NOTE 14 — RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS

The accompanying financial statements as of and for the nine months ended September 30, 2011 reflect the effects of the Company’s restatement of its financial statements for the year ended December 31, 2010 and for the six months ended June 30, 2011.

The Company restated its financial statements for the year ended December 31, 2010 to correct the amounts recorded in the Company’s preliminary allocation related to the November 12, 2010 acquisition of TerraSphere as the result, among other things, of TerraSphere’s restatement of its own financial statements for the nine months ended September 30, 2010 to correct its revenue recognition accounting. The Company has corrected its preliminary allocation related to the TerraSphere accounts receivable accordingly. The Company also corrected its assessment of the likelihood of the payment of the Milestone Two contingent payment (payable if TerraSphere receivables of $2 million are collected by February 28, 2011), and the resulting amount recorded as the fair value of this element of the acquisition cost. The net effect of these changes in the acquisition accounting affected the goodwill recorded when TerraSphere was acquired.

The following sets forth the changes to the determination of the acquisition costs and the preliminary allocation of the acquisition cost:


	As previously			Restatement			As
	reported			adjustment			restated
Components of acquisition cost
Election of option one	$	2,961,000					$	2,961,000
Election of option two		4,490,000						4,490,000
Milestone One		1,403,000						1,403,000
Milestone two		711,000			(673,579	)		37,421
Milestone three and four		1,684,000						1,684,000
Anti-dilution		837,000						837,000

	$	12,086,000					$	11,412,421


Allocation of acquistion cost

Cash	$	41,679					$	41,679
Accounts receivable		2,690,000			(1,615,000	)		1,075,000
Other assets		274,313						274,313
Leasehold improvements		176,181						176,181
Construction in progress		97,306						97,306
Patents		10,000,000						10,000,000
Goodwill		1,193,600			941,421			2,135,021
Assumption of liabilities		(1,738,435	)					(1,738,435	)
Non-controlling interest		(648,644	)					(648,644	)

	$	12,086,000					$	11,412,421

In addition, as the result of the reduction in the amount assigned to the accounts receivable upon the acquisition of TerraSphere, the bad debt expense the Company recorded for those receivables during the period November 12, 2010 to December 31, 2010 was reduced from $2,283,000 to $725,000.

The Company also restated its preliminary allocation of the purchase price for GoLocalProduceRI, LLC to allocate $250,000 of the purchase price previously allocated to goodwill to the license rights which the Company sold to GoLocalProduceRI, LLC in November, 2010 and reacquired as the result of this acquisition.

The following sets forth the effect of the restatement on the affected financial statement line items:


	As previously				Restatement			As
	reported				adjustment			restated
For the year ended December 31, 2010
Selling, general and administrative expenses	$	14,625,568			$	(1,558,000	)	$	13,067,568
Loss from continuing operations		(14,277,559	)			1,558,000			(12,719,559	)
Loss from continuing operations before provision for income taxes		(16,039,025	)			1,558,000			(14,481,025	)
Loss from continuing operations		(16,039,025	)			1,558,000			(14,481,025	)
Net loss		(50,729,383	)			1,558,000			(49,171,383	)
Net loss attributable to noncontrolling interest		(168,156	)			77,900			(90,256	)
Net loss attributable to Converted Organics, Inc. before other comprehensive income		(50,561,227	)			1,480,100			(49,081,127	)
Comprehensive loss		(50,562,600	)			1,480,100			(49,004,500	)
Comprehensive loss attributable to Converted Organics, Inc.		(50,562,336	)			1,480,100			(49,082,236	)
Net loss per share, basic and diluted
Continuing operations		(3.40	)						(3.10	)
Discontinued operations		(7.40	)						(7.40	)

Net loss per share	$	(10.80	)					$	(10.50	)


As of December 31, 2010
Accounts receivable, net	$	579,946		$		(57,000	)	$	522,946
Intangible assets, net		11,629,265				250,000			11,879,265
Goodwill		1,667,957				691,421			2,359,378
Additional paid-in capital		85,555,990				(673,579	)		84,882,411
Accumulated deficit		(100,453,292	)			1,480,100			(98,973,192	)
Noncontrolling interests		576,178				77,900			654,078
Total stockholders equity		3,186,314				884,421			4,070,735

The Company also restated its financial statements for the three and six months ended June 30, 2011 to correct the Company’s accounting for the goodwill recorded in connection with the acquisition of TerraSphere in November, 2010. The Company restated those financial statements to record a charge of $2.1 million at June 30, 2011 reflecting the impairment of that goodwill. See Note 1.

The following sets forth the effect of the restatement on the affected financial statement line items as of and for the three and six months ended June 30, 2011:


	As previously			Restatement			As			As previously			Restatement			As
	reported			adjustment			restated			reported			adjustment			restated
	Three months ended June 30, 2011									Six months ended June 30, 2011
For the three and six months ended June 30, 2011
Impairment	$	—		$	2,135,021		$	2,135,021		$	—		$	2,135,021		$	2,135,021
Loss from continuing operations		(3,547,413	)		(2,135,021	)		(5,682,434	)		(5,867,016	)		(2,135,021	)		(8,002,037	)
Income (loss) from continuing operations before provision for income taxes		869,392			(2,135,021	)		(1,265,629	)		(930,581	)		(2,135,021	)		(3,065,602	)
Income (loss) from continuing operations		869,392			(2,135,021	)		(1,265,629	)		(930,581	)		(2,135,021	)		(3,065,602	)
Net income (loss)		1,016,362			(2,135,021	)		(1,118,659	)		(784,110	)		(2,135,021	)		(2,919,131	)
Net loss attributable to noncontrolling interest		(85,530	)		(106,751	)		(192,281	)		(146,525	)		(106,751	)		(253,276	)
Net income (loss) attributable to Converted Organics, Inc. before other comprehensive income		1,101,892			(2,028,270	)		(926,378	)		(637,585	)		(2,028,270	)		(2,665,855	)
Comprehensive income (loss)		1,098,084			(2,135,021	)		(1,036,937	)		(651,889	)		(2,135,021	)		(2,786,910	)
Comprehensive income (loss) attributable to
Converted Organics, Inc.		1,098,818			(2,028,270	)		(929,452	)		(649,135	)		(2,028,270	)		(2,677,405	)
Earnings (loss) per share, basic and diluted
Continuing operations	$	0.10					$	(0.10	)	$	(0.10	)				$	(0.30	)
Discontinued operations		—						—			—						—

	$	0.10					$	(0.10	)	$	(0.10	)				$	(0.30	)


As of June 30, 2011

Accounts receivable, net	$	1,075,509		$	(57,000	)	$	1,018,509
Goodwill		1,668,369			(1,193,600	)		474,769
Additional paid-in capital		99,470,282			(673,579	)		98,796,703
Accumulated deficit		(101,090,877	)		(548,170	)		(101,639,047	)
Noncontrolling interests		426,899			(28,851	)		398,048
Total stockholders equity		12,087,391			(1,143,849	)		10,943,542