaining regulatory approvals, and procuring raw material at favorable prices.
     We anticipate that our next facility may be located in Rhode Island. We have commenced negotiation of a lease and services agreement with the Rhode Island Resource Recovery Corporation for a proposed facility in Johnston, Rhode Island. Other locations in Massachusetts and New York as well as other states may be considered as determined by management.
     In each contemplated market, we have started development activity to secure a facility location. We have also held preliminary discussions with state and local regulatory officials and raw material suppliers. We believe that this preliminary development work will allow the Company to develop and operate a second facility within 24 months from the date of our initial public offering, subject to the availability of debt financing. We will be able to use much of the engineering and design work done for our first facility for subsequent facilities, thus reducing both the time and costs associated with these activities.
Trends and Uncertainties Affecting our Operations
     We will be subject to a number of factors that may affect our operations and financial performance. These factors include, but are not limited to, the available supply and price of organic food waste, the market for liquid concentrate and solid organic fertilizer in the Eastern United States, increasing energy costs, the unpredictable cost of compliance with environmental and other government regulation, and the time and cost of obtaining USDA, state or other product labeling designations. Demand for organic fertilizer and the resulting prices customers are willing to pay also may not be as high as our market studies suggest. In addition, supply of organic fertilizer products from the use of other technologies or other competitors may adversely affect our selling prices and consequently our overall profitability.
Liquidity and Capital Resources
     At September 30, 2007, we had total current assets of approximately $744,000, consisting primarily of cash and prepaid and other assets, and current liabilities of approximately $1,004,000, consisting primarily of accounts payable and accrued expenses. The Company has accumulated a net loss from inception through September 30, 2007 of approximately $9,316,000. Owners’ equity at September 30, 2007 was approximately $3,139,000. Since inception, we have generated no revenue from operations, and do not expect to generate revenue until the second quarter of 2008. Although the Company has negative working capital as of September 30, 2007, approximately $233,000 of current liabilities will be paid from restricted funds which are classified as non-current assets on the balance sheet, and are more fully described below.

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An additional $300,000 of liabilities classified as current cannot be paid from current assets as a condition of the New Jersey bond.
     We currently do not have manufacturing capabilities or other means to generate revenues or cash. Approximately $14.6 million of the $25.4 million net proceeds from the equity and bond offerings, together with the $4.6 million of lease financing provided by the landlord, will be used to build our Woodbridge facility, which is expected to be completed in the first quarter of 2008. The remaining $10.8 million net proceeds from the equity and bond offerings ($25.4 million raised less $14.6 million for construction) has been and will continue to be used to sustain our operations, fund bond principal, interest and working capital reserves, and has provided the cash required to repay bridge loans, demand loans and accrued interest that were not paid at the date of our initial public offering due to covenants placed on the Company by the bondholder of the New Jersey Economic Development Authority Bonds.
     In May, 2007, we reached agreements with the bridge lender and the demand note lender to repay the entire principal and accrued interest on these debts. The principal of the bridge loan of $1,515,000 plus accrued interest of approximately $160,000, along with principal of the demand loan of $150,000 plus accrued interest of approximately $7,000, was repaid from unrestricted cash upon finalization of the agreement. In addition, for the various term extensions granted by the bridge lender, we issued approximately 56,000 shares of common stock, which represents 10% of the principal and interest repaid, divided by the five-day average share price prior to repayment of the debt. The statement of operations reflects expense of $178,048 related to the issuance of these shares.
     In order for the repayment of bridge and demand loans to comply with the terms of the covenants of the bondholders of the New Jersey Economic Development Authority bonds, the bridge lender has obtained a letter of credit in favor of the Company for $1,825,000. This letter of credit has an expiration date of April 9, 2008, and allows for a one-time draw down during the thirty days prior to expiration. The letter of credit will be supported by assets of the bridge lender, and we have paid the letter of credit fee of $27,375. In the event that we utilize the funds available under the letter of credit, we are required to 1) repay principal and interest at 12 % within one year, and 2) issue additional shares of common stock equal to 60% of the amount utilized, calculated by dividing 60% of the amount utilized by the then-current share price. If the total standby letter of credit is utilized, the total shares issued under this calculation would be approximately 375,000, if the stock was then trading at the September 30, 2007 market price. We have no way to determine how many shares would actually be issued at the share price in the future, nor the amount that might be drawn on the letter of credit. We have agreed not to issue more than 20% of the then outstanding shares of common stock without seeking shareholder consent. If the borrowed funds are not repaid within one year, interest increases to 18% and we are required to issue additional extension shares equal to 8 1/3% of the outstanding balance each month. We have received the approval from the bondholder of the New Jersey Economic Development Authority Bonds to enter into this agreement.
     In May, 2007, we also reached agreements with our two term note lenders, whereby the maturity dates of these loans have been extended to December 31, 2008. The outstanding balances on these term loans as of September 30, 2007 were $250,000 and $125,000. Among other terms, the agreement on one of these loans required accrued interest of $89,170 to be paid immediately. As we were precluded under the terms of the agreement with the bondholders of the New Jersey Economic Development Authority bonds from paying the accrued interest, we borrowed funds to repay this accrued interest by entering into an additional term loan in the amount of $89,170 with our CEO, Edward J. Gildea. This note is unsecured and subordinate to the bonds, carries an interest rate of 12% and has a two-year term. This interest rate is equal to or less than the interest paid on its other term loans. We obtained the necessary bondholder consents to enter into this agreement.
          As a result of the above transactions, our debt structure is as follows at September 30, 2007 as compared to March 31, 2007:

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    September 30, 2007   March 31, 2007
Demand notes payable
  $ -0-     $ 150,000  
Term notes payable
  $ 464,170     $ 375,000  
Bridge loans payable
  $ -0-     $ 1,515,000  
Bonds payable
  $ 17,500,000     $ 17,500,00  
     As of September 30, 2007, the Company has the following approximate cash balances:
         
General Operating (unrestricted cash)
  $ 343,000  
 
       
Construction Trust ( restricted cash)
  $ 10,963,000  
Subsidiary Working Capital Reserves (restricted cash)
  $ 1,750,000  
Principal, Interest and Lease Reserves (restricted cash)
  $ 2,986,000  
 
     
Total restricted cash
  $ 15,699,000  
     Withdrawals from restricted cash require approval of the third party trustee, and are governed by the Trustee Agreement.
     In addition to the above cash balances, a standby Letter of credit in the amount of $1,825,000 has been issued in favor of the Company. We decided to accept this letter of credit and to pay down the bridge loans in order to eliminate the 18% interest charge on funds that were not being utilized at this time. We will seek additional working capital sources in the future as the current general operating cash balance may not be enough to sustain us until our Woodbridge facility is operational and we may wish to explore alternatives to the additional equity distribution associated with the letter of credit drawdown. If sources of cash are not available to us in the future, we will draw down on the letter of credit to sustain operations, which will cause issuance of shares and repayment of the loan, which is discussed above. In order to ensure that the company has sufficient operating cash until the letter of credit is available, management has instituted a plan to reduce and defer costs, including management salaries.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2007
     The Company has been a development stage company since its inception. For the period from inception (May 3, 2003) until September 30, 2007 the Company has not earned any revenues from operations. The Company does not expect to earn revenues from operations until 2008. In addition, the Company has incurred operating costs and expenses of approximately $3,026,000 during the nine months ending September 30, 2007, and approximately $9,316,000 for the period from inception (May 3, 2003) until September 30, 2007. Operating expenses incurred since inception were approximately $7,600,000 for general and administrative expenses, $2,168,000 for research and development costs, and $198,000 for amortization expense.
     As of September 30, 2007, the Company had current assets of approximately $744,000 compared to $890,000 as of December 31, 2006. Deferred finance and issuance costs represented approximately $681,000 of the current assets as of December 31, 2006. Deferred costs associated with the public offering of approximately $1,687,000 were offset against the gross proceeds from the offering of approximately

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$9.9 million in the consolidated statements of changes in owners’ equity (deficiency) during the nine months ending September 30, 2007. Costs associated with the bond offering of approximately $953,000 have been capitalized and will be amortized over the life of the bond.
     As of September 30, 2007 the Company had current liabilities of approximately $1,004,000 compared to $3,734,000 at December 31, 2006. The decrease is due largely to a reduction in accounts payable and accrued expenses, which were paid with proceeds of the public offering and the debt, and the repayment of the demand notes, the term notes and the bridge notes payable.

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Item 3. Controls and Procedures
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision, and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer have concluded that these disclosure controls and procedures were effective such that the material information required to be filed in our SEC reports is recorded, processed, summarized and reported within the required time periods specified in the SEC rules and forms. This conclusion was based on the fact that the business operations to date have been limited and the Principal Executive Officer and Principal Financial Officer have had complete access to all records and financial information and have availed themselves of such access to ensure full disclosure. As the Company business expands, a more definitive plan relating to maintaining effective disclosure controls will be implemented. There were no changes in our internal control over financial reporting during the nine months ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Potential investors should be aware that the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any system of controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently aware of any pending or threatened legal proceedings to which we are or would be a party or any proceedings being contemplated by governmental authorities against us, or any of our executive officers or directors relating to their services on our behalf.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On February 16, 2007 the Company issued 293,629 units under the terms of the Bridge Financing Agreements as amended. The Company is required to file a registration statement, relating to these units, within 180 days of issuance. As of the filing of this report the registration statement has not yet been filed, and it is anticipated that it will be filed with conjunction with the statement to register the 55,640 shares as detailed in the following paragraph.
On May 23, 2007 the Company issued 55,640 common shares under the terms of the repayment of the Bridge loans. The Company is required to file a registration statement relating to these units within 180 days of issuance.
Item 3. Defaults Upon Senior Securities
During the nine months ended September 30, 2007 we were not in default of any of our indebtedness.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for shareholder vote during the three months ended September 30, 2007.
Item 5. Other Information.
None
Item 6. Exhibits
     
Exhibit No.   Description of Exhibit
 
   
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
 
   
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.1
  Certification of Chief Executive Officer pursuant to Section 906
 
   
32.2
  Certification of Chief Financial Officer pursuant to Section 906

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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  Converted Organics Inc.
 
 
Date: November 12, 2007  /s/ Edward J. Gildea    
  Edward J. Gildea   
  President and Chief Executive Officer,   
 
     
Date: November 12, 2007  /s/ David R. Allen    
  David R. Allen   
  Chief Financial Officer   
 
     
Date: November 12, 2007  /s/ Ellen P. Geoffrey    
  Ellen P. Geoffrey   
  Chief Accounting Officer